Company directors in Singapore urged to take climate change seriously or risk personal liability
The risks that climate change poses to companies are now undeniable. Company directors are expected to factor these risks in their business activities and decisions, or may be personally responsible, a new legal opinion warns.
Singapore corporate directors are required to consider climate change risks as part of their duties to act in the best interests of the company, and failure to do so can result in legal action for their companies and themselves personally.
As climate change poses both physical and transitional risks to companies, directors should understand the activities of their companies that may impact, or be impacted by climate change and take necessary action to ensure that these issues are addressed.
These are the main findings of a new legal opinion by a team of independent legal counsel, titled Directors’ Responsibilities and Climate Change under Singapore Law. A legal opinion is an opinion from lawyers issued in letter form expressing legal conclusions on a matter.
“Given the seriousness and public concern over climate change, directors of Singapore companies must be aware that they will incur criminal and civil liabilities if they do not inform themselves on how their companies impact or are impacted by climate change and factor these into their decisions as directors,” said Jeffrey Chan, senior director of TSMP Law Corporation and lead author of the opinion.
Commissioned by the Commonwealth Climate and Law Initiative (CCLI), the main aim of the legal opinion is to examine the legal basis for directors and trustees to take account of climate change risks, and societal responses to climate change risks.
The background to the new legal opinion is the landmark Hutley opinion written in 2016, which discusses how Australian law requires company directors to consider, disclose and respond to climate change.
The Hutley opinion rose to significance as it shifted the Australian company directors’ understanding of climate change as a financial risk issue rather than just an environmental issue. It was subsequently endorsed by the Australian monetary authority, the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority.
Ernest Lim, associate professor of NUS Law and co-author of the opinion explained: “As the impacts of climate change on Singapore become more visible, and legislative and regulatory responses strengthen, this affects the standards of conduct directors must meet to fulfil their duties.”
“Just last year the Monetary Authority of Singapore issued environmental risk management guidelines, setting out their expectations that directors and senior management of financial institutions should maintain oversight of environmental risk management and be assigned specific responsibilities in this regard. The legal opinion draws on these and other developments to find that climate issues are within directors’ responsibilities,” Lim added.
As the governance of a company, directors must ensure that their companies comply with all regulatory prescriptions relating to climate change. At the minimum, they should disclose the risks that climate change poses to the business of their companies, as required by the Singapore Stock Exchange Listing Rules.
Directors of Singapore companies must also be prepared for the possibility that they may be taken to court to compel them to take action to ensure that the business activities of their companies do not contribute to climate change, or if such activities are in progress, to terminate such activities.
Transitional business models are an imperative
Apart from legal action, companies that do not have a transitional business model to achieve net zero by 2050 risk stranded assets and erosion of shareholder value, warned Dilhan Pillay Sandrasegara, executive director and chief executive of Temasek International at the launch event of the legal opinion.
“If you don’t start today, you might find that your business model may no longer be relevant in the context of what a greener world may expect from companies,” he said.
Citing the example of the carbon pricing needed to limit global warming aligned with the Paris Agreement, he said that companies that do not factor in the possible increase in carbon tax will be greatly impacted down the road.
Although Singapore announced a carbon tax for this decade of S$5 to S$15 per tonne of greenhouse gas emissions, the government has said that they are going to reassess the carbon pricing.
“To achieve a 2 degree-world or even a 1.5-degree world, you need to have carbon pricing of between US$40-80 as of now, and then US$50-100 by 2030, assuming that you can half carbon emissions by then,” Pillay said.
“So if you’re not changing your business model to cater to a potential carbon pricing of that magnitude, you are going to see an erosion of value of your company. That could have serious implications across the different stakeholders that you’re engaged with,” he said.
In addition, nine out of 10 of the asset managers in the world have decided to put in place environmental, social and governance (ESG) frameworks to measure the performance of each company.
“Climate change risks are going to factor into the asset managers’ decisions about whether to invest in a company or not. If you’re not thinking about it, you might find that capital markets will punish you down the road,” he said.
“It’s very difficult for boards to consider all the risks that they face. But if you can get through the Covid-19 situation, you still have climate risk as the biggest existential problem with your business model. So directors have to come up with proper transition plans,” he warned.