Understanding directors’ duties and climate risk - A podcast from MinterEllison
Updated: Oct 12, 2021
In many nations – and many companies – the race towards net zero emissions is already underway. More and more business leaders now realise that climate action is not just a moral responsibility, but a matter of plain common sense.
Sarah Barker - MinterEllison Partner and Head of Climate Risk Governance - interviews Philippe Joubert - Founder and CEO of Earth on Board - on directors' duties and environmental limits.
The 1hour podcast is available on MinterEllison website: https://www.minterellison.com/articles/podcast-understanding-directors-duties-and-climate-risk
We repoduce here a summary of the interview kindly written by MinterEllison:
The intersection between purpose and net zero Board Directors must look at the purpose of the companies they oversee, and its compatibility with contributing to net zero, as part of their strategy to reduce emissions. CEO of Earth of Board, Philippe Joubert, says: “Boards have the duty to look at net zero, even to provoke it or to lead it, but first of all, Directors have to ask if the purpose of their company is either compatible, nearly compatible, or possibly compatible with net zero, then they can start their planning on how to change processes and the way they work.” Joubert notes that purpose goes beyond the actions of a company, to the actions of those connected to the company such as the supply chain and those who use their products. “It's not enough to talk or to look at just the emissions that your direct operations are provoking, you have to understand what the emissions are embedded in your supply chain. “Second, you have to understand your own emissions and third, you have to understand the emissions from the use of your product or service by your customers.”
Defining a company’s true profit The statutory requirements in Australia determine that companies must keep appropriate and adequate written financial records and these records must correctly record and explain its transactions, financial performance and position and allow for ‘true and fair’ financial statements to be prepared and audited. However, looking deeply at a company’s performance on achieving net zero can shift the conversation on what true profit is and recognise and that there are costs in nature that are not included in a balance sheet. Joubert says; “it is the duty of the board to consider the true profit of the company. “Look at the way we have been doing business for years, we have been taking nature for free and we have never paid for our impact and we have never paid for the work that nature has done to supply us with this product - we just produce a number based upon a cost that doesn't exist.” Carbon pricing is one mechanism that brings more transparency to costs: “All these costs, either the services that are being used free of charge such as water and air or the impact that you have, are not in the balance sheet, and they are not in the P&L, but this is changing for CO2 pricing is growing everywhere, and I think things are changing in Europe because of this. “So slowly, nature is sending the bill and saying that nature has no price is just sending the bill for the next generation,” said Joubert. Higher market expectations in the future The most recent Hutley Opinion acknowledges that evolving market expectations on climate change have considerably elevated the standard of care required to discharge a directors' duty of due care and diligence. It also highlights the risk of liability for misleading disclosure, in the form of 'greenwashing', should there be inconsistency between a company's stated position and ambition on climate risk management, and its internal strategy, plans and actions. Joubert says ‘greenwashing’ prohibits progress: “Once you decide to go to a net zero economy or society, you discover that the technology is there. It's just a matter of scaling up, implementing, and more importantly, putting the right price level in the system, because if you have fake numbers or fake costs, then you don't progress. “Somebody will tell you one day: you knew this, you were distributing dividends and paying bonuses on fake numbers, and this is a board duty that you have not fulfilled. “This is why governance and law are so important, because if you don't have the right law or if you don't have the right governance, the market will not correct itself. “We should kill this idea that market will act alone by magic - you need guidance, you need law, and you need right governance and that's why working with boards is so important, because it is where everything starts."