A British NGO has warned Japanese company directors that they face personal liability if they fail to act on climate-related risks.

The alert comes from the Commonwealth Climate and Law Initiative (CCLI), which argues that directors’ duties set out in Japanese law mean directors should consider climate a material risk.

A report from CCLI says: “Since climate change is affecting almost all businesses, failure by corporate directors to meet their obligation to identify and manage climate-related risks and opportunities could result in personal liability for failure to act with due care and in the best interests of the company.”

The warning appears as Japan comes to terms with an increasing severity of typhoons, heatwaves and increased rainfall. Typhoon Shanshan in August last year caused significant damage and the evacuation of as many as two million people.

Rising sun

Japan’s temperatures over the past two years have made 2024 and 2023 the joint hottest years on record for the nation.

The CCLI places responsibility squarely on the shoulders of directors. “The government of Japan has recognised climate change as a material financial risk affecting the sustainability of almost all Japanese companies. Corporate directors need to recognise their obligations to identify and manage climate-related risks.”

The report comes in the same week that Dutch bank ING found itself sued by Friends of the Earth for alleged failure related to climate change. The case follows other legal action against French bank BNP Paribas.

Rising litigation

Reports from the Grantham Research Institute on Climate Change and the Environment at the London School of Economics suggest litigation is on the rise.

The institute’s most recent report says there were 203 new climate litigation cases worldwide in 2023: 47 of those were against companies, the rest mostly governments. The US attracted most litigation. So far, climate litigation in Japan has failed to register in the research.

Many anticipate more climate litigation in Europe once new reporting rules take effect. EU companies were due to implement non-financial reporting rules but those have been delayed as a result of EU concerns about competitiveness.

In Japan, CCLI writes that Japanese companies might rely on the “business judgement” rule as a defence against personal liability.

But there is a warning: Japanese courts could order a review to assess whether directors acted “reasonably”.

“If directors neglect to undertake reasonable analysis of the relevant facts, fail to get expert advice on climate-related risk management and, or, fail to exercise due care in respect of climate risks, the courts are unlikely to defer to their business judgement and could find that they have breached their duty of care.”