Tough for Singapore shareholders to sue directors over climate risk: NTU study
There are "considerable doctrinal and practical difficulties in private enforcement of directors' duties with regards to climate change", the report stated. The general reluctance for the courts to interfere with business decisions means that environmental protection is primarily within the purview of the Parliament and the Cabinet.
Consequently, this also means that there are no records in Singapore of company's shareholders taking its directors to court for not considering climate-related risks resulting from a corporate action. The report noted that directors are obligated to act in the company's best interests as part of their fiduciary duties, and also have a duty of care, skill and diligence under the Companies Act. Given that climate-related risks have been established to have a material impact on companies, directors are required under Singapore law to take these risks into account.
However, the report noted that what constitutes a company's best interests has not been codified in Singapore. In addition, it is likely to be difficult for a disgruntled shareholder to satisfy thelegalrequirements for a successful lawsuit if the harm caused is non-financial in nature, or is one that has resulted in a negative impact on the environment and which has caused suffering for the broader public, said Joseph Tay, partner at law firm Shook Lin & Bok. That is because the conventional view is that a disgruntled shareholder has to show that the directors' actions have directly caused some financial harm to the company itself, for a litigation to commence successfully. Corporate governance professor Mak Yuen Teen from National University of Singapore's Business School noted that public and private enforcement of directors' duties have been rare even in cases where breaches appear quite evident.
He also said that, for public enforcement, the statutory penalties of either a maximum S$5,000 fine or 12-month jail are unlikely to act as much of a deterrent. The lack of shareholder litigation against company directors on climate-related issues is not unique to Singapore. The authors of the report also looked at four other jurisdictions within Asia-Pacific, namely India, Indonesia, Hong Kong and Australia. Australia is the only territory in Asia-Pacific with a record of shareholder lawsuits relating to climate change and the environment. While still relatively nascent, there is a growing trend of climate lawsuits globally, brought on by non-profit environmental groups or law enforcement agencies suing companies.
Possibly the most well-known climate lawsuit by shareholders is against Shell.
Environmental law charity ClientEarth had sued the oil and gas company for not adequately managing climate risks, though the case was dismissed by the English Courts in May this year. However, in Asia-Pacific, with the exception of Australia, domestic laws do not equip shareholders to bring on such actions, said the report. Besides the legal landscape, it noted that shareholders may face challenges in bringing such lawsuits as they have to demonstrate a financial interest in the matter. It is also difficult to establish a causal link between a company's conduct, its impact on climate change or the environment, and harm caused to the company and its shareholders. A lack of awareness among shareholders of their legal rights, as well as the lack of transparency in companies' disclosures of climate-related risks are also other possible factors behind the low rates of shareholder litigation on climate change, read the report. It recommended that companies improve their climate disclosures to help increase shareholder engagement and awareness, and that governments should review the scope of directors' duties under their respective company laws, as well as expand the scope for shareholder litigation to include environmental harm. "Given the ever-increasing awareness of and interest in holding corporations accountable for environmental and climate-change-related impact, the calculus for shareholders may - notwithstanding the obstacles identified above and others – shift in favour of commencing litigation as a means of managing corporate exposure to potential liabilities," read the report. However, Nichol Yeo, director of Nine Yard Chambers, pointed out that litigation is drastic and counterintuitive. "I accept that litigation is public, which in turn exerts pressure on the companies and directors to be publicly accountable for their decisions. But litigation kills off dialogue... The process is adversarial and 'win-lose'," he said. Wilson Ang, partner at Norton Rose Fulbright and head of the Asia regulatory compliance and investigations practice, added that directors should be given a margin of discretion in determining how to manage the company. "If shareholders are specifically empowered to bring a claim to compel the director's action in relation to climate-related issues, other issues which need to be taken into account in implementing corporate strategy may potentially be ignored or de-prioritised," he said.
For a more targeted and effective approach, Ang suggested that legislation be enacted where companies can be liable for climate-related harms, and directors and senior management can be held accountable for not taking reasonable steps to ensure that environmental and human rights due diligence processes were undertaken within the company. Mak, however, cautioned against amending the laws to require directors to focus specifically on climate-related issues as not all companies have a material impact on climate risks. Instead, he recommended adopting a law similar to the United Kingdom, where directors' duties also encompass its impact on the community and the environment. "This can be complemented by stricter industry-specific legislation for industries where climate-related issues are likely to be most relevant," he added. Yeo, however, said that legislation for environmental protection already exists in Singapore.
What needs to be done is not to amend the laws, but to impose a standard on directors to take environmental, social and governance issues in their decision-making process. Instead of litigation, Tay said that a more effective approach is to promote stronger awareness ofenvironmental issues among other shareholders, and to collectively exercise their votes to only appoint directors whoare equally committed to environmental issues and sustainability.
The general reluctance for the courts to interfere with business decisions means that environmental protection is primarily within the purview of the Parliament and the Cabinet.
Source : The Business Times