Is your company taking sufficient measures to address climate change risks from a corporate law perspective?

The main climate change-related risks companies face

Climate change poses three main categories of risk to a company's financial stability:

• physical risks: the physical risks to the company resulting from direct impacts from climate change. In particular, the impact from specific weather events and longer-term shifts in climate on the value of the company's assets, insurance matters (such as the availability of insurance and the effect on premiums) and how its supply chains are affected.
• transition risks: the economic risks to the company as a result of the process of transition towards a lower carbon emission economy. Notably, the economic risks resulting from related changes in policy and regulations, technology and business model obsolescence (including stranded assets), and changes in investor and other stakeholder preferences.
• liability risks: the risk of claims that a company's activities attributed to climate change or claims relating to a company's failure to properly manage physical or transition risks, which destroy shareholder value.

Of course, the related reputational risks can be significant. The most notable tangible impact on companies across industry sectors tends to be related scarcity or cost of resources, disruption to business models and supply networks and the effect on insurance. This is confounded by the uncertainty businesses face as to what political and regulatory changes may lie ahead. Carbon majors have been particularly impacted. The trend to move away from brown industries was given further impetus by the agreement reached at COP26 in November 2021 by 450 financial organisations controlling US$130 trillion in funds to back 'clean' technology and direct finance away from fossil fuel-burning industries. As companies across all sectors transition towards a lower carbon emission economy, the move to divest from carbon-intensive assets may leave assets obsolete and 'stranded'.

Significant increase in climate change-related litigation

Globally, climate change-related litigation has more than doubled since 2015¹. For further insight into whether we are reaching a 'tipping point' in ESG litigation, please click here. While claims have primarily targeted governments and major GHG emitters, and most proceedings have been brought in the US and Europe, businesses operating in other regions are increasingly expected to face claims. Asia has already seen an increase in climate-related proceedings, with notable findings in Indonesia, the Philippines and Malaysia. In May 2021 a court in The Netherlands ordered Shell to take preventive action on climate change and reduce its global net carbon emissions by 45% by 2030 compared to 2019 levels, setting a warning of the extent to which carbon majors and their corporate strategies may be subject to external intervention to address climate change.

Potential liability faced by companies and their directors

Companies and their directors face potential liability for failure to act on climate change, for failure to manage the risks and for failure to make complete disclosures about climate-related risks. Beware of greenwashing: ensure the company makes no misleading disclosures about climate change and other environmental issues. As liability can extend to harm caused indirectly from the company's GHG emissions or indirectly from the company's entire value chain, companies must identify potential risks which may arise in any part of their supply networks.

Companies' obligations regarding climate change are evolving rapidly. Jurisdictions are increasingly enacting regulations to mitigate climate change and other environmental damage, setting more stringent requirements. With the 2019 Carbon Pricing Act, Singapore was the first Southeast Asian country to introduce carbon pricing and require industrial facilities that emit direct GHG emissions to submit annual emission reports. In addition, the Resource Sustainability Act 2019 imposes obligations relating to the collection and treatment of electrical and electronic waste and food waste, and requires reporting of packaging imported into or used in Singapore. Relevant businesses must make submissions to the National Environmental Agency of Singapore.

Not only fossil fuel-intensive businesses, but companies across all industry sectors need to be aware of their climate change-related obligations. Companies need to identify, mitigate and manage their physical risks, transition risks and liability risks, considering the longer term, with interim milestones. Climate change-related risks - and opportunities – are a key component in business operations, risk management, strategy and investments. Climate Governance Singapore (the Singapore chapter of the Climate Governance Initiative) aims to raise board awareness about the impact of climate change, hoping to lead the way for businesses in Singapore and Asia.

Obligation to take climate change considerations into account in decision-making

In most jurisdictions, ultimate responsibility lies with a company's board of directors to understand the risks and opportunities posed by climate change, as well as the company's exposure. Unless regulators or shareholders actively intervene, it is generally for the board to set appropriate strategies and targets, including the necessary allocation of capital towards meeting any low carbon goals. Multinationals must be cognisant of the regimes in all jurisdictions relevant for the group.

In Singapore (as in certain other common law jurisdictions, such as the UK) directors have a positive duty to consider climate change and its associated risks. An independent team of legal counsel concluded that directors of companies in Singapore are obliged to consider climate change risks as part of their duties to act in the best interests of the company, and that failure to take account of climate change risks which have a material and adverse impact on the financial performance of the company could render the directors in breach of their common law and statutory duties². Conceivably higher standards may be expected of directors with relevant expertise.

Companies' risk management procedures and decision-making processes should ensure that due consideration is given to climate-related factors and that this is appropriately documented. Board minutes should demonstrate that the directors duly considered climate-related risks and opportunities in their decision-making. It is good practice to appoint an individual director with primary accountability for climate change matters, to take a lead role. It may be appropriate to establish a climate change committee or delegate in-depth consideration to the audit or risk committee. Some more active investors are calling for companies to include climate change-related objectives and action plans in the company's constitutional or policy documents, with related obligations on how the directors manage the company, while some shareholders are proposing climate-related shareholder resolutions to bind the company under the powers provided to them at law. Some companies link directors' remuneration to achieving climate-related goals.

Consider your entire global value chain

A company's entire global value chain is relevant for climate change purposes – and it is indicative that Europe has seen some legislative initiatives to impose mandatory supply chain environmental due diligence. Germany enacted legislation introducing supply chain environmental due diligence obligations from 2023, initially targeted at larger companies but to apply more broadly over time. Similarly, the European Parliament adopted a resolution recommending a directive which would require member states to implement measures to conduct environmental due diligence on the whole value chain. Despite the absence of any such legislative obligations in this region, as it is widely recognised that a company must account for the scope 3 indirect emissions that occur in its value chain (as per the Greenhouse Gas Protocol, for GHG accounting purposes), adding pressure for companies to conduct appropriate climate-related due diligence in connection with all procurement. Importantly, supply chain contracts should include appropriate climate-related obligations consistent with the company's low carbon economy strategy, potentially including price adjustment mechanisms for non-compliance. As supply chain emissions often account for a majority of a business' carbon footprint, such measures are crucial from a risk management perspective.

