Importance of Natural Resources

What Liability Risks Exist For Directors Who Ignore Climate Risk? Is there a Duty to Adapt?

– Good day! My name’s Sarah Barker,
I’m from Australia. I am a special counsel at — That’s my one for the discussion panel. I know, I did try and, sorry. Just go ahead. I tell you, I tell you,
it’s not my strong point. I’m a special counsel at
MinterEllison Lawyers. We’re the largest commercial law firm in the Asia Pacific region. We are very much a what I think, Joanne called last night, a what shoe? Practiced, does that
mean something over here? We’re a defendant practice, we act for big nasty corporations and their big nasty directors. And I’m also a Pension
Fund Trustee Director on the board of one of
Australia’s largest pension funds, the Emergency and Services
State Superannuation Fund. And it is my pleasure to be chairing the panel on my favorite topic, which is director’s duties and liabilities in relation to climate change risks. So today, I’m very excited
about the panel that we have to share their complimentary perspectives on this topic. I’ll briefly introduce them before I say a few opening remarks about the topic and then hand over to them
for their opening statements before we open it up to the discussion. To my right we have Kristin Casper, who is an attorney from
Greenpeace in Canada. Kristin creates the law, basically. If we didn’t have people like Kristin, actually acting on the legal theory and bringing corporations
and directors to account. Then we wouldn’t have any scary examples to talk to directors about. Thank you, Kristin. Then I have Andrew MacDougall, who is a corporate law
partner who specializes in corporate governance, securities law, disclosure, and shareholder activism at Oslo, Hoskin and Harcourt and Andrew is going to talk to us today about director’s duties through and disclosure obligations
through that corporate rulings. And then finally, to my very right, we have David Estrin, who
in a nut shell is a giant in an environmental law field in Canada and around the world. He literally wrote the
book on environmental law and its implications for business. Called the Business Guide
to Environmental Law. And amongst his many
other current positions and previous experience,
which I won’t go into they’re all the packs before you. He’s currently heading up the International Bar
Association subcommittee that recently wrote a report entitled Achieving Justice In Human Rights in an Era of Climate Disruption. I think we’ve got three really good complimentary perspectives
on this question today. We’re going to start with
Kristin talking about litigation all around
the globe in relation to climate risk and the
different categories of climate litigation that
we’re currently seeing. We’ll then move on to Andrew to talk — Sorry, we’ll move on to you then David to talk about perspectives
on director liability under environmental law in Ontario. And then finally bringing
up the (mumble) with Andrew to talk about duties and
disclosure obligations to the corporate and securities rulings. Very briefly before I
hand over to Kristin, I wanted to talk about an F word, which I think is the
center of this panel today and this word is fiduciary. One phrase that tends to be thrown around by directors and their advisors, usually is a blocking
mechanism when I don’t want to do something. Is this concept of fiduciary duty. Thrown around all the time, but it’s not really well understood. What does it mean? At its base, being a fiduciary means to undertake to acting to
someone else’s best interest and to prioritize someone
else’s best interest above your own interests and the interest of any other third party. Directors are fiduciaries
of their corporation. And pension fund trustees are fiduciaries of the beneficiaries. So they undertake to
prioritize the interest of either the corporation
of the fiduciaries. And for 30 years, when
we look at climate change and it’s relationship to directors duties, the focus of the debate
has been around well, can directors even think
about climate change, because best interests are making money for corporations and climate change is a non financial, ethical, environmental lefty greeny hippy issue that is fundamentally
inconsistent with making money. For the longest time, the
debate has been around whether or not it is
even in the best interest for a corporation to be
thinking about climate change. Now, after Ben’s came
out this morning I’m sure you have a much better sense of the fact that he’s not the case anymore. There are significant physical risks and economic transition risks associated with climate change that
are materially financial and that manifest within
mainstream business horizons. This is not something
that we can think about in 2070 or 2100, something that
we need to think about now. So that being the case,
the question is now evolving into, okay, well
if business is allowed to think about climate change
because it’s financial, what does it have to do
and what do directors need to think about? When they are considering
the impact of climate risk on their business. And that’s where I think the direction of the debate is heading now, around the second half of a fiduciary duty in relation to minimum
standards of competence. Due care and diligence. How does a director exercise
due care and diligence in acting in the best
interest of its corporation in relation to climate change. And that’s where we
really do need as lawyers, to be working with the economists, and the financial institutions, and the scientists, and those clever software
engineering people that do all the big data. Because to exercise due care and diligence in relation to this issue, you’ve got to be current. And it’s not about what you know but about what you ought to know. With that preface, to
my take on the F word, I’m going to hand over to Kristin to talk about the different categories of climate litigation that we’re seeing around the world at the
moment and very exciting. I know I need to get on,
but it’s really exciting. – Well, thank you for that
brilliant introduction. First I just want to thank
one of the key organizers of this event. Professor Williams,
you’ve done a great job bringing together an excellent group. I’m going to be sharing with you — First, let me say, I’m
not a Canadian lawyer, I’m a U.S. lawyer and as Sarah says, my role in all of this is
working around the world, around the globe. Creating, developing and
supporting climate litigation. I hope that this morning talk will set kind of the mood music, then for my co-panelists to come in and really bring in the Canadian aspects of fiduciary duty, Canadian governments, governance and the director’s risk. Two things happened in 2013 that I think changed the course of history on climate action. A major super typhoon hit the Philippines, killing 6,300 people and leaving millions
affected even to this day. Second, a ground breaking report came out that showed just 90 carbon producers, called the Carbon Majors, were responsible for 63% of the estimated global emissions of CO2 and methane. In response to these developments, Greenpeace and some
allies sent some letters to fossil fuel companies and insurers. And asked a simple question. What would they do if companies were sued over the history offending
climate misinformation and opposition to policies
to fight climate change? Let’s just say, the response
was pretty much silent. We were laughed at. The Canadian Association
of Petroleum Producers brushed the letters off as a stunt. One editorial board here in Calgary said it was reckless and laughable to be making a comparison to big tobacco. But as my colleague Cue Steward over there wrote in a recent blog, “The laughter now is turning to silence, “because we’re seeing climate
