Company Directors’ Personal Liability In Climate Decarbonization by Opatola Victor
The issue of observance of climate change is fast moving from mere ethical considerations to that which can cost heavy financial liabilities not only on companies but also personally on the directors of the company.
A rising list of cases all over the world are making giant strides in major efforts to make company directors personally liable for failure to comply with basic company law fiduciary duties and tort liabilities. Failure of the board of directors to consider environmental friendly initiatives, emission targets or country temperature targets is at the heart of these litigations. A number of these litigations have been successful, while others didn’t succeed entirely but made considerable progress past previous hurdles synonymous with such litigations.
From Europe to Africa, Courts all over the world are now positively responding to climate litigation cases – yes, even in Nigeria. Companies must begin to consider present realities of climate litigation, that it is fast becoming dynamic and standards of liability are evolving. The Courts are now increasingly willing to intervene and decide in favour of climate actions now than ever – due to increasing societal, economic impact of climate change. For instance, there have been a major tectonic shift in Nigeria in relation to Supreme Court’s position on climate and environmental related cases. Companies and Company Directors are increasingly open to litigations and Financial liabilities not only for fiduciary duties, but also for tort and criminal liabilities. The recent ruling by a Dutch court in the well-known case of Milieudefensie and Ors. v Royal Dutch Shell plc underscores the broadening scope of tort law in addressing climate change matters. With this expanding application of tort law, it becomes imperative for directors to be cognizant of and mitigate the growing risks to ensure compliance with their corporate legal obligations. Similarly, companies should adopt a proactive strategy for managing liability risks related to climate change.
Directors Duties and climate change:
A broad overview of the emerging trend in climate actions shows that companies and their directors are increasingly becoming liable in the following areas: Tort, Fiduciary duties, derivative action and ESG compliance. Modern tort law is increasingly expanding to accommodate climate actions – tort actions in climate cases on founded on the premise of duty of care even sometimes to third parties. This duty of care is based on the obligation on companies and directors to take reasonable care to avoid causing personal injury or death to others. To minimize exposure to climate-related litigation, it’s imperative for company directors to proactively educate themselves about climate matters and incorporate the effects of climate change, both immediate and long-term, into their decision-making processes, addressing both existing and emerging risks.
To promote the integration of climate risks into routine decision-making, companies can consider the inclusion of specific language within their board minute precedents when relevant. This can serve as a reminder and a formal acknowledgment of the importance of climate considerations in the board’s discussions and actions. This practice can help ensure that climate risk management becomes an integral part of the company’s governance and strategic planning, reducing potential legal liabilities associated with climate-related issues.
Fiduciary duty: Companies Directors has a major fiduciary duty – duty of doing business in the best interest of the company. This duty requires company directors to act from an informed perspective by considering all reseaonable information available and make the best decision in the interest of the company and it’s shareholders. Company directors has an obligation to factor the risk and opportunities presented by ESG when making important company decisions. Normally, the other side to the above arguement would have been that the company director does not have any fiduciary duty to consider ESG factors that are not material to the interest of the company but section 305(3) of the ompanies and allied matters Act 2020 and other relevant environmental laws in Nigeria has changed the game. This means that the best interest of the company must be considered along with environmental impact.
Section 305(3) of CAMA provides that:
“A director shall act at all times in what he believes to be the best interests of the company as a whole so as to preserve its assets, further its business, and promote the purposes for which it was formed, and in such manner as a faithful, diligent, careful and ordinarily skilful director would act in the circumstances and, in doing so, shall have regard to the impact of the company’s operations on the environment in the community where it carries on business operations.”
So, a director, in exercising fiduciary duty to the company must must have regard to the impact of his decision on the environment and the community environment where such business or project will be done. This in itself opens the director and the company to court actions from the company shareholders and the community vwherr such project will be carried out.
Tort liabilities: This is based on the principle of duty of care which the company owes to others. So parties may institute actions against a company where they can show that the company owed them a reasonable duty of care against environmental or climate population.
ESG compliance:
Environmental, Social and Governance issues are quickly moving away from mere cliches and catch-phrases into serious boardroom issues and company liability matters. ESG issues are sometimes law specific and sector specific although some might apply generally and or overlap, especially for companies playing in multiple sectors and states regulatory domain. Company failure to apply ESG regulations may attract sanctions ranging from financial sanction, personal liabilities of directors etc To avoid this regular compliance audit is important for companies. There are numerous ESG obligations for companies depending on the sector, for instance the Nigeria Central Bank and the Security and Exchange Commission issued guidelines related to sustainability and disclosure related guidelines. More of these ESG related guidelines will start coming up in various sectors. It is good for companies and directors to note that these ESG compliance guidelines and laws are not centrally codified or contained in one particular law, it is a corpus of various laws, regulations and guidelines; for instance: the Factories Act, harmful waste Act, NESREA Act, Environmental Impact Assessment Act, Nigeria Stock Exchange disclosure guidelines etc. With time other sectors like insurance, Manufacturing, Mining etc will come up with theirs if it is not already extant.
Also directors and companies can be liable for green-washing. Greenwashing is a term used to describe the deceptive practice of making exaggerated or false claims about the environmental friendliness of a company’s products or its commitment to sustainability. These claims are delibrately intended to mislead, deceive and hood-wink consumers into believing that the products are more eco-friendly or have a more positive environmental impact than they truly do – in order for the company to get more customers or environmentally friendly reputation. It’s a form of marketing or branding gimmick that can undermine trust and transparency in the realm of corporate sustainability. They can be liable in tort and under various consumer laws.
It is gradually becoming important for companies and their directors to factor in environmental considerations in their decision making, it is no longer ethical consideration but legal consideration that can lead to significant financial liabilities, prison sentence, loss or restriction of license and other punitive measure; also most important is the increasing media goodwill that might be lost.
Opatola Victor is a legal practitioner and policy expert.
