Carol Hansell is one of the foremost Canadian experts on corporate governance. She has served on a number of public and private boards, is a senior partner at Hansell McLaughlin Advisory Group, and past Chair of the Business Law Advisory Council, among many other positions and honours. She is also a Distinguished Fellow of the Conference Board of Canada.
In the paper, Putting Climate Change Risk on the Boardroom Table, Hansell argues that board members are duty-bound to assess the long-term risks associated with climate change and provide strategies to deal with those risks. She goes as far as to say that boards that do not deal with the long-term risks of climate change in a satisfactory manner risk legal liability for their inaction. In addition, the strategies and risk assessments that the board comes up with should be clearly communicated to staff and shareholders.
In May 2020, the Bank of Canada published a staff discussion paper, Scenario Analysis and the Economic and Financial Risks from Climate Change, that outlines exactly what the potential financial impacts of climate change are in Canada, both long and short-term. In a speech to the Ontario Securities Commission in November of 2019, the Bank of Canada Governor Stephen Poloz brought up the concern about physical and transition risks of climate change to the Canadian economy.
Physical risks are the tangible consequences of climate change, such as natural disasters. Transition risks are the risks to business which will come with the transition to a low-carbon economy, such as changes in consumer spending patterns or investor preferences. Essentially, there is no industry sector that will be untouched by climate change in the coming years and decades, and climate change is one of the Bank of Canada’s top risks to the economy according to its financial system health report.
Addressing climate change long-term risk as it concerns investors
One of the most important duties of the Board of Directors is to represent the interests of the Company, its management, and shareholders. When governance is good, the interests of all three entities are represented in a way that drives the company forward beneficially.
It goes without saying that institutional investors are an important consideration for any publicly listed Canadian business. Hansell also lists proxy advisory firms, which act as consultants for institutional investors, as important to the investment decisions of institutional investors. Institutional investors consider two related movements – Environmental, Social, and Governance (ES&G) investing, and Corporate Social Responsibility (CSR). The difference between the two is illustrated here.
In summary, CSR follows a standard set of best practices to score a company’s sustainability efforts and good corporate citizenship and is usually run internally by the company. ES&G investing is a way of performing stock analysis that takes the company’s social role, sustainability efforts, and corporate governance all into account. Climate change risk, and how a company is managing it, is pertinent to both.
Hansell states in the paper that institutional investors have largely adopted the Task Force on Climate-Related Financial Disclosures (TCFD) framework in order to evaluate the climate change risk of a company. A good starting point for a board would be to adopt this framework themselves when formulating a strategy.
Hansell’s assertions about institutional investors are not predictions – institutional investors are looking for companies to invest in that meet ES&G requirements right now. In a May 2020 survey by Natixis Investment Managers, 65% of institutional investor respondents agreed that ES&G analysis has a place alongside traditional stock analysis, and 70% stated that ES&G integration would become standard practice.
Duty of Care, fiduciary duty, and how they pertain to climate change risk
The paper offers an opinion on how duty of care is distributed among board members. Hansell argues that all have an egalitarian duty of care, despite what their area of expertise is. Climate change risks touch on all areas of the business, from financial prudence to reputation management. She further argues that fiduciary duty means to look out for the financial interests of the corporation, citing a Supreme Court of Canada decision’s statement: “The fiduciary duty of the directors to the corporation is a broad, contextual concept. It is not confined to short-term profit or share value. Where the corporation is an ongoing concern, it looks to the long-term interests of the corporation.”
The paper states that the business judgement rule, in which “courts defer to the reasonable business judgement of disinterested directors who follow an appropriate process”*, does not let off directors from their obligations when it comes to anything, and not just climate change risk. Following the process alone is not enough – where a director becomes aware of an issue, they have to act and not be passive.
There are other, more programmatic things that a director needs to ensure are being done related to climate change risk. Reporting of Climate Change Related Risks is now a requirement of the Canadian Securities Administration, and Hansell lists several other reporting requirements and best practices in her paper.
How to properly implement a Climate Change Risk Strategy
Rather than forming a separate committee to address climate change risks, Hansell recommends embedding climate change concerns into work each committee is doing, and the board as a whole should incorporate climate change risk into its work plan. She recommends the Canadian Coalition for Good Governance’s The Directors’ E&S Guidebook as a resource for Canadian boards in dealing with climate change risks.
Following Hansell’s game plan for climate change risk management is a logical next step for companies which are wrestling with the implications of new disclosure rules and best practices in CSR and ES&G investing. It will ensure that directors fall within legal guidelines for addressing climate change risk and, more importantly, ensure that their companies have proper strategies in place for risk management.
*Page 17: Hansell, Carol. Putting Climate Change Risk on the Boardroom Table, Hansell LLP, 2020