A team of independent legal counsel issued a legal opinion (the Opinion) on 14 April on Directors’ Responsibilities and Climate Change under Singapore law, concluding that directors of corporations in Singapore are obliged to consider climate change risks as part of their duties to act in the best interests of the company. This LawFlash summarizes the key issues in the Opinion.
SINGAPORE LEGAL OPINION
As background, the Commonwealth Climate and Law Institute, a research, education, and outreach project focused on Commonwealth countries, has requested for the Opinion.
Singapore, as a small and relatively flat tropical island-state dependent on international trade, is not immune from the consequences of climate change such as rising sea levels and disruption to international trade.
The business sector in Singapore, like in all countries, also has substantial stakes in climate change as their business activities are or can be affected by the consequences of climate change. Simultaneously, businesses can contribute to the mitigation of climate change through sound practices.
The Opinion describes climate change as the collective efforts of the rising average temperature of the Earth’s climate system. This includes, among others, changes in rainfall patterns, extreme weather, seasonal changes, rising sea levels, and general surface temperature increases. Issues arising from climate change can be seen as falling within the general context of concerns over the Earth’s environment.
POTENTIAL CONSEQUENCES FOR BREACHES OF DIRECTORS’ DUTIES
Directors play a crucial role in the governance of their companies and owe duties arising from both statute and common law in Singapore. Directors are required under the Companies Act (Cap 50, 2006 Rev Ed, the Companies Act) to act honestly and use reasonable diligence in the discharge of their duties at all times. Directors should generally ensure that a company conducts its business in accordance with applicable laws, taking into account the interests of its stakeholders.
The Opinion states that directors’ failure to take into account climate change risks insofar as these risks have a material and adverse impact on the financial performance of the company will render the directors in breach of both common law and statutory duties. The Opinion further states climate change has and will have an impact on directors’ liabilities. These liabilities include (i) criminal law where various statutes specifically provide that directors are criminally liable if their companies are guilty of breaching the provisions of certain laws; or (ii) civil liability where directors are held liable for losses caused by breaches of a civil nature such as the failure to exercise due care and diligence.
The Opinion goes further to highlight that directors of listed companies also owe duties in relation to disclosure to the shareholders of the listed company and to the public as a whole. The disclosures should also include climate change risks where the risks have an effect on the companies’ business, activities, or profitability.
Numerous statutes provide that company directors can be personally liable and be subjected to a fine or imprisonment if the company breaches the applicable provisions in the statute. The legislative intent is certainly to compel and urge directors to take actions to ensure compliance with the statutes.
The Environmental Protection and Management Act (Cap 94A, 2002 Rev Ed, the EPMA), the Carbon Pricing Act (Act 23 of 2018, the CPA), the Energy Conservation Act (Cap 92C, 2014 Rev Ed), the Transboundary Haze Pollution Act (Act 24 of 2014), and the Resource Sustainability Act 2019 (Act 29 of 2019) are some examples of legislation passed to combat climate change in Singapore.
For example, the EPMA, which makes it an offence for companies to unlawfully discharge trade effluent, oil, chemical, sewage, or other polluting matter, also provides that where an offence is committed by a body corporate is proved to have been committed with the consent or connivance of an officer, or to be attributable to any act or inaction of the officer, the officer shall also be guilty of an offence. As directors are officers of a company, the criminal provisions in EPMA would apply to directors.
The CPA also provides that where an officer of the company involved in the management of the company and is in a position to influence the conduct of the company knew or ought reasonably to have known that the offence by the company would be or is being committed and failed to take reasonable steps to prevent or stop the commission of that offence, the officer will be guilty of the offence as well. This goes further than the EPMA as the omission by the director would suffice for criminal liability to arise.
Thus, the Opinion states that directors should inform themselves of the activities of their companies and take necessary actions to ensure that their companies do not breach these laws, including mitigating climate change risks, and failure to ensure such compliance may lead to personal criminal liability.