change really happening.” There’s a mosaic of cases
and soon there will be a cascade of decisions. Columbia, the United Nations
Environmental Program in Columbia Law School and Sabin Center for Climate Change Law, recently
produced a global survey of climate litigation. And they found that
litigation has arguably never been a more important tool to push policy makers
and market participants to develop and implement means of climate change
mitigation and adaptation. So what’s happening? There’s 250 climate cases
happening in 25 jurisdictions. And that’s not including
the 600 plus cases in the United States. And what we now have is were looking — There’s scholars and practitioners like Sarah Barker and the Two
Degree Investing Initiative that are starting to dig in and they just produced a must read report, so download it now, it’s
called Climate Boomerang Litigation Risk as a
Driver and Consequence of the Energy Transition. It does a great job
laying out how litigation, the long tail of litigation,
has impact across the board. Whether its cost, potential
fines or penalties, prosecution of executives. We can see impacts on
valuation, credit ratings, shareholder claims, and even bringing in new parties to the litigation. And exclusions and disputes
between insured and insurer. Climate litigation is a material risk. And don’t take my word for it, this is the 10K filing of Chevron that recently came out. Chevron stated, “In addition,
increasing attention “to climate change risk has resulted “in increased possibility of
governmental investigations “and potentially private litigation “against the company.” In my short time left with you today, I’m going to take you on a whirlwind of climate litigation around the world and then I’m going to end
with three recommendations or insights that hopefully
will be discussed in this panel and maybe
in the coffee breaks. That same report, the Carbon
Boomerang Litigation Report does an excellent job
categorizing litigation into three distinct categories. First are claims relating
to the failure to mitigate. Second, claims relating
to the failure to adopt, and the third, is regulatory claims that come out of the transition,
the energy transition. I am only going to focus on the first two, but maybe we’ll get
into the third category in the Q and A, because
that’s also really important. Failure to mitigate, let me
just put this in context. We have all been witnessing and sadly, clicking on you know, looking at the news, and Sarah, I hope you’re
keeping time on me. – [Sarah] I am. – Okay, great. That there is — And keep me accountable, please. The flooding in south Asia, the fires in western Canada
and the western United States, Hurricane Harvey, Irma, Maria, devastating the Caribbean and parts of the southeastern United States. And scientists are in a broad agreement that hurricanes like Irma are intensified by climate change. And climate change is increasing the risk of deadly and destructive fires. The costs are astronomical and the unofficial cost of Irma and Harvey and Maria combined is $300 billion U.S. And just two of B.C.s wildfires, the Elephant Hill and
the Williams Lake Fire cost insurers approximately
$127 million Canadian dollars. And that doesn’t include
all the businesses and homes and possessions
that are uninsured. This is a billboard
that went up in Houston I think last week. It has a question on it. People are starting to
ask, who’s going to pay for all the damages? And some are suggesting that
the big fossil fuel companies that have contributed a
disproportional amount of the greenhouse to climate pollution and that have undermined climate science and actions and solutions should make a significant contribution to the cost of resiliency and adaptation. There’s also science that has come out. UCS Union Concerned Scientists, University of Oxford, the
Climate Accountability Institute, produced a study looking at
those carbon major companies and they found that nearly 50% of the global average rise
in temperature since 1880, and 30% of the sea level rise since 1880 can be attributed to
these company’s emissions. I mean, it makes me want to ask, if that extra carbon had not been added to the atmosphere, would we be facing that climate driven
disasters we are today? What is happening in response? Three communities, the
county of San Mateo, the city of Imperial Beach, the county of Marin, have filed a case against 37 carbon producers. It’s under various causes of action, including public nuisance,
strict liability, design effect, many others. So various causes of action. And the cost, the damages
that they are looking at, for example, San Mateo is expecting $39 billion in property damage over the next period of time. The response has been quick. The companies have filed notice to remove the cases from state court to federal district
courts, and it’s expected that they will be following
a motion to dismiss at the appropriate time. Those municipalities were also joined by San Francisco and
Oakland, but this time, the case is a bit different,
it’s a bit more targeted, it’s looking at only five, the
five largest investor-owned carbon producers. Chevron, Conoco Phillips, Exxon Mobil, BP, Royal Dutch Shell,
and they are arguing, that the defendants, the corporations, knowingly and recklessly
created a public nuisance that has led to a present harm and a risk of future harm to
human health and property. Again, we’re talking billions. San Francisco, we all know
that incredibly rich city, they’re facing at least
10 billion in public and 39 billion in public
property risk alone. Now I’m going to take you to
probably where my heart is on the other side of the world. Some of the same people who
survived Typhoon Haiyan, along with NGOs and notable individuals filed the first ever
petition to a commission on human rights seeking an investigation into the responsibility
of the carbon producers for climate related human rights harms. The case is based on international
law and national law. The petitioners argue that these companies are not fulfilling their responsibility to respect human rights
through the extraction, production, and sale of products, that when used as directed result in significant climate change pollution and resulting human rights impacts. They argue that these companies are acting without due diligence in
light of the known risks posed by climate change. Just two days ago, the
Commission on Human Rights issued a notice to all the companies asking them to appear at
a preliminary conference on December 11th in Manila. That’s the day after
International Human Rights Day. But let’s say they haven’t
been so active yet. Only 21 of the 47 companies even bothered to respond to the petition. It does include some of the
major companies like Exxon, but the Canadian companies
have been silent. The question is, will these companies show good corporate citizenship? We’ll have to see. So I’m going to move quickly. There are also cases against governments that are happening. A successful one in the Netherlands that’s increased the ambition in its national climate policies that is on appeal. We’re seeing grandmothers
taking on the Swiss governments. This case not only involves
just the power sector, but is also looking at the transports and building sector emissions. Norwegian youth, now this is important for companies that are seeking to extract new or to have new fossil fuel projects. So Norwegian Youth and Greenpeace Nordic have sued the Norwegian government, seeking to invalidate license granted to multi-national companies to drill based on the constitutional
