Reporting requirements: what do businesses need to know?
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Climate change can act as a threat multiplier. Do your assumptions around
Failure to show intent to improve, let alone positive performance, could expose companies and their directors to negative publicity, leading potentially to loss of customers and contracts and difficulties attracting and retaining the best talent. Credit ratings could be downgraded, and a more challenging investment landscape could emerge, especially as ESG investing becomes prevalent. And though it has not happened yet, in the future, poor credentials in this area could influence the availability and pricing of financing and insurance, particularly as banks and insurers come under increasing pressure from regulators and other stakeholders to assess and manage climate risks in their portfolios and actively support the transition to net zero. Not to mention potential litigation against companies and their directors arguing they have not done enough to address climate change risks, be it physical or transition (as in the above-mentioned examples of strategic litigation against companies). At the same time, scrutiny over perceived greenwashing is increasing, with internal andexternal stakeholdersalikekeentoknow how reliable businesses’ green statements are. Last year, such issues were brought into sharp relief by the EUR 5m fine imposed on Italian energy giant ENI by the country’s Competition and Markets Authority over claims that its diesel containing 15% treated palm oil was green, despite the fact that palm oil production is a well-known cause of deforestation 55 .
Activists, investors, regulators and even customers themselves are on the alert for discrepancies between companies’ statements and their actions, heightening the risk of litigation. At this time of mounting consumer expectation and protection, ESG mis-statements constitute a legal and reputational vulnerability. In a world of increasingly accessible litigation funding and an ever more sophisticated claimant bar with access to collective consumer redress remedies and class actions, consistent, accurate reporting around climate, sustainability and ESG promises is essential.
For all these reasons, boards should be focussing not just on TCFD requirements, but on how climate change issues interplay with their duties of care. They need to ensure risks are identified and mitigated proactively and to report accurately — and to spot opportunities arising that could create value, such as developing new market offerings. If your business is ignoring climate change and the opportunities and risks it presents, the business is exposing itself to being left behind at best, but also possibly being subject to potential regulatory issues and litigation.
physical risks consider climate modelling? Can you keep up with changing standards? Have you considered how climate risks could impact business demand? Directors have a duty to consider all these risks.
- Jacinta Studdert, Partner, Clyde & Co, Sydney
Secondly, while TCFD is ultimately about disclosure, a great deal of groundwork needs to be laid first (some say this is a three-year exercise). Fundamentally, climate change has to be integrated into key governance processes and the risk management function. Beyond that, a company would identify and (perhaps) quantify the potential financial impacts of physical and transition risks on all parts of the enterprise; run climate scenarios; determine how the risks identified are to be managed; consult investors about the climate-related risks and opportunities they need to know about; rigorously check the information to be reported; and decide whether to integrate this information in its annual reports or disclose it separately.
- Vikram Sidhu, Partner, Clyde & Co, NewYork
The benchmark for assessing what directors and officers (and their professional advisers) should know or have known has altered significantly in recent years. Boards need to be aware not just of current risks, but future risks, too, and must influence how risk mitigation actions are operationalised throughout the business. Good governance has a critical role to play in anticipating and responding to all these challenges and possibilities, as we explore in the next section.
- Simon Konsta, Partner, Clyde & Co, London
A RAFT OF OTHER OBLIGATIONS
There are of course many other legal obligations companies and their directors must consider: financial services regulations, company law, environmental laws, health and safety requirements, contract and procurement issues and directors’ duties among others.
55 Wall Street Journal https://www.wsj.com/articles/eni-to-appeal-italian-fine-for-diesel-ads-11579112280
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