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Climate change risks need to be addressed at board level

Director specializing in climate change not needed, lawyer says
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Company boards should be treating climate change the same way they have handled the COVID-19 crisis, a Canadian lawyer says.

That is to say, boards need to have information from management on the risks posed to an organization so they can make prudent and informed decisions, said Carol Hansell, a principal with McLaughlin Hansell Advisory Inc. and senior partner with Hansell LLP, which provides corporate legal, government relations and communications advice.

As with COVID-19, if management is to manage climate change risk, it needs direction and resources from the board level, she said.

“If the board accepts the fact that climate change is a real and imminent risk, they need to say to management, ‘we need some information on how climate change is a real and imminent risk to this business,’” Hansell said.

Her comments in a July 9 webinar coming after her release of her ‘Putting Climate Risk on the Boardroom Table’ opinion released in June.

Hansell said there is now broad consensus among scientists, politicians and policy makers that climate change is real.

“Climate change has been so broadly acknowledged that boards of directors need to onboard that consensus and assess how climate change is affecting their business,” Hansell said. “A reasonably prudent person would be taking climate change risk into account as part of their risk register.”

What it comes down to, she said, is a simple test where duty of care requires each director to exercise care, diligence and skill.

“But to what standard?” she asked in the opinion. “That question is answered by the next phrase in the test – a director must exercise the care, diligence and skill that a reasonably prudent person would exercise.”

And, she said, Canadian courts have taken judicial notice of that climate change consensus on “and the existential risks it poses or business.”

“They essentially said, ‘You don’t need to bother proving this to us,’” Hansell said.

Moreover, Hansell said, if a board of directors is not seen as reasonable in its decision making, a court would not defer to it.

And, Hansell said, directors need to be clear their first duty is to the organization rather than its stakeholders.

“We have yet to have case law on whether stakeholders like creditors or communities or environmental groups can say they are stakeholders that directors must take into account,” Hansell said.

Hansell said tools exist to assist boards in deliberations.

Hansell was clear that boards do not need a director brought specifically as an expert on climate change issues.

She said that became the case in 1999 when companies were worried about the Y2K issue, where havoc was expected in computer systems which only dealt with years in two digits rather than four – ie ‘99’ instead of ‘1999’ which would have dated things to the start of the last century – 1900 instead of 2000 - as the millennium changed.

“That created a board position with a single-subject matter person boards would defer to,” Hansell said.

“It was otherwise an empty chair at board meetings,” she said.

“Many, many boards in Canada are already doing a spectacular job,” she said.

Chartered Professional Accountants of Canada director of corporate oversight and governance Gigi Dawe said the issue is one of many new areas directors have to wrangle with, including digitization, cybercrime and geopolitical considerations.

She said directors know banks, investors, regulators and other stakeholders are demanding boards consider climate change as part of their operational oversight.

“Boards are being given an unambiguous message that they need to step up to the plate,” Dawe said.

York University Osgoode Hall law school Prof Cynthia Williams said Hansell’s opinion builds on work done by Australian Noel Huntley who said climate related risks “represent foreseeable risks of harm to Australian businesses.”

Williams said many Canadian law firms have no issues with memos to boards saying climate change is real and an issue needing to be addressed.

The webinar was put on by Canada Climate Law Initiative, which examines the legal basis for corporations’ directors, officers and pension fiduciaries to consider, manage, and report on climate-related financial risks and opportunities. It also looks at advancing effective climate governance practice knowledge and exploring the scope and limits of fiduciary obligation limits around climate change.

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