right to a healthy environment. So just quickly, I feel
like I need more time, but I’m going to do this
as quickly as possible. The failure to adapt cases. And these are probably the ones that everyone in this
room is thinking about. The Attorneys General
in the United States, two of them in particular, in
New York and Massachusetts, are investigating Exxon for what they knew about climate change and what they did about climate change. Looking at whether there’s
been some sort of fraud underneath the Martin Act and potentially the consumer protection laws. What’s interesting about this case, is that it does have ties here in Canada. An employee of Imperial,
a wholly owned subsidiary of Exxon Mobil has been asked to testify about whether he was asked
not to apply carbon pricing when looking at assets in the tar sands. Very important decision and case and investigation to look at. But there’s been leaders, financial firms like Black Rock and Vanguard, have really pushed Exxon Mobil through shareholder resolutions to ask for more of a clear assessment on how climate change
commitments and action impacts the business
operations and business plans. There are also shareholders
that are moving in here. There’s a class action
lawsuit in the United States brought against not just Exxon Mobil, but four of its former
and current officers looking at whether Exxon
produced misleading or materially false public statements and failing to disclose climate risks in its internal reports. Essentially what they are saying is that they believe the stocks
were artificially inflated, stock pricing was artificially inflated. And then, in Australia. We saw a very interesting legal action, once again by two shareholders saying that Commonwealth Bank, and investor that had
potentially investing in a very controversial mine, the Adani Carmichael Mine,
whether they had included climate risk, sufficiently
disclosed climate risk. The case was ultimately ended
because Commonwealth Bank did produce in September
2017, a report that included climate change, looking
at climate change risks and also committed to
undertaking a scenario analysis. I’m missing something
here, but that’s okay. Just very quickly, also here in Canada, we’re seeing NGOs like Greenpeace Canada looking at IPOs that are being issued and asking whether climate change risks have been sufficiently
considered in those. So Kinder Morgan had an IPO out. Greenpeace Canada submitted a complaint to the Alberta Securities. Regulators just said that the out-of-date oil demand productions
were overly optimistic. That the international market
oil market had changed, so they listed these issues. Ultimately, the IPO was put out again and moved forward, but it had changed in response to this complaint. Finally, I just want to end
with three recommendations. And the first one is just
that deadlines focus the mind. Anyone in this room that
is working with companies that are named in the Philippines
petition, for example, ask them to show up, to be
there at that investigation and to talk about the risks
associated with climate change. December 11th is an important date and so I hope that is
communicated to these companies. Second, honesty is the best policy. And what I mean here is that we hope that there is wide support for companies and supporting securities regulators in establishing requirements
for mandatory disclosure of climate related
risks and opportunities. Just the other day, actually yesterday, Greenpeace Canada filed
a application for review for the need of a new policy or regulation for mandatory corporate disclosures of climate related
risks and opportunities. This is under the
Environmental Bill of Rights, so please come and talk to us. This is a new action I think
is particularly relevant for all of us in the room. And third, I think the big thing here is that people can act now. Directors and officers can act now or get sued later. And the best and most
important thing to do is to start thinking
about how business models can be aligned with a world
where temperature rise is kept to one point five. So thank you so much. (audience applauding) – We’ll take questions at the end rather than after each speaker. David, I’ll invite you to the podium. – It’s going to be difficult because I don’t have the
PowerPoints in front of me. Can I stand over here? Okay, I can see them
over there, yeah, yeah. Hi, thanks so much, Cynthia and Ivy Foundation for undertaking this significant
and important project. I’m pleased that I’ve had an opportunity involved to some peripheral extent and pleased to be here today It’s an amazing coincidence
to be here with Sarah, who we were just on a
panel together last week in Sydney talking about in general terms, the same topic. And with Kristin and with Andrew. So, climate change. Directors and officers statutory duties and liabilities under environmental law. This is Ontario. Ontario has this provision in its Environmental Protection Act. Every director or officer, you can read it I hope from there. Has a duty to take all reasonable care to prevent the corporation
from causing or permitting the discharge of a contaminant (mumbles) this Act or the regulations. So that’s a positive duty. Secondly we go to Section 14 of the Environmental Protection Act, which says, despite any other provision of the Act or the regulation,
a person shall not discharge a contaminant or permitted discharge if it may cause an adverse effect. What is an adverse effect defined as? Everything that climate change can do. Impairment of the quality
of the natural environment. (mumble) use that can be made of it. Injury or damage to property
to plant or animal life. Harm or material discomfort to people. Impairment of the safety of people. Rendering property or plant or animal life unfit for human use. Loss of enjoyment or
normal use of property and interference with the
normal use of business. In other words, there is a clear provision in Ontario law that says, despite whatever permanent
approval you have, you can’t do this. And with Section 194, directors and officers have a duty to prevent that from happening. Beyond that, there’s an onus on directors, under the EPA. If a director or officer of a corporation is charged with an offense
under that section, the director or officer has the onus in the trial of the offense approving that he or
she carried out the duty in connection with the contravention. So that’s making it pretty clear that there is a duty and under the next subheading, a director or officer of a corporation is liable to conviction under this section whether or not the corporation
has been prosecuted or convicted. And then what are some of the penalties? Well, depending if in fact, emissions are getting out there, the penalties can be substantial. Not less than $5,000 and
not more than $4 million on a first conviction. Not less than $10,000 and not
more than six million dollars on a second conviction. Et cetera et cetera. And to imprisonment et cetera. And then beyond that, a
court who convicts somebody of this offense, can make an order that is in nature of an injunction, a prohibition saying, don’t do that again and don’t allow this to occur again Mr. or Ms. Director. And if you do, you’ll
be in contempt of court. That’s Ontario law. I think that has to be taken
into account in this area. Now let’s turn to federal law. So we have the Canadian
Environment Protection Act 1999. Before we get into it, I just want to give you a quote from a recent federal court decision
where court had found in a case that Syncrude took to attack federal regulations about climate change. The court said, “The evil
