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Company directors in the UK could face responsibility for damages caused by climate change, according to legal experts.
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Company directors in the UK could face responsibility for damages caused by climate change, according to legal experts.

Attorneys have stated that directors of companies in the UK may face personal responsibility for neglecting to adequately address risks related to the environment and climate change.

A recently published legal analysis revealed that board members have a responsibility to take into account the impact of their company on the natural world. This encompasses risks related to climate change, as well as potential threats to biodiversity, soil health, and water quality.

The assessment revealed that UK corporate leaders could face severe individual repercussions for violating these obligations, such as being sued by their shareholders for damages or reimbursement. Even if the exact financial loss suffered by the company is unclear, directors may still risk losing their positions or having their pay and severance reduced.

Currently, there have been limited legal actions taken against individual corporate leaders regarding environmental issues, with none resulting in a win.

Legal experts commissioned by the climate advisory firm Pollination Group and the Commonwealth Climate and Law Initiative said failure to assess financial risks from a company’s unaddressed nature-related impacts and dependencies could expose directors to increased shareholder scrutiny under the Companies Act.

Legal evaluations requested for different countries such as Australia, New Zealand, and the Philippines have reached comparable findings.

Industries such as food production are affected by risks associated with nature. For instance, the success of crops and livestock relies heavily on the health of soil and pollinators.

Most businesses rely on and have an impact on the natural world in some tangible manner. For instance, banks that have mortgages on homes located in areas prone to coastal flooding run the risk of losing a significant asset.

Organizations also encounter potential changes that may affect their operations, such as changing consumer trends and emerging laws aimed at conserving the environment. The recently passed 2021 Environment Act prohibits the use of goods produced on unlawfully cleared land outside of the country, although it is not yet enforced. Additionally, the deforestation rules of the European Union mandate UK businesses selling certain items in the region to ensure they were not obtained through deforestation.

A recent ruling, written by a team specializing in corporate, financial, and environmental law, found that directors who had correctly acknowledged and evaluated these risks would have increased protection against potential legal actions.

According to Martijn Wilder, CEO of Pollination Law, the document stresses the importance of board members addressing nature-related risks in their agendas and being able to show that they have thoroughly considered and weighted these risks in their decision-making.

Last year, ClientEarth filed the initial lawsuit against the directors of Shell for their lack of adequate preparation for the shift to renewable energy. The charity, focused on environmental law, asserted as a minority shareholder that the board of Shell had violated their legal obligations outlined in the UK Companies Act.

ClientEarth was required to cover Shell’s legal expenses after the case was dismissed. In February, Lord Carnwath, who is currently a visiting professor at the London School of Economics, expressed disappointment in the missed chance to review the responsibilities of directors in the case.

He expressed surprise that the judge determined that ClientEarth had not presented even a basic argument, and he finds it unfortunate that their request to appeal was rejected by a sole lord justice without a hearing.

ClientEarth is challenging the ruling.

Last year, a UK court dismissed a case filed by trustees of the Universities Superannuation Scheme, who claimed that their duty was violated by their pension fund’s choice to maintain investments in fossil fuels.

Although lawsuits against company directors are likely to persist, there is also a rise in backing for them. In the previous year, the Law Society released instructions for lawyers on how to counsel corporate boards on addressing climate change risks. Additionally, a system has been created to assist enterprises in evaluating their contributions to environmental damage. More and more companies are embracing the suggestions of the Taskforce on Nature-related Financial Disclosures to increase disclosure of their nature-related vulnerabilities.

Source: theguardian.com