The Paris climate agreement is ratified – What does this mean for businesses?

CEO in jail

On the heels of the entry into force of the historic Paris agreement on climate change, a legal opinion declares that directors who don’t properly consider the material impacts of climate change on their business risk personal liability for breach of duty. With this, business leaders are inexorably confronted with the need to consider climate change and sustainability risks for their companies, and to price, mitigate, and manage them accordingly. Is your business ready to bring climate change and sustainability to the board?

This past month the world celebrated the ratification of the historic Paris climate change agreement, years sooner than expected, particularly given that is the single largest piece of climate change legislation ever enacted. The agreement, signed by 196 attending parties, achieves a legally binding and universal agreement on climate, with the aim of keeping global warming below 2°C compared to pre-industrial levels. It was the outcome of the 21st meeting of the Conference of Parties (COP) to the United Nations Framework Convention on Climate Change, held in Paris from 30 November to 12 December 2015.

One notable component of COP21 was the exceptional involvement of the private sector contributing, lobbying and discussing the importance of reaching accord together. The private sector was more visible and active than at any other previous COP, involving CEOs from a wide-ranging array of industries from around the world concerned about the threat of climate change to economic development. They not only demanded that governments sign the agreement and adopt policies and regulatory regimes that would mitigate climate change and encourage action on climate change, but they separately made their own commitments that their companies would decrease their carbon footprints, adopt renewable energy and engage in sustainable resource management.

The private sector clearly recognizes that responding to climate change is not only the right thing to do, but it also makes good business sense. However, with the coming into force of the Paris agreement, the Centre for Policy Development and the Future Business Council together sought legal clarity as to what the private sector’s exact legal responsibilities will be under the agreement. Specifically, they obtained a memorandum of opinion from Solicitors in Australia on the extent to which the law permits or requires Australian company directors to respond to “climate change risks” under the aegis of their requirement to have a “duty of care and diligence” under the Corporations Act.

This legal opinion found that company directors do indeed have a duty to take climate change into account when making decisions about company strategy, performance and risk disclosure. In fact, directors who fail to consider the impact of foreseeable climate change risks on their business properly could be held personally liable by the courts for breaching the duty of due care and diligence they owe to their companies. In the solicitor’s view, “it is likely to be only a matter of time before we see litigation against a director who has failed to perceive, disclose or take steps in relation to a foreseeable climate-related risk that can be demonstrated to have caused harm to a company”.

Of course, this is not a new concept that directors are liable for ignoring risks; rather, it gives legal certainty that climate change is one of them. And all company directors and risk managers are aware that companies that don’t recognize, manage and mitigate risks face greater problems as they aggregate and worsen in the future. With this legal opinion, there are substantial benefits to companies who previously have swept climate change-related concerns under the carpet: now their directors have the impetus or excuse to implore shareholders, investors and clients to be aware of the risks their company faces with climate change, and if they have not yet already done so, investigate the extent of these risks with the aid of a comprehensive risk assessment, and to take action with the aid of such market tools as index-based weather insurance. Which may make this rather gloomy legal opinion actually very good news indeed for all businesses.