of global climate change “and the apprehension of harm resulting “from an enabling of climate change “through the combustion of fossil fuels “has been widely discussed. “Contrary to Syncrude submission, “this is a real, measured evil “and the harm has been well documented.” It’s a pretty clear statement and I think it puts into context why we’re talking about this. Under this CEPA, government can add substances to the toxic substances list if it’s determined the substance is entering a man through the environment in a quantity or concentration that may have an immediate
or long-term harmful effect on the environment or
its biological diversity or may constitute a
danger to the environment from which life depends. Or may constitute a danger in Canada to human life or health. Well, guess what? In November 2006, three of
the major greenhouse gases, CO2, methane, and nitrous oxide, were all added to the
toxic substances list. Now, let’s look at duties
of directors and officers under CEPA 1999. Every director or officer of a corporation shall take all reasonable care to ensure that the corporation applies with this act and regulations and orders and directions of the ministry. There’s big penalties if
that’s not given proper regard. There’s a further section that makes clear that officers and directors can be charged as a party to an offense
by a corporation as well. Regardless of whether
or not the corporation has been prosecuted or convicted. And finally, there’s a provision that if a corporation is convicted of an offense under CEPA,
shareholders must be notified of the commission of the offense and of the details of
the punishment imposed. So all of that has potential implications, not only for directors,
but for the reputational risks and values of the corporation. Let’s turn to the last part of this, what is all reasonable care? I’m going to paraphrase a quote from a case that was on
Jen and Sarah’s paper. The standard reasonable care involves a proportionality test
assessing the risks involved, potential harm, potential benefit, and whether the level of sophistication of the system and its continual monitoring or reasonable given the activity sought to be registered. As we heard from Ben Caldecott, it’s clear, the risks are there, the intergovernmental
panel in climate change has made that perfectly clear. Ben’s work is showing
that it’s perfectly clear. Here’s a quote from
the Bloomberg Taskforce on climate related financial disclosure. Just came out a couple of months ago. Recent years have seen an increase in climate related litigation claims being brought. Kristin talked about these. Reasons for such litigation include the failure of organizations to mitigate impacts of climate
change, failure to adapt, and the insufficiency of disclosure around financial risks. Material financial risks. As a value of loss and damage arising from climate change grows, litigation risk is also likely to increase. What again, dealing with the question, what is all reasonable care? For those who lose money, investments, property, livelihood or lives due to hazards of climate change, the focus will be on
those major corporations that extract GHG or produce
GHG emitting products. Those financial institutions
that finance such activities, even if such activities were at that time quote, legal, unquote, and
also on the responsibility of directors and officers of operators of financial enablers. As noted by the Bloomberg TCFD report, there is increased risk that corporations that finance as well
as those which operate major GHG emitting
activities will be targeted for climate related damages
and there may well be statutory and civil liability. Why? Well, it’s stated above. They didn’t do what they need to do to comply with what is reasonable care. They didn’t take into
account the significant risks that adding more GHGs can cause, even if only a proportion of
everything that’s out there. They didn’t assess the risks, they didn’t look at the harm, and they didn’t take reasonable steps. What could all reasonable
care mean in generic terms? It could mean that no new
major GHG emissions sources be operated or built, except
in exigent circumstances and where there is no alternative. And it could mean there is a duty on corporations and their directors who do not wish to be implicated in or found legally responsible, for climate related
environmental human rights evils, to use the word of the federal court. And impacts to refrain from
authorizing or financing them. This is what all reasonable
care could arguably mean. And just to conclude, I want to (mumbles) a couple of quotes from
the Oslo Principles, which came out a couple of years ago. Group of experts in international law, human rights, came together, articulated
these principles one of which is based on these three key points. Avoiding severe global
catastrophe is a moral and legal imperative to the extent that a human activity endangers the biosphere, particularly through the effects of human activity on the global climate. All states and enterprises,
that means companies, have an immediate moral or legal duty to prevent the deleterious
effect of climate change. And they said, the primary
legal responsibility rests with states and enterprises. And they also said, no
single source of law alone requires states and enterprises
to fulfill these principles, rather, a network of intersecting sources provide states and enterprises obligations to respond urgently and effectively to the climate change in
a manner that respects, protects, and fulfills basic
dignity and human rights for the word’s people
and safety and integrity of the biosphere. Think about this, you’re going to defend what you didn’t do and you’ve got faced with these conclusions
that have been articulated two years ago. They basically included,
all states and enterprises must reduce their GHG emissions to the extent that they
can achieve such reduction without relevant additional cost. States and enterprises must refrain from starting new activities that cause excessive GHG emissions,
including for example, erecting or expanding
coal fired power plants without taking countervailing measures. Unless irrelevant activities can be shown to be indispensable. That’s what’s stated there. Let me end with a couple more slides. I think what we’re seeing is carbon as a toxic substance. There’s a need for carbon limits. There’s a human right to
a healthy environment. You put those two things together, seems to me carbon is or will become a toxic substance. In fact, under CEPA, it already is. In future, carbon reserves may be regarded as toxic substances and would therefore, need to remain embedded. Except under these conditions, exigent circumstances or local economies that absolutely need some form of energy. You know what? I don’t think what’s going to occur is any different than what
happened in these slides. If you can see them. The one on the right is a proposed label to go on a gas pump handle. And it’s being potentially implemented by Canadian municipalities. Thanks very much. (audience applauding) – Thank you for having me here today. I must say, after hearing
from my co-panelists, I’m reminded of the
quote that uneasy rests the head that wears a crown. And a little bit of unease is a good thing for a director, if it provides motivation for action and dis spells complacency, but if there’s too much unease well, remember the Damocles fled his seat to escape the perilous sword that hung by a slender
thread above his head. And we still need talented individuals to serve as directors. I think it’s worth reviewing
how corporate governance shapes expectations for
the director’s role, some of the limitations that exist under corporate law, and accountability for corporate disclosure in
