Alex Rhodes
Welcome everybody. Thank you for joining us. I’m Alex Rhodes, the Head of Mishcon Purpose and I’ll be your host today. Today, we’re going to talk about directors’ liabilities and particularly how to take responsibility in an age of growing accountability. Companies are under the spotlight like never before and as Governments and civil society struggle to tackle climate change and social inequality, eyes have turned to business as perhaps the erstwhile unlikely driver for progress on environmental, social and governance issues. In the context of this broadening scope of corporate accountability, directors have a really big challenge on their hands. Our two speakers will talk about the changing rules and frameworks that directors and decision-makers need to be aware of, the merits of different approaches that they may take and key upcoming developments they should be aware of.
I am really excited today to be joined by Kevin Bourne. Kevin is the Managing Director and Head of Sustainable Finance at IHS Markit and will be in conversation with Victoria Piggott, who is a Partner in Mishcon Private. Kevin, I’ve asked you to help us for everyone by providing an outline of the profusion of ESG frameworks that are being cooked up and rolled out by regulators and supervisory bodies and to give a bit of a forecasting in terms of your view as to how this will develop over the next five years.
Kevin Bourne
Everyone thinks that markets move quickly. My opening statement is that despite how fast people think markets move, I have never in my career seen regulation move as quickly in financial markets and in – and now increasingly for corporates – as I have around this subject. There is no doubt that the regulators and supervisors around the world see a tremendous systemic risk in climate change and intend to use regulation as a key weapon to change behaviour. If you are a company, being a public or private company globally, today and you want to report on sustainability issues, you can quite comfortably publish a sustainability document on an annual basis and you can use one of up to about 100 voluntary frameworks that are published by various NGOs and supranationals like the World Bank and use those to fray the information as a company and as a board that goes out into the public domain that investors use to analyse and assess your views on these issues. At the moment, everyone says reporting should be however they want it to be, highly qualitative. Actually, I – and now it appears, the Indian Government – disagree with that, a growing number of people are doing. We are saying that reporting around ESG in the first instance must be quantitative. I said this was moving very quickly, let me give you an example and a very good example of the impact. The EU introduced reporting obligations for public companies around ESG. They tried to introduce them back in 2014 and they are a set of broad guidelines that companies have to submit or have to… sorry, have to use to publish ESG reports when they undertake such activity and there is an obligation to do so but no definitions of what, in detail, must be in the reports. That regulation applies to about 11,700 public companies but I can tell you that most of those do not have ESG reports that they publish. They are in breach of the rules. And so, the EU back in April, on the 21st April made an announcement that they’re going to change things. The first thing is that you are going to have a legal obligation to publish ESG information, not on a broad basis but against specific questions, as a public and importantly as a private company. The reporting you do if you are inside Europe, is going to have to be assured and they’re going to start this legislation for larger companies in October next year, 2022.
Let’s cross the Atlantic now and look at what’s happening in the US. You may or may not be aware that a couple of weeks ago the new President issued an executive order dealing with climate change and the risk of climate change. Although it wasn’t picked up very strongly by the media, in the executive order they make it quite clear that if you want a federal contract, you’re going to have to commit to ESG standards and climate standards. So, when I started my kind of five minutes on, ‘Where is this going?’ I said in five years – approximately five to seven years – everyone’s going to have to be doing ESG reporting be they public or private companies. I have no doubt that is going to happen.
Alex Rhodes
Victoria, I wanted to talk to you because as a, as a Private Commercial Litigation Partner, you’re regularly bringing and defending claims against directors in Court, in relation to the way they’ve executed their duties and I wanted to start, start sort of with you on this, by talking about the scope of directors’ duties and how you see these increasing expectations affecting the scope of directors’ duties.
Victoria Piggott
Directors’ duties were already quite broad in the way that they’re set out in the Companies Act and previously the duty to promote the success of a company was very much in relation to maximising shareholder returns. Now, success has many other elements and is really diverse: climate change, environmental damage, human rights, diversity and inclusion. But the cost to companies of getting ESG wrong is now incredibly high in terms of financial and reputational harm. All of these things impact consumer behaviour and directors need to be aware if it impacts on their company, what they can do about it. Really, it is absolutely imperative for directors to take the non-financial ESG factors very, very seriously because the repercussions can be incredibly damaging.
Alex Rhodes
How are companies going to do this? I mean, is it feasible at the pace that you’re talking about to meet the kind of change that Victoria is talking about?
Kevin Bourne
Everyone talks about physical risk from climate change, everyone talks about the transition. But actually, if you go back to Mark Carney’s speech, back to Lloyds in 2015, he put three primary risks around climate change. Physical risk, so which buildings get broken, which dams get damaged. Transition risk, so what is going to be the impact on the economy of a sudden shift from a non-green to a green economy. But the one that everyone misses is liability risk. Has to be one on the watch label for boards of directors. What happens if your company does not adequately hedge its climate risks, its climate liabilities? Are you open then to all sorts of class action activity against you when you suddenly find that you need to go and spend half your year’s turnover on, on carbon credits or water credits because you need access to these materials or these guarantees? So, liability risk is there for directors already, baked into the debate.