Bearing in mind the aforementioned directors’ duties under the Companies Act and common law to use reasonable diligence in the discharge of its duties, directors are also urged to take steps to prevent their companies’ business practices from providing opportunities of potential public interest litigation initiated by nongovernmental entities to challenge business activities of their companies on the basis that they exacerbate climate change and must be curtailed.
The Opinion argues that as the risks of climate change are widely known and publicized, it is only reasonable for the directors making up the governance of companies to factor in climate change consideration in their decisions.
While the Opinion observes that shareholder activism in Singapore is relatively muted compared to other jurisdictions such as Hong Kong or the United States, bearing in mind that Singapore is an open economy and society, it is easily influenced by developments across the world. As of May 2020, 1,587 instances of climate-change litigation have been filed globally, and the Opinion notes that there is a risk such public interest litigation may be instituted in Singapore.
The Opinion notes that directors of listed companies also must comply with the Listing Manual and ensure timely disclosure of information by the listed company necessary to avoid the establishment of a false market in the listed company’s securities, or which is likely to have a material effect on the price or value of the listed company’s securities.
While the Listing Manual is not statutory, in instances of noncompliance, the Singapore Exchange (SGX) may sanction the company and its directors in various ways, including (i) requiring the resignation of the director or executive officer from an existing position with any company listed on the SGX; and (ii) issuing an order prohibiting any listed company for a period not exceeding three years, from appointing or reappointing the director or executive officer, as a director or executive officer, or both.
There are numerous ways that the price or value of a listed company’s shares might be materially affected by climate change risks, such as legislative changes rendering a company’s activities untenable at cost, damage caused by extreme weather events, and the commencement of climate change litigation against the listed company or its subsidiaries.
In 2016, the SGX also promulgated the Listing Rule 711A, which requires every listed company to prepare an annual sustainability report describing its practices with reference to components such as (i) material environmental, social, and governance (ESG) factors; (ii) policies, practices, and performance; (iii) targets; (iv) sustainability reporting framework, and (vi) board statement. This highlights the recognition by regulators that these ESG factors can affect the business of the company and value of its shares and returns to shareholders.
DEFENCES AVAILABLE TO DIRECTORS
The Companies Act also states that any provision that purports to exempt a director from the consequences of breaches of directors’ duties in the Companies Act is void.
The Opinion notes that a relevant issue to be considered is also whether the directors can rely on the “business judgment rule” which provides a defence for directors whose companies encounter commercial losses in their dealings despite the directors acting properly, diligently, and in the best interest of their companies. It is to be noted that directors will not be protected by the “business judgment rule” if they fail to make a conscious decision, or do not exercise their judgment, or fail to properly inform themselves of the relevant facts and circumstances before undertaking a course of action. It is arguable that the scope of the “business judgment rule” may evolve as knowledge concerning climate change risks becomes more prevalent.
The Opinion concludes that directors in Singapore are obliged, when carrying out their responsibilities as directors, to take into account climate change and its associated risks, particularly insofar as those risks are or may be material to the interest of the company. This is demanded, first and foremost, by legislation in Singapore that seeks to address environmental sustainability and climate change, and necessitated by the duty of care, diligence, and fiduciary duties owed by the directors. Directors should accordingly take commensurate steps to inform themselves of the risks of climate change that may impact their companies and manage such risks by instituting governance and management processes for identifying, monitoring, and reporting on these risks, among others.
DEVELOPMENT IN OTHER COUNTRIES
This Opinion on climate change follows
- the Hutley legal opinion published in Australia in 2016 and 2019;
- the Sustainable Finance Forum legal opinion published in New Zealand in 2019; and
- the Hansell LLP legal opinion published in Canada in 2020.
All of these covered the directors’ duties in connection with climate change.
Thus, the trend across the globe of increased recognition of climate change risks as a consideration to be taken into account by directors is clear and it is high time for directors in Singapore to recognize it as well.