This article first appeared in The Edge Malaysia Weekly on December 26, 2022 - January 1, 2023

When the Commonwealth Climate and Law Initiative (CCLI) approached Janet Looi, a senior partner at Skrine, to write a legal opinion on whether a board of directors has a legal duty to consider and disclose climate change risks, it was a natural “yes” for her.

She already headed the environmental practice in her law firm and advised clients on climate change risks, carbon credits and environmental compliance matters. She also wrote a primer for the World Economic Forum on climate change for Malaysia, so she was familiar with the science of climate change published by the Intergovernmental Panel on Climate Change (IPCC).

“For me, the natural confluence of having been a corporate governance and environmental law practitioner, in addition to an active mergers and acquisition practice, meant that the journey for me on climate change and ESG issues already started a long time ago. Interest [in the subject] is, of course, very important, so keeping up [with all the developments] has been easy,” says Looi.

“We were very fortunate that Tan Sri Zarinah Anwar agreed to co-write the legal opinion together with me, with her tremendous wealth of experience having been the former chairman of the Securities Commission Malaysia (SC).” 

Zarinah is also currently the chairman of the Institute of Corporate Directors Malaysia.

After the CCLI legal opinion, Looi wrote the Malaysian chapter of a guide to shareholder climate resolutions by the non-profit ClientEarth and the Asia Investor Group on Climate Change. The guide was published in November.

The common thread across these recent publications is the finding that directors of companies have a fiduciary duty to consider climate change risks in their decision-making process. Company directors, whose responsibilities include preparing businesses for future risks and opportunities, could be held liable for failing to do so.

“I think boards don’t initially associate what the company is doing with climate change. Some still say that ‘it’s an act of God’. So, the [science that shows that] human action [is causing climate change] is important. That’s why I keep bringing up the scientific evidence from the IPCC reports,” says Looi.

“Boards are always looking at short-term profits. They are used to being accountable to their shareholders to maximise profits. That is a very short-term view. Looking at the bigger issue of climate change being a financial risk requires some kind of re-education.”

Already, there is an increasing number of climate litigation lawsuits against companies. Earlier this year, Shell’s board was sued for failing to implement a climate strategy that aligns with the Paris Agreement.

The confluence of a few factors has made it crucial for directors to consider climate change factors. The burgeoning scientific literature on the impacts of climate change, which is widely accessible to the public, is one.

Another is the initiatives from regulators, such as Bank Negara Malaysia, the SC and Bursa Malaysia, that require companies to incorporate climate risk mitigation into their strategies and improve their disclosures on such matters. The government has also stated its climate targets publicly.

This means that directors cannot claim ignorance on these matters, because the risks of not complying with the regulations or adapting and mitigating to the potential impacts of climate change — like floods and higher temperatures — are too high.

“We say in the legal opinion that directors who behave like an ostrich that sticks its head in the sand will attract criticism for wilful ignorance. The world has changed, and investors’ expectations have changed accordingly. We can see that from the awful floods in Pakistan and our own floods last December. The most extreme sort of climate change impact is physical. The link to financial risk is also much clearer now,” says Looi.

The court cases brought by activists and consumer associations against companies are just one type of activity. In other circumstances, there has been shareholder activism against companies that fail to set practical climate targets. A prominent example is how hedge fund Engine No. 1 forced ExxonMobil to accept new board members who could confront the risk of climate change.

Looi says one cannot completely rule out that these things will occur in Malaysia. There is already pressure from retail and institutional investors, who are increasingly asking companies to act.

ClientEarth sent a pre-action letter against the directors of Shell in the UK, claiming a breach of duty by its board for failing to assess, disclose and manage material climate change risks to the company.

“This is a common law jurisdiction action and it provides some impetus. It is possible [for it to happen] here too,” she says.

“There have already been actions taken for breach of fiduciary duties by directors, so this is just an expansion of that. The stakes are very high if the shareholders, investors or communities feel that nothing is being done while livelihoods are destroyed.”

Other than lawsuits or shareholder activism, companies that fail to consider and disclose climate change risks may run afoul of regulations and guidelines.

The Malaysian Code on Corporate Governance (MCCG) stipulates that the board, together with the management, must take responsibility for the governance of sustainability in the company. The board must also stay abreast of and understand sustainability issues relevant to the company.

The SC’s Guidelines on Conduct of Directors of Listed Corporations and Their Subsidiaries, meanwhile, reinforce existing obligations of directors to discharge their fiduciary duty and act in the best interests of the company. Directors must establish a group-wide framework for corporate governance and ensure it has oversight and policies on, among other things, risk management and managing material sustainability risks.

These guidelines effectively allow the SC to regulate the discharge by public-listed company directors of their fiduciary duties. Failure to comply could lead to administrative sanctions issued by the SC against directors personally.

“Although these powers have yet to be used by regulators against directors specifically in connection with the failure to adequately disclose climate-related risks or over-inflation of asset value or profit forecasts, for instance, it is available to them,” she says.

Under the Companies Act 2016 (CA 2016), directors have a fiduciary duty to exercise their powers for a proper purpose in good faith and the best interest of the company. This has been examined by the Court of Appeal and the Federal Court of Malaysia.

The vast amount of information regarding climate risks and regulators’ guidance regarding climate risks means that Malaysian courts can “reasonably expect” a director to have this knowledge.

“In our opinion, there is no way that boards can deny their obligation to take into account climate change risks in discharging their duties. Indeed, the Malaysian courts have observed that a ‘director cannot now be viewed as a mere sentinel who may occasionally doze off at his post. Directors are officers who must remain alert and watchful at the helm’,” wrote Looi and Zarinah in the legal opinion.

In defence, directors may claim the “business judgment rule”, which is a legal principle that offers recourse to directors who seek to defend their actions when faced with claims for breach of duty.

Looi and Zarinah’s view, however, is that since climate risks pose a real and legitimate threat to a company, the ability of directors to rely on this rule is premised on their ability to demonstrate that they considered climate risks in their decision-making process.

Ultimately, Looi is cautious about giving too much focus to liabilities and the risk of lawsuits. She still encourages directors to look at evidence that shows companies that consider climate change outperform those that do not.

“These boards are the ones better able to withstand the scrutiny of consumers, shareholders, investors, employees, stakeholders and the communities in which they operate,” she says.

This understanding of a director’s legal duties is important for lawyers as well. With all the upcoming regulations on climate-related matters and innovations like carbon markets, lawyers must keep abreast of these developments.

“They’ll need to help clients look at the big picture and incorporate into their strategies requirements from the regulators’ guidelines. This includes looking at how the clients have considered the issues and risks in their approval processes, and if they’ve taken the right things into account,” says Looi.

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