Alex Rhodes
What approaches do you see directors taking to non-financial reporting and what steps do you think they should be taking to mitigate their exposure, starting now?
Victoria Piggott
It really depends on the type of company that you’re a director of and what the kind of risks are for you. So, obviously if you’re a clothing manufacturer, you need to look very carefully at the way that the people you employ are looked after. But you would also need to look at the impact that your factory might have on the environment. I don’t think directors can any longer turn a blind eye to ESG. They’ve got to absolutely focus on it and they’ve got to ask the right questions, they’ve got to get the answers and then they’ve got to do something about the answers that they get, if they’re unsatisfactory. My suggestion would be that directors form sub-committees, specifically in relation to considering ESG. They need to have one or several directors who are going to lead the charge and it’s a standing item on the agenda. Directors need to almost get an MOT of their business and get somebody in or do it themselves, to say to them, “These are your risk factors. These are the areas that we think are a problem and this is how we think you should look at them and engage with them” because directors may not know what their risk factors are.
Kevin Bourne
One of the things that ESG has done is it has spawned the whole series of data capabilities that track companies in the public domain in intense detail using some fairly advanced technology. So, we have a very deep and technically structured ESG framework that we can apply to a public company and if we can get access to who their supply chain components are, to their supply chain as well. And we track what these companies are doing. We are also now being asked by some investors to do the same sort of tracking for the directors of the companies personally. When you look at reputational risk, it could be that a director is misbehaving as an individual outside of his responsibilities, or her responsibilities, to the company but that will wash back onto the company and the investors are very aware how influential the activities of directors are on the valuation of companies and they’re looking to track that through an ESG optic, using artificial intelligence and it is happening.
Alex Rhodes
I wanted to talk to you about Shell. This is the Dutch Court, ordering Royal Dutch Shell to reduce its carbon emissions by 45% by 2030, which is obviously in line with the science-based targets initiative but is a massive departure for a Court to do that. And the way, I think, that the Court came about that decision was that the claim was founded in a duty of care owned by the company under the Dutch Civil Code but the Court looked to international law and soft law that Shell had as a business endorsed, in trying to understand what those obligations were. As directors are trying to work this out, I mean, do you think they should be concerned that adopting any of these voluntary standards and commitments may increase their company’s or indeed, their personal risk to exposure?
Victoria Piggott
Shell’s problem was in a way they were caught out. They will have signed up to the voluntary standards and then thought, “Oh, well that’s a good PR tool.” I’m in favour of directors looking at voluntary standards and if they are appropriate, and if they think that they can achieve those standards, that they sign up to them and say, “Yes, this is what we’re willing to do or at least certainly try and do.” If Shell were able to say, “Well, we signed up to these voluntary guidelines and it was our best effort but what actually happened was this and we couldn’t have foreseen it,” I don’t think the Court would have come down on them quite as hard as it did. But I think what the Court was saying was, “You signed up to these guidelines and you didn’t hit the standards that you said you were going to achieve and you don’t have any proper mitigation to explain why you didn’t.” You need to find a framework that you’re happy with and some might be completely inappropriate for the type of company that you’re running. Adopt one and make it clear what you can and can’t do. Be realistic. I think it really helps directors to have a framework that forces them to look at the wide scope of ESG that they need to be considering and it may be that if they can find the right voluntary framework that works for them then they should sign up to it.
Kevin Bourne
If you were going to appoint a director to a company, public or private, you would be very, very unwise to appoint someone who doesn’t understand financial reporting at some level. “Why are we appointing, why are we appointing directors that don’t understand non-financial reporting?” The answer is of course, there is not enough information, training, education out there. If you look what the Prudential Regulatory Authority did through the Bank of England, was they actually said, “You must, as a company, name a director who is personally responsible for climate change.” Perhaps that’s the way forward. For ESG maybe, public and private companies need, at some point, to be told, “You must nominate a member of the board and this is part of your core responsibility in your appointment as a director.”
Victoria Piggott
The more people you get onto a board with different views and different ideas, different backgrounds, the more likely you are to be able to properly identify the risks to start with but then to actually have the momentum to do something about it. If a director is personally liable for ESG, they’re going to want to bring it to the attention of the board.
Alex Rhodes
Look, thank you both so, so much. It’s been really rich, really valuable and some really great insights but also some practical steps that people can take away. I’m really, really grateful to you and thank you to everybody for joining us.
The Mishcon Academy Digital Sessions. To access advice for businesses that is regularly updated, please visit mishcon.com.