This article first appeared in The Edge Malaysia Weekly on August 10, 2020 - August 16, 2020
LAST August, a group of Exxon investors filed a suit against the company’s officials and board members for failing to protect their investments from the risks of climate change.
The litigants, representing a mutual fund of the Saratoga Advantage Trust, allege that the officials “knew, were reckless, or were grossly negligent in not knowing” that Exxon was misleading its investors regarding the risks of climate change to its business.
According to The Climate Docket, a non-profit news site that reports on climate liability lawsuits filed against the fossil fuel industry, the plaintiffs say that the defendants knew that Exxon’s asset valuation processes were unsound and did not accurately assess the risk climate change posed to the company.
The news site says the number of such legal cases is growing.
This trend underlines the World Economic Forum’s forecast of changes that will determine the sustainability of global growth in the coming decades.
Its Climate Governance Initiative (CGI), set up last year, is an effort to support the development of climate-effective board governance. It seeks to prepare supervisory boards to fulfil their responsibilities in this area by framing the principles and producing tools for establishing the necessary processes in the corporations they oversee.
CGI founder Karina Litvack turns the spotlight squarely on the duty of care owed by board members on the issue at the launch of the initiative:
“Failure to identify potential climate risks is a potential failure of corporate governance. Irrespective of their personal beliefs or present knowledge, directors will not be able to argue — in the future, say, five years’ time — that they did not know it was going to be destructive to the ecosystem and to the business, as climate change has been identified as the defining issue of our time.”
Malaysia took an early lead in the work of engaging with non-executive directors (NEDs) of listed company boards to develop business responses to the longer-term risks of climate change.
The first CGI chapter in Asia, and second in the world, was launched in Malaysia in May last year. CGI also has chapters in Italy, France, Brazil, Russia, Canada and the UK.
Founder of the Malaysian chapter, Datin Seri Sunita Mei-Lin Rajakumar, said at the launch that the initiative aims to bring NEDs together with subject matter experts for strategic planning, risk management, human capital planning, examining remuneration, and to develop legal and governance models. (See her accompanying commentary on Page 60.)
Attention has been growing on the business response to the climate emergency, particularly since the Paris climate agreement of 2015. The landmark treaty, which involves all 197 nations in the world, seeks to greatly reduce greenhouse gas emissions in order to limit the global temperature increase in this century to well below 2°C compared with pre-industrial levels.
While the US has announced that it is quitting the climate pact, this decision is being countered by the US Climate Alliance, representing 55% of the country’s population, which is dedicated to realising the mission of the Paris agreement.
The implications of climate change need to be clearly grasped in order to appreciate the urgency of the crisis facing humanity.
The repercussions of a global temperature increase from 1.5°C to 2°C higher than in 1750 are brought home in the 2018 report “Global Warming of 1.5°C” by the Intergovernmental Panel on Climate Change.
Among them, notes Brookings senior fellow Nathan Hultman, is the likelihood that “it would expose several hundred million people to dangerous climate-related risks by 2050, and would likely wipe out 99% of coral reefs”.
In a word, the impacts of the climate crisis are devastating.
Nor is time on our side. As Hultman states, the study estimates that global emissions of greenhouse gases need to drop by 45% from 2010 levels by 2030 to stay on a 1.5°C path.
Given recent dramatic increases in emissions, he warns, that is roughly equivalent to a 60% cut in a decade’s time — a goal that may be close to unattainable under current conditions.
Under the Paris climate deal, all major greenhouse gas emitting countries have made commitments to cut the amount of pollution they produce and to improve these commitments over time.
This will require a reorientation towards a low carbon economy, forcing governments, investors and enterprises to adopt new ways to use resources and capital.
The payoff is a US$26 trillion opportunity in economic benefits through to 2030, according to a study by the Global Commission on the Economy and Climate, a high-level initiative to guide the international community on ways to balance economic growth with the risks of climate change.
The 2018 report by the commission’s New Climate Economy project identifies pathways to accelerate action in five sectors: energy, cities, food and land use, water and industry.
Business as usual comes with a huge opportunity cost, as World Resources Institute CEO Andrew Steer notes in reviewing the report. Disasters triggered by weather- and climate-related hazards were responsible for thousands of deaths and US$320 billion in losses in 2017.
“The climate crisis is a series of high probability, high impact events which will be occurring repeatedly over an indefinite time horizon,” says Sunita.
How should businesses respond to the risks posed by the climate emergency? What responsibilities do they have for ensuring that human society makes the best choices in this Doomsday situation?
The WEF, in partnership with PwC, has looked to chart the task facing company directors in its policy paper “How to Set Up Effective Climate Governance on Corporate Boards”.
On the one hand, it notes, climate change is simply another issue that drives corporate risk and opportunity, which boards inherently have a duty to address.
“On the other hand, climate change is a new and complex issue for many boards that entails grappling with scientific, macroeconomic and policy uncertainties across broad time scales and beyond board terms,” the paper states.
The initiative sets out to provide a compass for boards through a set of principles and questions to guide the development of good climate governance (see chart 1).
The good news is that more global corporations, from tech giant Google to global fashion brand Burberry, are stepping up their commitments to climate action.
However, scientists are worried that it may already be too late to prevent us from reaching a number of tipping points that could trigger abrupt, perhaps irreversible changes to the climate.
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