Canadian securities laws. And then I’d like to canvass some of the current imperatives for board consideration of climate change. So let’s start with the
director’s fiduciary duty. At common law and by statute, it is a duty to act honestly and in good faith with the view of the best interest of the corporation and
the duty to exercise the care, diligence, and skill that a reasonably prudent
person would exercise in comparable circumstances. Directors cannot contract
out of these duties. Indemnities, D and O insurance,
do not cover a breach of a director’s fiduciary duties. The fiduciary duty is
owed to the corporation. It is not owed to any
particular stakeholder group. In particular, although
shareholders exercise governance rights that are not afforded to other stakeholders in the corporation, it is the corporation’s interests that are paramount. And in determining what is in
the corporation’s interests, directors may consider the interests of various stakeholders. However, directors must treat stakeholders affected by the corporation’s actions fairly and equitably when addressing conflicting stakeholder interests. So far so good. But then the Supreme Court of Canada modified the director fiduciary duty by saying that directors have a duty to act in the best
interest of the corporation viewed as a good corporate citizen. And the effect of these
additional words is unclear. It should encompass compliance with laws. But it also could extend
into other aspects of citizenship, we just don’t know. So another key concept in law and understanding director’s duties, is the business judgment rule. Directors are expected to make decisions. And courts will defer
to the board decisions when made in good faith
and in the best interest of the corporation, free
from conflicts of interest, following reasonable investigation and consideration of alternatives and within a range of alternatives. In short, if the board follows
an appropriate process, the court will not second guess the board’s determination. So in addition to liability for failing to comply with their fiduciary duty, directors can be personally liable under the oppression remedy in Canada. And the fundamental purpose
of the oppression remedy is to protect the reasonable expectations of a security holder, creditor, director or officer. I’d like to pause here to
draw just a couple of points from all of that. First, the themes of reasonableness, fairness, the importance of context underlie and inform
both the fiduciary duty and the oppression remedy. These are important themes,
because they provide the balance and law needed to attract experienced and talented individuals to serve as directors
while at the same time, holding those individuals to account when their actions fall below standard of reasonability. But it’s also worth noting what is context or what is reasonable or fair can change and evolve to
reflect changing societal norms. And that’s important when considering what role directors should play in considering climate risk. As Sarah mentioned in her opening remarks, expected norms are changing. Second, the corporate
statutes limit the range of potential claimants. Only the reasonable expectations of current and former
directors and officers, security holders, and
creditors are protected under the oppression remedy. And while other stakeholders might be able to get the leave of a court to bring an action in the name of for the benefit for the corporation, practically speaking,
that’s very unlikely. So in summary, directors
who fail to consider climate risk, potentially could be held accountable for such
failure under corporate law, but there are some hurdles to doing so. By contrast, misrepresentations
in corporate disclosure under securities law is a
much more important source of potential director liability. Kristin referenced several instances where companies have been challenged on the basis of their disclosure and I’d like to turn there next. Under common law, there’s
potential liability in the event that a person makes a materially untrue
statement either knowingly or negligently and someone relies upon it to their detriment. However, in the case of a
shareholder class action, the need to prove the detrimental reliance by every shareholder in the class action makes the common law remedy
impractical in Canada. In a public offering, though, there’s no need to show
a detrimental reliance. If there’s a misrepresentation, then the purchaser has a remedy of rescission or damages and
it’s said out in this slide, to constitute a misrepresentation, there needs to be an untrue statement of immaterial fact or an
omission of a material fact that is either required to be stated or is necessary to make a
statement not misleading in the circumstances. However, most capital markets activity occurs in the secondary markets. And it’s not surprising, therefore, that there are statutory civil remedies from misrepresentations in
written and oral disclosure and untimely disclosure. And these remedies also dispense with the need to prove reliance on the misrepresentation
or untimely disclosure. But there are counter-balancing provisions which are intended to protect
against frivolous lawsuits. For example, directors are entitled to a due diligence defense. And with respect to core documents, such as the annual and
quarterly financial statements, management discussion and analysis, proxy circulars and
material change reports, directors have the onus of showing that they were diligent. But for non-core documents
and public oral statements, the plaintiff has the onus of showing that there was knowledge,
willful blindness, or gross misconduct on
the part of the director in respect to the misrepresentation. Other protections include the fact that the plaintiff needs
the lead of the court to pursue an action and
finally there are caps on liability in the event
that a claim is successful. Now we’ve had many
conversations with our clients regarding environmental and climate change disclosure matters. At one point, the conversation involved the need for better internal oversight over the voluntary disclosure that the company provided
on environmental matters. For example, one of our clients
had the legal department and the financial department
thoroughly reviewing their quarterly and annual
management discussion analysis and financial statements,
but those same individuals had no involvement whatsoever reviewing their annual report on ESG. And as a result, the
language in the ESG report became somewhat promotional
and it just did not align well with the mandated disclosure
under securities laws the company was providing. In case you’re wondering, well the company has now changed its practice. But that was one example. We’ve also had conversations
with our clients about the surveys that
they are asked to complete, including those for the
carbon disclosure project and the Dow Jones Sustainability
Index among others. And a common complaint is that the level of detail required by
these and other surveys is far too granular and time consuming. Some of our clients have cut back on the means of surveys that
they’re prepared to complete. Others have taken the
approach with varying degrees of success of revising their ESG report to include as many commonly
requested elements as possible, so that they can simply
cross-reference their ESG report when responding to the survey questions rather than having to settle the details in the response to the survey. And so that they can be more consistent between the different
surveys that they respond to. This year, as a result
of the climate change disclosure review program announced by the Canadian Security
