In the UK, as in many other countries, directors are legally required to consider material financial risks facing their business, and to report these risks in their corporate disclosures. This can often include the risks posed by climate change—which, after all, can be a material risk for business like any other.

The case against Commonwealth Bank was dropped after the bank released new reporting that recognised climate change as a financial risk. But many directors are still exposing themselves to liability by remaining tight-lipped: it has just been revealed that almost two-thirds of FTSE 100 companies are not including climate risk in their annual reports.

So, what’s the outlook for directors and how best can they protect themselves?

Climate reporting 101: the FSB’s Task Force

June 2017 saw the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD) release its final recommendations, which provide a comprehensive, voluntary framework that all companies can follow to assess and disclose climate change-related risk. The recommendations have received widespread support from investors, banks, insurers, and companies themselves—among them, fossil fuel majors like Royal Dutch Shell.

However, some companies remain reluctant to embrace climate risk disclosure, particularly when it comes to forward-looking statements. How can directors tell shareholders what the outlook is when the future impacts of climate change on the company are uncertain? Directors’ main reservation about complying with the TCFD recommendations is fear of legal action: they worry they will be sued for misleading disclosure, or securities fraud, if forward-looking statements regarding climate risk are later proved to be inaccurate.

Forward-looking statements: where’s the liability risk?

Are directors’ fears well founded? Here we should turn to legal analysis. A recent report produced by experts at the Commonwealth Climate and Law Initiative (CCLI), including ClientEarth lawyers, explains why these particular fears about climate risk disclosure are misconceived.

Under UK law, directors are obliged to assess and, where material, meaningfully disclose climate risk and its impact on the company’s performance and prospects. Directors’ legal obligations regarding climate risk fall into two key categories (similar laws apply in other jurisdictions):

1. Climate risk and the annual strategic report: Under the Companies Act, directors of large UK-traded companies, banks and insurance firms have to prepare an annual strategic report identifying “main trends and factors” likely to affect the company’s business and “principal risks” regarding environmental matters. The law also asks them to explain how the company is managing those risks. If directors fail to do so, they run the risk of being held criminally liable—or they may be targeted by regulatory interventions.
2. Directors’ duties: The fiduciary duties directors owe to their company require them to adequately identify, assess, and manage material financial risks to the company, including climate risk. Breach of these duties could result in shareholder litigation—or, it was recently suggested, claims for damages by clients or beneficiaries of financial institutions, like banks and pension funds.

The CCLI report concludes that in many jurisdictions, companies and directors are actually likely to face greater liability exposure if they fail to report climate-related financial risk altogether.

Why following the TCFD recommendations on climate risk reporting will reduce directors’ risk of being sued

Complying with the TCFD recommendations is currently the best insurance policy against climate-related legal action.

First, the recommendations serve as a framework to help companies comply with existing national disclosure laws, helping directors identify and assess climate risk and accurately report that risk to the market. In short, they are a handy “best practice” tool to help directors fulfil their existing reporting duties. This process could also help directors defend shareholder actions alleging breach of duty for climate risk mismanagement; it may help demonstrate that the director undertook thorough climate risk assessment.

Second, while the TCFD recommendations are not yet mandatory, they may not remain voluntary, at least in some jurisdictions. Calls for making them a legal requirement are coming from many corners—most recently, the European Commission’s Expert Group on Sustainable Finance. Early compliance in this case means companies are not playing catch-up later and ensures they are prepared for future legal developments.

Have concerns over forecasting been overstated?

It is true that the future trajectory of global warming (and its impact on any particular company) remains unclear. However, rather than requiring certainty of future outcomes, the TCFD recommendations include stress-testing and scenario analysis across a range of plausible climate futures, which means directors can undertake climate risk assessment despite this uncertainty.

Existing disclosure laws already require companies to make certain assumptions and forward-looking statements. In the UK, companies which do so in good faith and on reasonable grounds will not generally be vulnerable to liability. Liability only arises when the company fraudulently or recklessly makes untrue or misleading statements or omissions.

Industry should have no qualms about embracing the TCFD recommendations. When it comes to climate risk, the most misleading disclosure in many cases is silence.

Alice Garton is a lawyer (Australian-qualified) at ClientEarth and leader of the company and financial project.