Directors must ensure company operations don’t harm the environment’

Directors of local firms should consider climate change-related risks in the discharge of their duties, to fulfill their companies’ long-term legal, economic, moral and social obligations towards their shareholders and other stakeholders, according to a white paper commissioned by the Commonwealth Climate and Law Initiative (CCLI).

The opinion finds that under Philippine corporation law, the risks arising from climate change are within the scope of directors’ duties to act in the best interest of the corporation and its shareholders. Directors owe their duties to stakeholders more broadly, and hold a stewardship role to ensure that company operations do not degrade the environment or contravene environmental laws.

“It is now globally recognized that climate change poses serious physical, transition, and liability risks to companies, and that climate change must be included in companies’ enterprise risk management framework,” the paper read.

“Under the ‘comply or explain’ approach of the Philippine corporate governance framework for publicly-held companies, boards of directors are encouraged to foster the corporation’s long-term success, and to sustain its competitiveness and profitability in a manner consistent with its corporate objectives and ‘the long- term best interests of its shareholders and other stakeholders’.”

The said paper was authored by Cesar L. Villanueva, Lily K. Gruba, Angelo Patrick F. Advincula and Joyce Anne C. Wong.

Regulatory authorities, including the Securities and Exchange Commission (SEC), have taken detailed and specific steps to bring climate change risks to the attention of banks and insurers and listed companies. For example, the Sustainability Reporting Guidelines for Publicly-Listed Companies provide a Sustainability Reporting Framework to which Philippine publicly-listed companies must adhere on a comply or explain basis.

The new legal analysis finds that if sustainability reporting is made fully mandatory by the Philippine SEC, as is predicted for 2023, the failure to comply with the reporting rules may demonstrate gross negligence or bad faith in directing the affairs of the corporation in relation to climate change risks that the company may face, or regarding the company’s obligation to refrain from harming the environment.

Boards of directors of both private and public companies should prepare for increased reporting standards and corresponding changes in their identification and management of climate-related risks, as well as employ value chain processes that take ESG, or environmental, social and governance, issues into consideration.

“This independent opinion of Philippine counsel adds to and complements opinions which we have commissioned in Malaysia, India, Hong Kong and Singapore. It finds that governance of foreseeable financial climate change risks forms part of directors’ duties and that directors have a stewardship role to ensure that company operations do not degrade the environment,” said Alex Cooper, lawyer at the CCLI.

“The opinion finds that directors may be held liable for gross negligence in performing their duties, but generally are able to take actions to mitigate the impacts of climate change on their company without exposing themselves to the risk of liability due to the business judgment rule.

“With climate change being at the forefront of the COP27 in Egypt last month, it is inevitable to continue to be deeply embedded in sustainability reports for the long term, according to Carlos Gatmaitan, CEO of the Institute of Corporate Directors.

“It is essential therefore that the framework for climate change as part of Sustainability Reports be reviewed towards a global standard. This publication is a major step for formalizing an SEC Memorandum Circular for proper duties and responsibilities of directors as well as disclosures and obligations of publicly-listed companies.”

“The legal opinion provides a unique opportunity to drive crucial conversations regarding the role of the private sector, particularly company directors, in tackling the climate crisis. It is essential reading for lawyers and company directors on the legal framework for managing climate risks and pursuing opportunities as the Philippines transitions to a net zero carbon economy. We believe this will lead to more companies in the Philippines establishing, and fulfilling, net zero transition plans within a Paris-compatible timeframe,” said Joyce Melcar Tan, senior lawyer at environmental law NGO ClientEarth.

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