There is an increasing trend towards requiring Boards of Directors to report on and disclose risks due to climate change. In Canada, recent commentary and policy developments suggest that directors have a fiduciary obligation to be informed about, act on, and disclose the risks and opportunities associated with climate change. This article canvasses some of these developments, from tying COVID recovery to climate disclosure to Canadian Securities Administrator guidance, and details the potential implications for corporate directors.
Climate change risk and the economy
Climate change poses a significant risk to organizations across the world but the large-scale and long-term nature of the problem makes it uniquely challenging. Organizations are generally affected by three types of risk: i) physical risks, such as the impact of changes in water availability or temperature on operations and financial assets; ii) liability risks, such as litigation due to damage or loss; and iii) transition risks, including regulatory policies requiring businesses to shift to lower emissions in production and energy use.
These risks have particular implications for the Canadian economy, including disruptions to a variety of sectors and damage to infrastructure resulting from extreme weather and slow-onset events. The existence of these climate risks led the Federal Government to create the Expert Panel on Sustainable Finance in 2018 to consider how these issues should be addressed in Canada. Among other things, the Expert Panel recommended the development of a Canadian approach to implementing the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which encourage that:
- Companies should disclose how they govern climate change risk, carbon emissions, emissions intensity, and their metrics and targets; and
- Companies should disclose the board's role in climate change risk management.
Leading voices in the financial community have been taking note of these risks and their implications for firms. For example, Mark Carney, former governor of the Banks of Canada and England, has been vocal on the subject and took on the role as UN Special Envoy on Climate Change earlier this year. Larry Fink, Chairman and CEO of BlackRock, in a widely publicized letter to CEOs, referred to climate risk as leading to "a fundamental reshaping of finance".
The corporate "Duty of care"
According to a new legal analysis released by the Canada Climate Law Initiative (a research initiative of the University of British Columbia and Osgoode Hall Law School that examines the legal basis for corporate directors officers and pension fiduciaries to consider, manage and report on climate-related financial risks and opportunities) ,corporate board members and officers are legally obligated to address climate change risk and opportunities as part of their oversight of the companies they serve.; The opinion, penned by lawyer Carol Hansell, contends that as climate change increasingly impacts the global economy, corporate actors have emerging responsibilities to both be informed about the risks of climate change vis-à-vis the corporation, as well as to be satisfied that those risks are managed appropriately.
The duty of care - which refers to the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances – is an objective standard of performance for corporate directors in corporate law. It requires directors to consider the appropriate issues and whether they have the information they need in order to make the necessary decisions.
Due to the increasing acceptance that climate change poses risks to corporations, the analysis suggest that it is likely that the corporate duty of care requires thoughtful consideration of climate change. This is consistent with Canadian corporate law under section 122 of the Canada Business Corporation Act. Although a director's fiduciary duty is owed solely to the corporation, corporate law does not specify the beneficiary of a director's duty of care. This leaves open that directors may owe a duty of care to other stakeholders, including the wider public. This was also confirmed by the Supreme Court of Canada in two widely cited decisions: Peoples Department Stores Inc (Trustee of) v Wise, 2004 SCC 68 and BCE Inc. v 1976 Debentureholders, 2008 SCC 69.
The duty of care is assessed through a principle referred to as the 'business judgement rule'. This rule represents a deferential presumption that in making business decisions, directors act on the informed and honest basis that the action taken was in the best interests of the company and its shareholders. Importantly, courts will not defer to the business judgement rule if a decision cannot be attributed to a rational business purpose, if directors have made an unintelligent or unadvised judgment, or if they have otherwise been unduly passive. As a result, it is Hansell's opinion that Boards must engage in a reasoned analysis before making decisions. Consequently, as climate change risks increase, the business judgement rule is likely to require directors to inform themselves, seek advice, and make reasonable decisions that consider and react appropriately to the risks of climate change.
Disclosing risks and seizing opportunities
Public companies have disclosure obligations that include disclosing the risks facing the corporation. Corporate disclosure of risks is important to ensure that investors are provided with relevant information about companies to inform their investment decision. As is the case for any disclosure, misrepresentations about climate change risk can expose the corporation, its officers and its directors to both regulatory and civil liability.
Corporate directors must identify the risks and opportunities that confront corporations. This is critical for boards and officers to be able to manage those risks and take advantage of those opportunities effectively. It is also important information for the corporation's financial stakeholders. Hansell contends, "If investors are misinformed or unaware of climate change risks and opportunities, "investors and others are likely to collectively misprice assets and systematically misallocate capital, threatening financial stability and profit."