administrators in March, several of our clients
were selected for review. And a common request was to explain why the level of detail included in the carbon disclosure
project survey responses was not reflected in their
continuous disclosure filings. The answer, I’m going to
cut to the chase here, by the way, was the level of detail under the CDP survey
was much more granular than the level of materiality that the client viewed
as being what investors were looking for on the subject. But I’m very eager to hear what Joann here has to say about the
review later this morning. I’m not aware of a civil action in Canada based on this representation
and disclosure as a result of climate change, but clients have nevertheless, been considering their approach to disclosure on climate change matters. Before I conclude, I’d like to touch on what I see are the driving pressures for boardroom discussion
of climate change. Physical impacts, which we
heard about earlier today, are a key impetus. Extreme weather events can have a sudden and profound impact on
operations of a business, both negative and positive. For example, in Texas
refining was hit hard by Hurricane Harvey, but I understand that construction is now doing a very brisk business. Rising temperatures can
impact utility demands and challenge capacity or reduce demand for winter-based activities. Boards need to consider these impacts in assessing the corporation’s risks, resiliency and opportunities. The move to a less carbon
intensive environment threatens certain industries, but also increases opportunities in renewable resources. Changes to laws and regulations not only may constrain the corporations ability to realize on its strategy,
but may necessitate a change in strategic direction. Another impact is that
investors are asking for more disclosure. And that is to enable the investors to make their own assessment of the corporation’s
performance and expectations for the future. And they’re looking for it
whether in mandatory reports, voluntary ones, or consolidated scores generated from the
databases that are filled with all those survey response data. We have assisted clients
in conducting peer reviews to ensure whether their current approach, in terms of disclosure, is
in line with market practice. And then in addition, ethical investors make investment decisions
based on their assessment of the company’s
performance on ESG matters. And as Professor Williams
alluded to this morning, the Globe and Mail reported that the case is looking to make a 25% reduction in its carbon footprint of its portfolio. So these changes, in investor focus, they can all have an impact on the company’s cost of capital, and its stock performance,
and its long-term prospects. These pressures have an immediate impact at the board level because
reputational concerns are a key board focus. And while the focus of this panel is on the liability risks for directors, concern for the reputation of the company and of the directors on the board have a strong and frankly,
more immediate impact. Employees, especially younger ones, are much more sensitive
to climate change issues and companies with a poor
reputation on climate change are finding it harder to attract talent. Likewise will also have more trouble attracting investor interest. And the pervasive influence
of social media today can enhance or destroy a
company’s or a board’s reputation and it can do it far faster
than any legal process. (audience applauding) – Thank you so much. Before I throw open to the floor, I’ve got a couple of questions
for the panelists myself. I’m not going to dwell too much on the comments made in relation to the disclosure cases, because I know the subject of the next panel
is entirely on disclosure. So I don’t want to step on any toes there. Although, suffice to say, interestingly in the context of your comments
there at the end, Andrew, around the disparity between the voluntary disclosures on climate risk and the disclosures in the mandatory financial filings, last year in the UK, we
actually had ClientEarth, Alexia was there from ClientEarth. Actually refer the financial statements of a number of upstream oil
and gas exploration companies to the Financial Reporting
Council over there. On the basis that in their,
say they paid disclosures, capital disclosure project disclosures. They had listed particular issues associated with climate change as being material financial risk likely to manifest within five years. Yet, were completely silent
in their mandatory filings in relation to that. I think certainly, that
is an area in which there is ripe for litigation. But the thing I did
want to focus on myself is this concept of due diligence. Because both in relation
to the disclosure aspects that were mentioned and also in relation to the
duty of directors to exercise that degree of due care and diligence as a reasonable director would
in their same circumstances. This issue of liability really turns on what a reasonable person would do in the circumstances. Reasonable doesn’t mean average, we can’t forget that. And particularly with
the benefit of hindsight the courts do not apply. It is very easy to point to things that ought to have been done or should have been done that were not. I wanted to test a couple
of things with the panel in terms of the why I understand the care and diligence is the very first principles concept. And then to discuss
with you whether or not you think under Canadian law, certain inaction in
relation to climate change is a breach of that
due care and diligence. When I teach director’s duties, you’ve got to dumb it down. Got to dumb it down. I talk about the five Es
of due care and diligence. First of all, the first E is educate. So directors need to have a core of understanding about
what the corporation does, what its financial position is, the regulatory environment of the (mumble) and what the broader industry issues that affect the business are. Doesn’t really seem very controversial. Does it? How much do they need to know? They don’t need to be experts. But they need to know
what they don’t know. This is the knowns unknowns. Donald Rumsfeld was right, this is the alarm bell knowledge so that they can get to the next E, which is inquire. Might be inquire with an I, but that would ruin my system, so let’s just forget that. So they need to educate themselves about what the issues are so that they can then
inquire of management and independent experts. Now, I’m a director on a board of a $24 billion superannuation
fund, pension fund. My IT knowledge extends to you turn it on and off, and
then you call help desk. But I know that cyber risk and cyber tech is a huge issue for any company in the financial services industry. And if I’m not getting data of information from my management about how that risk manifests in the context
of our pension fund and what we are doing
to address that risk, who’s fault is that? The director’s. Exactly the same with climate change. How can you deny that it’s
a material financial issue? It’s in the financial price. It’s in the Wall Street Journal, even on Fox News. You need to then inquire how that impacts on your business. Next E is examine, which
means write your board papers and not just 11 o’clock at night in front of a game of Thrones, which we may or may not do. And interrogate them. And not just accept the recommendations that you’re getting. Fourth E is evaluate, critically evaluate what comes before you. Whether its board papers or opinions or advice or reports,
exercise independent judgment. And the last E is express. Which means, have an opinion about what comes before you. Even when you throw the
business judgment rule in, which is courts, I’ve got to second guess commercial decisions that
