Board governance expert Carol Hansell issued a game-changing legal opinion stating unequivocally that directors in Canada are obligated to address climate change.
Senior corporate lawyer Carol Hansell, from boutique law firm Hansell LLP, issued an extraordinary legal opinion on June 25, 2020, to the Canadian Climate Law Initiative (CCLI).
The legal opinion sets out three potential grounds of liability for directors of boards:
- Under corporate law, directors could find themselves liable under their fiduciary duty to the corporation.
- Also under corporate law, directors have a duty of care which establishes an objective standard for their performance. This could be to the corporation, or potentially to other stakeholders.
- Under securities law, as part of their disclosure obligations.
Ms. Hansell’s opinion makes it clear that these are not new expectations in Canada, and points to some leading cases that serve as the basis for corporate directors’ liability in general under both corporate law and securities law in Canada.
What does this mean for directors? It is a clear indication of their potential liability for failure to consider and address climate change risk. This means that organizations should expect that their boards will have heightened expectations of information and performance of management.
In addition, the board and management can expect scrutiny from all stakeholders, such as investors, institutional investors, lending institutions, shareholders, and proxy advisors.
Some boards in Canada are already world leaders when it comes to addressing climate change risk. Other boards are just starting their journey and may benefit from their management teams raising climate change risk to them, especially where the management teams are already tracking and implementing best practices in this area but have not yet taken the issue to the board level.
What Does This Mean for In-House Counsel?
Section 4 of Ms. Hansell’s legal opinion provides recommendations for directors. Put simply, directors must inform themselves of the risk that climate change poses to the organization and how that risk is being managed by the management team. The board level already has the strategic risk management tools that it can bring to bear to this issue.
General counsel will be impacted due to their seat at the executive management table and their usual active role in the strategic risk management and risk mitigation at the enterprise level. Local counsel, regional counsel, and business unit in-house counsel have an extremely important role to play as well, as they often serve as the quasi–general counsel of the division, business or region of the company that is under their legal department remit. As is often the case for many topics, legal counsel often can lead from behind and manage upwards.
This is especially true in industries at direct risk, such as oil and gas and utilities, plus other sectors that will face the impact of higher fossil fuel costs, such as transportation and industrial production.
While not all industries face the same risks, directors of organizations that decide not to take significant steps to address climate change risk would need to demonstrate the risk assessment process they followed to reach this conclusion.
Recommendations for Directors on Climate Change Risk
While the legal opinion does not create a specific compliance checklist for board directors to follow, it does provide recommendations for directors to follow.
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Board directors can set the tone at the top by enhancing their skills on climate change risk through appropriate training designed for the board, led by experts from outside of the organization or management.
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Detailed briefings from management of relevant issues regarding climate change risk, as they arise, to build the board’s understanding.
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Add climate change risk to the regular board agenda. This is essential to enable the board to do its oversight role, and also sends a strong signal to management about climate change risk.
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Consider having the organization conduct a risk assessment focused on climate change risk.
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Consider whether the organization is appropriately resourced to address the risk.
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Ensure the board is satisfied that management has the required knowledge in the area or is bringing in outside consultants.
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In addition to the board as a whole, each board committee should be assessing its responsibilities from a climate change risk lens. For example:
- The risk management committee of the board may look at the governance around the organization’s approach to climate change risk as part of enterprise risk management (ERM).
- The HR committee should look at programs that incentivize good climate change risk governance and as well as related objective setting for the organization.
- The audit committee may need to consider how climate change risk impacts the organization’s risk and financial reporting.
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Ongoing review by the board of management’s disclosure of climate change issues in order to develop the directors’ knowledge and sensitivity to the issue.
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Consideration by board of how climate change risk should be addressed in its engagement with stakeholders.
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Awareness by directors of industry benchmarks for addressing climate change risk.
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Integration of climate change risk into the board’s overall work plan, especially key areas of board responsibility, such as strategy.
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Remaining alert to compliance issues. As governments around the world continue to raise the standards regarding climate change, the laws, rules and regulations that apply to corporations will continue to increase, with increased cost and compliance impacts.
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From my vantage point as an in-house counsel of many years, followed by six years as an integrity officer who implemented compliance programs at a public issuer (albeit in the anti-corruption and modern slavery contexts, as opposed to the climate change risk context), it is essential to operationalize legal advice and recommendations into an actionable program that management can commit to, track, implement KPIs against, measure, report on and improve.
In-house counsel and general counsel have a crucial role to play in implementing such compliance programs, including being integral to:
- Setting the organization’s “tone from the top” and “mood in the middle.”
- Assisting with determining KPIs and accompanying metrics for others, as well as achieving their own.
- Internal reporting upwards to the board (general counsel) and to divisional management (in-house counsel).
- Actively participating in creating an internal culture transformation.
- External reporting.
- Stakeholder engagement.
- Training for all employees.
- Implementing their organization’s strategic plans.
- Managing organizational risk.
- The whole-sale operationalization of all of the above into tangible changes to every organizational process.
In-house counsel have always played a key role in working with management to reduce company risk. As such, they are instrumental in addressing climate change risk, ultimately fighting climate change itself.
Amee Sandhu is Founder and Principal Lawyer at Lex Integra Professional Corporation. She has extensive experience at major Canadian engineering companies doing business internationally as in-house counsel, commercial manager, and an Integrity Officer. She is on the board of Transparency International Canada and on the Advisory Council for the Law & Business Program at Ryerson University's Ted Rogers School of Management. She is also a frequent speaker on ethics and compliance programs, and occasionally, diversity. Reach her at amee.sandhu@lexintegra.ca.