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CLYDE & CO CLIMATE RESILIENCE EVENT – TOP TWO VOTED AUDIENCE QUESTIONS 1. Is it possible that oil and gas will be divested by investors and cease to be underwritten by insurers in a similar way to what we have seen happening with coal? There’s a big distinction between coal and oil & gas. The latter have a smaller carbon footprint, plus green technologies are not expanding fast enough to take over from them. So, while getting out of coal is priority, we’ll need to keep using oil & gas for some time to have an orderly transition. For investors, engagement is a better way to influence change than divestment. Shareholders can encourage reporting and support the shift to net zero, voting against boards if necessary. Demand for oil & gas shares remains strong, as for shares in carbon-intensive sectors like steel or automotive. For insurers, difficult issues can arise if companies are involved in other activities as well as oil & gas, further complicated as businesses have different timescales for green commitments. Insurers will need to ask themselves: where do they draw the line? Energy specialists need to think about what their book of business will look like in ten years’ time and if it should be reconfigured. If their fossil fuels business diminishes, will renewables replace it? Credit insurers need to consider the impact if carbon pricing gains momentum. Companies operating on tighter margins may be at risk of being downgraded by ratings agencies.
2. Is there an emerging view on “day zero” for D&O awareness of climate risks? I.e when is it
reasonable to assume boards know and understand the risks they face?
“Day zero” is the date when directors and officers should reasonably have been aware of the potential risks of a decision or action. If a case can later be made that they should have known, they are negligent. The lawhas not changed, but the standards against which duties are judged have. Five years ago, backward-looking box- ticking may have been adequate when signing off a new project, but not today. Now directors need to know more and look ahead. Given the amount of information available relating to transition risks, regulation etc, “I didn’t know” is no defence. Failure to seek out knowledge or take account of it is not the only risk. If directors exaggerate the company’s green credentials or preparedness for climate risk – or are silent about those risks - they could be exposed to claims.
Nigel Brook, Partner, Clyde & Co
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