In a recent speech to the Anglo-Australasian Law Society — Directors' duties and climate change: Keeping pace with environmental challenges — Lord Sales, Justice of the UK Supreme Court, outlined the extent to which existing 'company law frameworks' in Australia and England, enable and (increasingly oblige) directors to take into account environmental considerations.
He concluded that overall, 'the basic direction of travel in both jurisdictions seems clear. With respect to the legislative scheme, environmental considerations may and, increasingly, must be taken into account by directors, particularly where there may be financial impacts on the company'. He went on to observe that this is 'especially true in England given section 172(1)(d). But it is also in practice so in the Australian context, by application of section 180(1). It is clear that the very traditional view of the undemanding nature of directors' duties is now outmoded in both jurisdictions'.
[Note: Section 172(1) of the UK Companies Act 2006, the Duty to promote the success of the company, lists matters directors should 'have regard to' in discharging their duty, including s172(1)(d) the impact of the company's operations on the community and the environment.]
However, Lord Sales considers that 'procedural reform' in both England and Australia is justified to raise the profile of consideration of environmental impacts in director decision making. 'The clear message to be taken away from this lecture is that company law in England and Australia alike is still undergoing a process of coming to terms with the new challenges raised by climate change and wider environmental issues. These challenges are, at present, primarily accommodated within the general framework of wide and open-textured directors' duties, with certain statutory overlays…There is a clear case for these company laws to be modified, by legislation, to provide a greater impetus to boards and individual directors to accord greater attention and weight to climate issues than has until now been considered appropriate'.
Three suggested 'procedural' reforms
Lord Sales outlines three reform proposals, all of which he says are 'procedural in nature, but which would have the objective of raising the profile of consideration of environmental impacts in decision-making by directors'. The proposed changes would he said 'respect the existing basic pattern of legal responsibilities, so that directors would continue to have the freedom and responsibility to take the business decisions for their companies without being compelled to act in particular ways'. The proposed changes are as follows.
The inclusion of a s172 type 'enlightened shareholder principle'?
Lord Sales suggests that an 'obvious reform proposal in Australia' would be the explicit adoption of the principle of 'enlightened shareholder value' in section 172 of the Companies Act 2006 into the Australian Corporations Act 2001. He suggests that this could be done by making 'specific provision requiring consideration of environmental impacts by directors'. Lord Sales observes that while it seems that s 180(1) 'is capable of being construed so as to have an effect similar to that of the section 172 duty in the English Act, as Noel Hutley SC contends in his Opinions, it might be thought to be unsatisfactory to leave such a significant issue to the subtleties of interpretation and inference'.
[Note: On 7 October 2016, Noel Hutley SC and Sebastian Hartford-Davis provided an opinion considering the extent to which the duty of care and diligence imposed upon company directors by s 180(1) of the Corporations Act 2001 (Cth) permitted or required Australian company directors to respond to climate change risks (2016 Opinion). In April of this year, The Centre for Policy Development (CPD) released a supplementary opinion, responding to developments since the original opinion was finalised.]
Streamlined climate disclosure
Further thought should be given, Lord Sales suggests in both Australia and England, to statutory 'standalone environmental disclosure duties'. 'The idea would be to require specific reporting with the relevant legislation or a supplementary best practice code providing clear parameters for which aspects of environmental impact should normally be covered' Lord Hales said. He suggested that examples might include: reporting on supply chain management, corporate waste disposal, company investment profiles, environmental impact assessments for major projects and energy consumption.
The imposition of a new requirement for boards to include a designated member environmental impact issues
Lord Sales suggests the introduction of a legislative or, as a preliminary step, regulatory best practice requirement, to appoint a designated board member for environmental impact issues. 'This director would provide a dedicated voice on the board to ensure that such issues are indeed brought into account by directors when the board acts. The director would be the focal point for the company's environmental responsibilities, and would provide the lead to ensure fulfilment of the company's duties regarding environmental disclosures and reporting' Lord Sales said. In suggesting this change, Lord Sales clarified that he is not proposing that responsibility for environmental impact issues be 'siphoned off' to one designated member of the board. Rather he says that the purpose of designating a specific board member is to 'give environmental impact issues due prominence in the decision making process of the board as a whole'. Lord Sales further observed that larger companies are already beginning to appoint senior environmental officers at various tiers in their organisations and that his proposal is a 'natural progression'.
Alternately, Lord Sales suggests that there could be a legislative requirement or best practice provision in a Code calling for the appointment of an environmental consultant to the board. Further, he suggests that depending on the size and resources of the company, another option would be to require the setting up of an internal environmental committee reporting to the board (which could first be trialled in a best practice code).
'Ever more tailored and specific duties of a procedural nature'?
Lord Sales concedes that his suggested changes may create a risk of being overly prescriptive, but argues that they would also sharpen directors' attention on environmental factors as a 'substantive matter'. He observes 'the tenor of these suggestions is clear. In line with reform proposals in the "Time to Act" report in Canada and regulatory calls for action by the Bank of England and the APRA, the way forward in this area, legally, seems to be ever more tailored and specific duties of a procedural nature. While this might create a risk of over-proceduralisation, possibly at the expense of substance, it would have the clear benefit of imposing concrete procedural obligations at board level. These can be policed effectively, and it is to be hoped that duties to consider specified environmental impacts would also sharpen the attention and awareness of directors regarding environmental factors as a substantive matter'.
Lord Sales observed that despite the 'increasingly high likelihood' that the 'financial consequences of inaction may even curb the need, speaking purely pragmatically, for extensive further legislation in England and Australia', the importance of the issue warrants consideration to be given to the proposed reforms. 'The gravity of the issue of climate change and the leadership role performed by both the UK and Australia on these issues on the international level, it seems desirable for their company laws to keep pace with and indeed assume a position in the lead in the current trends in favour of disclosure, reporting and risk management' he said.