An Industry Sea-Change for Enterprises and Investors on Climate Change?
Lisa Benjamin examines the new array of guidelines, recommendations and emerging legal principles on climate change for enterprises and investors.
A number of new guidelines, recommendations and legal principles have been published in the last few months, which together indicate a sea-change in industry approaches to climate change - directors of companies and investors alike should take heed. In particular, the Enterprise Principles published last month articulate legal obligations for companies and investors, and are likely to provide fertile ground for progressive courts in existing and future litigation against companies. Changing industry norms can and do create legal obligations for directors and investment actors, and legal obligations are beginning to emerge in this area. The Enterprise Principles in particular provide a roadmap to future-proof businesses for a net-zero future.
On the heels of the publication last year of the final report of the Task Force on Climate-Related Financial Disclosures (TCFD) came a number of reports issued by ClientEarth in their November-December 2017 ‘Risky Business’ series, outlining legal risks and recommendations for auditors, DB investment consultants and DB pension actuaries in the UK. The reports distil legal obligations stemming from the TCFD reports, and provide investment actors with useful guidelines to avoid liability.
In December 2017, the Pensions and Lifetime Savings Association (in conjunction with ClientEarth) issued detailed guidelines to governance bodies of pensions funds in the UK, stressing the ‘significant material and systemic risk implications of climate change’. The report includes guidance such as ensuring pension fund managers familiarize themselves with the economic impacts of climate change on their investment portfolios, how those impacts relate to their investment strategy, and recommendations to review climate risk and opportunities on at least an annual basis.
In January 2018, in response to the 2017 Law Commission’s Report on Pensions Funds and Social Investment, the UK Government’s Department of Works and Pensions issued what has been called a ‘landmark’ policy reform proposal that will require UK pension schemes to report on climate risk where it poses financially material risks to pension funds. In addition, an EU High-Level Expert Group on Sustainable Finance issued their final report on ‘greener’ approaches EU financial practices, including in relation to climate change.
Also in January 2018, the Oxford-Martin Principles to Guide Investment towards a Stable Climate (the Oxford-Martin Principles) were published in Nature by four academics at Oxford University. They are designed to provide clear, fact-based approaches to global investors, and set out three main principles to guide investors: ensure your investment target company has a clear commitment to net-zero emissions, provides a profitable net-zero business model, and articulates clear, quantitative mid-term targets for emission reductions.
On 18 January 2018, a group of eminent legal experts published the Principles on Climate Obligations of Enterprises (the Enterprise Principles), which aim to outline the current state of international legal obligations of both enterprises and investors on climate change. The Enterprise Principles are partly a successor to the 2015 Oslo Principles on Global Obligations to Reduce Climate Change (the Oslo Principles), which outlined international legal obligations for states, and to a more limited extent, for enterprises. The Enterprise Principles expand on the obligations for enterprises, and also specifically include obligations for investors and financiers.
The Oslo Principles establish, in Principles 3 and 4, essentially country-based carbon budgets consistent with a plan of steady emissions reductions to keep global temperature increase below 2°C above pre-industrial levels. The Enterprise Principles follow on from this goal, and divide enterprises into those carrying on activities in countries which have carbon budgets which are ‘Above Permissible Quantums’ (or APQ – mainly developed countries) and ‘Below Permissible Quantum’ (or BPQ’). Enterprises based in developed countries, for the most part, attract legal obligations under the Principles, although global enterprises have obligations in all jurisdictions. Enterprises in developing countries have no-cost reduction obligations, obligations to take countervailing measures against excessive GHG emissions, and disclosure obligations.
The Enterprise Principles establish five main categories of legal obligations for enterprises and investors. Enterprises have obligations to reduce emissions from their own activities (Principles 2-8 and 12-16); to reduce emissions from their products and services (Principles 9-11); to reduce emissions in their supply chains (Principle 17); and procedural obligations on disclosure and environmental impact assessments (Principles 18-24). Investors and financiers have direct obligations as well, which include carrying out an assessment of the GHG emissions of any project (Principles 25-30). Critically for investors, Principle 28 states that no investment should be made in coal-fired power plants or enterprises engaged in excessively emitting activities (with a caveat that this definition will change over time) without ‘a compelling justification.’
So what does all of this mean for companies, their directors, investors and financiers?
Firstly, investors (excluding pension funds) would be characterised as enterprises under the Enterprise Principles, and so would be considered to have direct emission reduction obligations. Enterprises are defined quite broadly as private (non-governmental) or non-private entities that carry on commercial or industrial activities, taking into account factors such as profitability, business competitors and the nature of their activities.
Secondly, the Enterprise Principles are themselves specifically positioned by a group of eminent legal experts as outlining the current state of international law, or, more likely, where they believe the law will develop. Although they recognize the Principles may be ‘aspirational’, they specifically mention the Principles may also constitute opinio juris, thereby over time providing a potentially binding legal character to them under customary international law.
Thirdly, the Enterprise Principles specifically note they are providing fertile ground for litigation against companies, which are subject to a wider array of courts than States, and this is a very realistic possibility. The Oslo Principles were cited in the Dutch Urgenda case of 2015. It is likely that the Enterprise Principles will also be similarly referred to, if not completely relied upon, in upcoming decisions regarding carbon-major’s contributions to sea level rise in California or in a recent suit against ExxonMobile.
Finally, these recommendations, guidelines and principles likely signal an industry turn regarding climate change, which directors and investors can no longer avoid. Fiduciary duties, and duties of due consideration under company law, can often be interpreted against industry standards. Directors and investors must at least now be aware of the impacts and risks of climate change for their business and portfolios, disclose these risks where they are material, and work towards emissions reductions, particularly if their companies and target investments are based in developed countries. New risks and opportunities are emerging due to climate change, and the Enterprise Principles can be used to prepare companies and investors for a net-zero future. Undoubtedly, the Enterprise Principles, together with the new array of guidelines and recommendations in this area, will provide more ammunition for active investors to engage and challenge directors on their compliance with a low carbon emissions trajectory.
Lisa Benjamin is a 2018 Global Leaders Fellow at the Blavatnik School of Government, University of Oxford, and an Assistant Professor at The University of The Bahamas.