Transactional considerations: due diligence and protections

Climate change considerations are equally important for transactions. M&A due diligence should include identifying and evaluating climate-related risks and opportunities, including how any wider stakeholders may be affected by climate risk and any transaction-related transitioning towards a low carbon economy. How might climate-related considerations impact on the ability to exit and, importantly, on pricing? Should climate change mitigation plans be incorporated as conditions precedent or conditions subsequent? The related board minutes should reflect whether the transaction is aligned to the company's net zero targets and, if these may be jeopardised by the transaction, what mitigation measures are proposed, as well as generally the climate-related financial risks posed by the transaction. For any joint venture or other form of collaboration, it is prudent to ensure from an early stage that the potential partner has compatible intentions regarding climate change. It may be appropriate that the transaction documentation (preferably already at the MOU stage) includes obligations to work towards a just transition to net zero - or at least an acknowledgement of common intent. Shareholder agreements may require shareholder consent for transactions that may impede the company's net zero goals, may embed carbon footprint-related shareholder information rights and may include offset obligations on the shareholders (with penalties for non-compliance, such as forfeiture of pre-emption rights) and on the company. Including relevant provisions in the transaction documentation provides further evidence of the directors' due consideration to climate change factors.

Climate-related disclosures and reporting

Driven by the need for reliable climate-related financial information to enable financial markets to price climate-related risks and opportunities and a concern that current valuations do not adequately take account of climate-related risks, there is a growing global trend in support of disclosures and reporting about climate-related risks and opportunities in financial statements. More countries are imposing mandatory climate-related financial disclosures, tending to focus initially on financial institutions (banks, insurers, asset managers and pension schemes) and listed companies and increasingly catching 'large companies' (irrespective of whether they are lists) (such as the proposed expansion of article 8 of the EU Taxonomy Regulation).

The voluntary recommendations on disclosure issued by the Task Force on Climate-related Financial Disclosures (TCFD) in 2017, are increasingly becoming the standard for climate-related disclosures, as more and more regulations require reporting that aligns with them. The Singapore Exchange (SGX) issued a public consultation paper in August 2021 proposing to impose mandatory climate-related disclosures in sustainability reporting under a three-year phased approach from 2022 to 2024, with issuers initially required to provide climate reporting on a 'comply or explain' basis consistent with the TCFD recommendations. Increasingly more sectors of issuers would be subject to full climate reporting requirements. SGX also proposes that all listed company directors must attend sustainability training. The UK already requires that from financial years beginning from 1 January 2021, companies incorporated in the UK with a premium listing must make a statement whether they have made in their annual financial reports climate-related financial disclosures consistent with the TCFD recommendations, on a 'comply or explain' basis³, with consultations to extend the regime to standard listed companies and beyond.

In December 2020, the Monetary Authority of Singapore issued environmental risk and management guidelines for banks, insurers and asset managers, which 'expect' at least annual disclosure of the potential impact of material environmental risks on the entity in accordance with a 'well-regarded international reporting framework', such as the TCFD recommendations. While 'expectations' (and not legally binding), the guidelines may be indicative of what may follow more broadly in Singapore and further afield in the region.

Companies are required to consider climate-related matters in applying the International Financing Reporting Standards (IFRS) when the effect is material in the context of the financial statements as a whole. The IFRS Foundation Trustees' announcement during COP26 to create the International Sustainability Standards Board to establish globally consistent sustainability disclosure standards for financial markets, paves the way towards embedding global climate-related reporting standards in accounting rules. This is accompanied by increasing pressure from investors, lenders, customers, employees and other stakeholders (including activists) for companies to include climate-related reporting in their financial statements – and generally to move towards green products and services. While this trend has been more prevalent in other parts of the world, it is expected that Southeast Asia will see an increasing push in this direction. Climate-related reporting is increasingly viewed as good corporate practice, demonstrating corporate commitment and promoting reputational and branding value.

Is your company doing enough now?

We expect to see a rapid shift in how companies address the risks and opportunities posed by climate change in the region, increasingly mirrored in relevant legal documentation. As impact investing gains momentum and regulators, shareholders and other stakeholders demand greater consideration of climate-related factors and related transparency, companies need to be fully aware of all relevant factors and prepared to take necessary mitigation and abatement measures. In this fast-moving area, directors and senior management must ensure they remain up-to-date about the requirements and stakeholders' expectations. Moreover, companies will want to be well placed to make the most of the new business opportunities presented by the transition to a low carbon economy, including access to sustainable 'green' financing. Can your company sufficiently demonstrate that its operations take proper account of climate-related risks and opportunities and that you are taking sufficient measures to address the potential legal implications posed by climate change?

Singapore law aspects of the article were written by Peiguan Cai of Virtus Law LLP (a member of the Stephenson Harwood (Singapore) Alliance).

¹ Global trends in climate litigation: 2021 snapshot - Grantham Research Institute on climate change and the environment (lse.ac.uk)

² Legal opinion on directors' responsibilities and climate change under Singapore law prepared by a team of independent legal counsel in April 2021 at the request of the Commonwealth Climate and Law Institute. Legal-Opinion-on-Directors-Responsibilities-and-Climate-Change-Under-Singapore-Law-1.pdf (pdlegal.com.sg)

³ UK Listing Rules 9.8.6R(8)