Directors should also be aware that their decisions about disclosure are not protected by the business judgment rule. In 2007, the Supreme Court of Canada considered the nature of the disclosure requirements and concluded that, "while forecasting is a matter of business judgment, disclosure is a matter of legal obligation." Put simply, the rule cannot be used to qualify or undermine the duty of disclosure. For this reason, directors should assess their expertise with respect to sector specific climate change-related risks. This will enable them to ask the right questions about climate change-related risks and opportunities, and make informed decisions about both risk management and disclosure.
According to a staff notice written by the Canadian Securities Administrators, dated August 1, 2019, directors should avoid vague disclosure. Instead, the CSA writes, "relevant, clear and understandable entity-specific disclosure will help investors understand how the issuer's business is specifically affected by all material risks resulting from climate change. This risk disclosure should provide context for investors about how the board and management assess climate change-related risks."
Benefits and opportunities
As with any risk, there are also opportunities. Climate change disclosure and other efforts that support mitigation and adaptation efforts generate a number of opportunities for boards and investors to exploit. These include resource efficiency and cost savings, access to investment opportunities and revenue streams, the development of new products and services, better informed investment decisions, and readiness for regulatory and economic change. Strategic boards will look to identify and seize these opportunities.
Emerging Government Requirements
Large Employer Emergency Financing Facility (LEEFF) relief
The Large Employer Emergency Financing Facility (LEEFF) is a new federal program that provides "bridge financing" for large companies across all sectors of the Canadian economy, excluding the financial sector, who are experiencing hardship, as a result of the COVID-19 pandemic.
Notably, companies wishing to access LEEFF funds will be required to publish annual climate-related disclosure reports in accordance with the reporting standards developed by the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD). This will include disclosing what they are doing to meet Canada's specific target to be "net zero" by 2050.
A Growing Trend
Although climate risk disclosures have been largely voluntary in the past (as is the case with the TCFD recommendations), stakeholders – from shareholders to members of the public – are increasingly aware and may expect directors to address climate change-related risks.
The disclosure trajectory is clear: all companies – whether they are accessing LEEFF funds or not - should be informed and prepare for the risks associated with climate change in governance policies and practices.
Implications for Directors
As the legal and policy landscape shifts towards greater reporting and disclosure of climate risk, companies and directors should continue to follow corporate governance best practices, which include:
- Stay informed with respect to the climate change risks and opportunities relevant to your corporation;
- Ensure you have the resources, knowledge, and expertise to address risks posed by climate change;
- Be alert to compliance issues; and
- Listen to your investors and stakeholders.
Canada Climate Law Initiative
Jennifer Laura King and Liane Langstaff are Canadian Climate Governance Experts with the Canada Climate Law Initiative.
The Canada Climate Law Initiative is a cross-disciplinary research initiative that examines the legal basis for corporate directors, officers and pension fiduciaries to consider, manage, and report on climate-related financial risks and opportunities. The principal investigators are Dr. Janis Sarra and Dr. Carol Liao, Peter A. Allard School of Law, University of British Columbia and Professor Cynthia Williams, Osgoode Hall Law School, York University.
The Canadian Climate Governance Experts program offers free sessions on effective corporate governance to address climate-related financial risks and opportunities to corporate boards of directors and Canadian pension fund boards.
To learn more about the Climate Change Law Initiative, please contact Liane or Jennifer, or program manager Joanne Forbes firstname.lastname@example.org.
 See details on the Canada Climate Law Initiative at the end of this article.
 Janis Sarra and Cynthia Williams. "Directors' Liability and Climate Risk: Canada - Country Paper" (2018) Commonwealth Climate and Law Initiative at 12.
 Peoples Department Stores Inc (Trustee of) v Wise, 2004 SCC 68 and BCE Inc. v 1976 Debentureholders, 2008 SCC 69.
 Janis Sarra and Cynthia Williams. "Directors' Liability and Climate Risk: Canada - Country Paper" (2018) Commonwealth Climate and Law Initiative at 11, 20.
 Carol Hansell, "Putting Climate Change Risk on the Boardroom Table," Legal Opinion published on June 24, 2020 at 20.
 Carol Hansell, "Putting Climate Change Risk on the Boardroom Table," Legal Opinion published on June 24, 2020 at 18.
 Kerr v Danier Leather Inc, 2007 SCC 44 at para 54.
 Carol Hansell, "Putting Climate Change Risk on the Boardroom Table," Legal Opinion published on June 24, 2020 at 20.
 Canadian Securities Administrators, "CSA Staff Notice 51-358 Reporting of Climate Change-related Risks," August 1, 2019.
 Canadian Securities Administrators, "CSA Staff Notice 51-358 Reporting of Climate Change-related Risks," August 1, 2019. See also, Markus J Milne, et al. "Private climate change reporting: an emerging discourse of risk and opportunity" (2011) Accounting, Auditing & Accountability Journal.