General Counsel (GCs) are increasingly under pressure to address risks related to climate change. As CEOs face questions regarding what they, and their organizations, are doing in respect of climate change, GCs will need to guide their responses in light of board responsibilities, disclosure obligations, and investor inquiries. GC approaches vary, often depending on their industry, location and regulatory environment. Consequently, many are only now beginning to “know what they don’t know” and acknowledging the need for active ongoing supervision.
In spite of this uncertainty, all GCs share one core goal: their organizations have to understand and prudently manage climate-related legal risks. In this respect, the following six practical approaches should help GCs improve their organization’s management of climate-related risks.
Understanding Climate Risk: GCs should understand the impact of climate change on their organization and treat it like any other risk. To aid their analysis, GC should develop a framework to evaluate potential climate-related risks and obligations that may impact their organization. For instance, State Street Global Advisors, one of the largest global asset managers, has divided climate risk into three primary categories: physical risk, regulatory risk, and economic risk. Once these risks are identified, mitigation measures can be implemented and, as required, appropriate changes can be brought to existing policies, procedures and practices to protect the interests of their organization.
Board Oversight: GCs should help evaluate climate competence of the board and establish mechanisms for review of climate risk by the appropriate board committee. GCs may liaise with the nominating committee for evaluating sustainability expertise of directors and support implementation of protocols to ensure director education on evolving climate risks. An important aspect of this task is to determine the most appropriate board committee(s) to handle climate accountability. For example, as the Canadian Coalition for Good Governance (CCGG) notes, climate-related risks could be addressed by a stand-alone sustainability committee (that deals with corporate social responsibility issues), or be included within the mandate of environmental, health and safety committee. On the operational side, GCs may consider engaging in regular dialogue with the management to review ongoing climate-related risks and outlining sustainability responsibilities for finance, investor relations, and strategy teams.
Climate-Related Disclosure: GCs should ensure that their organizations avoid boilerplate climate risk disclosure that is vague, incomplete, or inconsistent while being mindful that their disclosure may be used against their organization in potential litigation. A key focus of stakeholder groups (including regulators, investors and proxy advisors) in the climate risk debate is entity-specific disclosure. GC’s should ensure that public disclosure addresses the regulatory, physical, and operational trends and reflects their organization’s estimate of climate-related uncertainties, materiality assessments, and governance mechanisms. At the same time, they should be cognizant of exposure to litigation risk as such disclosure may be used in potential court actions against their organization.
Monitoring Guidelines of Major Investors: GCs should put in place appropriate monitoring mechanisms for the opinions, policy statements and proxy guidelines of their organization’s key investors to ward off unexpected surprises at annual meetings or important corporate events. Major institutional investors like Blackrock have taken the lead on climate-related issues, and in certain cases, they are well ahead of the regulatory curve.
Climate Litigation: GCs, particularly those in carbon-intensive industries, should analyze their organization’s vulnerability to climate change litigation. There is a new wave of climate liability lawsuits aimed primarily at oil and gas companies that draw upon the experience of tobacco litigation.
Transition Risk: GCs should take a holistic view and be aware of the so-called “transition risk” of dealing with rising public pressure to shift economies to a low-carbon footprint. Transition risk, said to be the “most challenging” by Mark Carney, Governor of the Bank of England, can be either direct, stemming from a company- specific action, or indirect, in the form of public perception of the overall industry. A poor reputation on climate may hurt sales through consumer boycotts, adversely impact the regulatory environment, or damage relationships with local communities. GCs that identify the vulnerabilities, think through how they relate to one another and put in place suitable oversight measures can begin to manage the challenges ahead.
Ravipal S. Bains is an associate at McMillan LLP in its Vancouver office
In spite of this uncertainty, all GCs share one core goal: their organizations have to understand and prudently manage climate-related legal risks. In this respect, the following six practical approaches should help GCs improve their organization’s management of climate-related risks.
Understanding Climate Risk: GCs should understand the impact of climate change on their organization and treat it like any other risk. To aid their analysis, GC should develop a framework to evaluate potential climate-related risks and obligations that may impact their organization. For instance, State Street Global Advisors, one of the largest global asset managers, has divided climate risk into three primary categories: physical risk, regulatory risk, and economic risk. Once these risks are identified, mitigation measures can be implemented and, as required, appropriate changes can be brought to existing policies, procedures and practices to protect the interests of their organization.
Board Oversight: GCs should help evaluate climate competence of the board and establish mechanisms for review of climate risk by the appropriate board committee. GCs may liaise with the nominating committee for evaluating sustainability expertise of directors and support implementation of protocols to ensure director education on evolving climate risks. An important aspect of this task is to determine the most appropriate board committee(s) to handle climate accountability. For example, as the Canadian Coalition for Good Governance (CCGG) notes, climate-related risks could be addressed by a stand-alone sustainability committee (that deals with corporate social responsibility issues), or be included within the mandate of environmental, health and safety committee. On the operational side, GCs may consider engaging in regular dialogue with the management to review ongoing climate-related risks and outlining sustainability responsibilities for finance, investor relations, and strategy teams.
Climate-Related Disclosure: GCs should ensure that their organizations avoid boilerplate climate risk disclosure that is vague, incomplete, or inconsistent while being mindful that their disclosure may be used against their organization in potential litigation. A key focus of stakeholder groups (including regulators, investors and proxy advisors) in the climate risk debate is entity-specific disclosure. GC’s should ensure that public disclosure addresses the regulatory, physical, and operational trends and reflects their organization’s estimate of climate-related uncertainties, materiality assessments, and governance mechanisms. At the same time, they should be cognizant of exposure to litigation risk as such disclosure may be used in potential court actions against their organization.
Monitoring Guidelines of Major Investors: GCs should put in place appropriate monitoring mechanisms for the opinions, policy statements and proxy guidelines of their organization’s key investors to ward off unexpected surprises at annual meetings or important corporate events. Major institutional investors like Blackrock have taken the lead on climate-related issues, and in certain cases, they are well ahead of the regulatory curve.
Climate Litigation: GCs, particularly those in carbon-intensive industries, should analyze their organization’s vulnerability to climate change litigation. There is a new wave of climate liability lawsuits aimed primarily at oil and gas companies that draw upon the experience of tobacco litigation.
Transition Risk: GCs should take a holistic view and be aware of the so-called “transition risk” of dealing with rising public pressure to shift economies to a low-carbon footprint. Transition risk, said to be the “most challenging” by Mark Carney, Governor of the Bank of England, can be either direct, stemming from a company- specific action, or indirect, in the form of public perception of the overall industry. A poor reputation on climate may hurt sales through consumer boycotts, adversely impact the regulatory environment, or damage relationships with local communities. GCs that identify the vulnerabilities, think through how they relate to one another and put in place suitable oversight measures can begin to manage the challenges ahead.
Ravipal S. Bains is an associate at McMillan LLP in its Vancouver office