I might buy corporations. That is a substantive defense in terms of if you have done those five
Es and you’re making a call between different potential
commercial alternatives, and you know, you chose A in good faith after having that robust
process of five Es. When B actually turned
out to be the way to go, you chose Beta instead of VHS. That’s such an old analogy now. Do you guys even know
what a video cassette is? There are a lot of young people in here. Then of course, the court isn’t
going to second guess that. If you’ve done your five Es. You need to have the robust
process sitting underneath. So, my question is, if you are a climate change denier, now in Canada, are you
discharging your duty of due care and diligence? If you are honestly ignorant
about climate change, are you discharging your duty
of due care and diligence? If you are not turning
your mind to the issue, are you discharging your duty
of due care and diligence? If you are just saying,
look we’ll deal with it when there is a carbon tax,
and that’s the beginning and the end, are you exercising your duty of due care and diligence? If you are paralyzed by the uncertainty, saying I thought too hard, we’ll
deal with these in 10 years when the policy situation becomes clear. Are you exercising your duty
of due care and diligence? – [Kristin] Canadian
first and then I’ll — – [Andrew] Sure. – Well, that’s a question
you want to ask rhetorically, but also to anybody I suppose. Let me just say that I agree with what your tests or parameters are for what the corporate director should do in general terms by due diligence. But I think the essential
question in this area, at least in Ontario because of the Ontario
Environmental Protection Act is driven by what the law says about emissions and
directors having a duty to make sure the corporation
doesn’t discharge contaminants that may cause
those adverse impacts. I think there’s a
positive duty on directors to focus and to accept that climate change is recognized as a significant matter by Provincial federal governments, they write laws about it. So there’s a positive obligation. They have to recognize that
that obligation is there. The next question is exactly what should the company’s overall goal be and I like what Kristin ended up saying and I wonder if you can just tell us what the last point in your last slide was that you recommended companies should do. It was —
– In the alignments. – Yeah, to get to one
point five or two degrees. You had a specific
statement, can you repeat? I don’t know if you can or not. – Yeah, I think what I said was that this is one of the direct requests that’s being made of Canadian companies in the Philippines, which is to publicize and publish a plan of how business model
is going to be aligned with one point five. So that’s the aim of the Paris Agreement. – I think that’s a very good objective and overall goal for any company. How are your operations and
your supplier’s activities and everybody in the
chain going to achieve this one point five or
two degrees C objective. If you haven’t tried to figure that out, you don’t have a plan that
tries to get you there, then I think you’re
missing a basic element of due diligence. – I’d like to chime in
because I think Sarah, you raise a really great question in terms of the continuum of where are we on this particular issue. What do we really expect people to be able to do and to think about as a regular part of
what they are handling? It’s amorphous question and a hard one to really come down on
because climate change is a big, broad concept. And a lot of us, we’re not very good at dealing with big, broad concepts, we like dealing with
smaller bite-size concepts and some aspects of climate change absolutely have to be discussed and addressed and that is because the board’s responsibility is to be forward looking for what the corporation is going to need to do
to survive and thrive in the places where it currently operates and the places where it
could potentially operate. That may or may not align with the overall climate change agenda that the world might have and we wouldn’t necessarily expect the corporation to do that under our corporate law regime. Certain aspects are absolutely critical. Compliance with environmental
law is a necessity. You have to just comply. You have to be aware of the standards that are being articulated because those standards articulate in international treaty
agreements and the like for the norms of expected behavior for an organization. I think we’re on a continuum, we’re on an evolving path here. And I’m not sure that on some aspects I think it would be
quite remiss for a board to ignore or be willfully blind to or deny that there’s a
issue to contend with. And the question then becomes, how can we enable directors to do a better job of this? I’m going to put in a momentary plug because I love the work that they do, but CPA Canada has issued a number of publications focused on
what directors need to know and think about on climate change and that is a particular useful tool for enabling directors to ask
those meaningful questions to get behind the
reports they’re receiving and look for the gaps. And to be able to get some comfort that at least their
questions and their approach are in alignment with where people expect directors to be acting. – Could I say one thing just to add. I think we’re really far
from due diligence right now. I think that the context
that we’re working in is that there are companies
that are still even funding climate misinformation that are out there. And that’s so far from due diligence. And that there are a few examples, Total for example, has done some of those scenario analysis
around the two degree world. There are, but where we’re at right now to where we need to be is
very, very challenging. And so I think we need to dive into what is good corporate citizenship and one legal angle I didn’t bring into my talk today, is the UN guidelines on business and human rights. And that’s been applied in other fields. It hasn’t necessarily
been applied in context of climate change, we’re
trying to move that there. But I think we need to go back to those and really consider that
as a guideline to move to good corporate citizenship. And a good place to start
is to really working with Canadian securities
and administrator’s review of corporate reporting and
actively getting involved in that and really considering how
we can get some mandatory climate reporting requirements in place and doing that together. – I should admit here,
I think the Canadian’s Supreme Court are a bunch
of socialist hippies. And actually, the best interest of the corporation are purely financial. But the question I would
like to ask is when — – We’re a kinder gentler nation. – Yes. – I think the most (drowned out). – Yeah. If the threshold for a board
to consider a risk issue is whether or not it’s foreseeable, because you can’t ascertain whether it has a material
impacted until you think about it. For what corporations,
in which industries, is climate change other than
its physical risk manifestation or economic transition risk manifestation, not a foreseeable risk to a Canadian corporation? Can anyone tell me of an example? Is there any company
that doesn’t hire people to sell products using natural resources pay tax? It’s hard, it is hard and to my mind, there are two issues that are stopping progress on this. And the first is knowledge because directors just don’t understand. They’re still looking at this
as an environmental issue and not a financial risk. And the second is enforcement. And there’s actually a question I wanted to ask you, David, because those environmental
laws are awesome. Are they being enforced? Why are not half of directors
in Canada are in jail now? (laughing) – Well, that obligation
that I spoke of in Ontario has not been applied to
climate change specifically, but it’s lurking out there and it is something that the government can enforce. In Canada and maybe even in Australia under British Common
Law that we still have, any citizen can go and
enforce that provision. – So Kristin could enforce it? – Private prosecutions, I’ve done them, they are done. – On the to do list. – They’re coming. – But there is and we’ve had some history of the utilizing environmental laws to hold directors accountable. Many years ago, a court denied the ability of a director to rely on their indemnity because there had been some contamination in the form of storage of canisters on a site, the Nevada decision. And at the initial trial level, the court said, no, you
can’t be indemnified for the liability you’re
going to be facing because that would be contrary to public policy to indemnify you against a quasi criminal offense. Ultimately, the court on appeal, overturned that decision and concluded that you could be indemnified because the director hadn’t breached their fiduciary duty
and so indemnification was possible and they
weren’t going to read in the public policy element that the lower court had read him. And then one other instance under environmental legislation, the one that really gets directors nervous was the enforcement action in Numista Airspace, where they pursued the directors and former
directors and officers of a company that became insolvent. Those individuals had
been working diligently to deal with some historical
remediation on the site, but despite all that effort, the company simply just wasn’t viable and went under and then the Ministry issued an order and at the individuals under the charge, management
and control authority that they have, to issue orders requiring them to clean up. And ultimately, those individuals ended up settling for
a large amount of money with the ministry because although they thought
that they might be able and to successful ultimate in an appeal the problem was that they
would still be on the hook for what had to have been achieved subject to the order. They couldn’t just pause, appeal, and then have the order rescinded. That was probably the high water mark of actually holding directors accountable, although what was offensive about it was that these were people that actually were trying to be diligent. – In a few minutes that we do have left, I’m sure there’s plenty of questions for our panelists from the floor. Yes. Really? There we go. And if you could state your
name and your affiliation before you ask your question too? – [Lynn] Lynn Johannson
with (mumble) Corporation. There is interest in various
jurisdictions in Canada to do a rebalancing of standards largely voluntary activity and regulation. What value do you think standards like ISO 14001
for environmental management will have in this scenario where you can go to a company and say, as part of your due diligence, have you adopted these things? And will that make a difference in terms of what you see going forward? – Andrew, is that alright with you? – Standards as I alluded to earlier, are important because they inform what is that you’d expect an organization to adhere to. And to the extent that the organization states that it will adhere to its standard and does not, there is absolutely a possibility of being held accountable for that disconnect between
what they’ve promised and what they have actually performed. So there is a relevance in terms of trying to move the dial on this one in adopting standards that are promoted as being a practice that
organizations should adopt. I think there is value to doing that. The question then becomes, is it a standard that becomes sufficiently widely adopted or is otherwise meaningful
as a reference point for the organization or the industry the organization is in. – I think one of the biggest drivers of standards and improvement will be the financial institutions who are being asked to loan money on future development activities. It was the financial institutions that actually drove the cleanup of contaminated land in Ontario because they having
lent money on a property and then see the facility go bankrupt, the Ministry of the
Environment was targeting them for the deep pockets to clean up the site. They said no, we’re not
going to allow that to happen certainly in the future, so they insisted that appropriate testing and revelation of potential risk on that property were known before they
would loan the money. That’s going to become the case, I believe with financial institutions, insurance companies, and other lenders. They better not, for their own sake, lend money in future on
any carbon-based activities unless they fully assess what they think will be the risks to them. – One more question. – For any legal advice, come on. – [Dana] Thanks, I’m Dana Scott, I’m a faculty member
at (mumble) Law School. A question for David. As you know, I’m paying
attention closely recently to the journalists that are focusing on the price of oil investigations on the sour gas issue
in Saskatchewan and also the petro-chemical cluster in Sarnia. And there, in Ontario, we haven’t seen something
like a private prosecution for an adverse effect and I suspect the issue is related to
the difficulty in proving that anyone’s emissions in particular are causing that adverse effect. How do you think we might get to a different outcome on climate change or how will we overcome that barrier with respect to what
climate change action. – Well very quickly, I
think the argument would be on the side of the prosecution that any contribution
of HG to the atmosphere could potentially with others is something that needs to be dealt with and it is in a defense, that it’s a de minimis contribution or that others are doing it. We never accepted that
argument in common law that others are doing it. You can still be liable for the nuisance and in Holland and even the Supreme Court of the United States rejected
the de minimis defense in those cases. But I think it has to be tied to the identification of what is needed by any corporation to be doing in order to meet the Paris objectives. That’s why I think it’s going to be particularly important to figure out what every emitter should be doing to bring their emissions within the limits that they need to do as part of the emission sources. And if they’re not doing
that if they’ve ignored doing even the analysis, I think they’re in trouble. – Could I just say, I
think a really good place to look at where this is being dealt with is in this San Francisco
and Oakland complaints. They’re claiming that the companies are jointly and severally liable for causing, creating and assisting in the creating or contributing to or maintaining the public nuisance. It’s a really good section there. In addition, West Coast
Environmental Law Center has a project called,
Climate Law in Our Hands. And several BC municipalities
have sent letters to companies asking
for their contribution, their fair share towards damages. And they have a really fantastic analysis around how do you attribute responsibility and the damages among those companies. – We just go back to
Ben’s satellite tracking of these emissions. – [Dana] Yeah, Ben’s Satellite. – That is going to be
an exciting development. – Thank you everyone. Thank you very much to my panelists, David, Andrew and Kristin. Give them a round of
applause and get caffeine. (audience applauding)

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