A Dutch court’s recent order that Royal Dutch Shell Plc substantially reduce its global carbon-dioxide emissions is a sign that climate change may present challenges to the Canadian energy sector in the future. The challenges will likely come on three different fronts: judicial decisions, legislative initiatives, and via investor activism.
On the judicial front, there are two possible developments. One is that Canadian courts will follow the Dutch example and recognize a new tort that establishes a corporate “climate duty of care.” Drawing from the Dutch court’s approach, such a duty could be derived from human-rights obligations found in international instruments such as the UN Guiding Principles on Business and Human Rights, the UN Global Compact, or the OECD Guidelines for Multinational Enterprises. Indeed, the groundwork for this approach has already been laid. In Nevsun Resources Ltd. v. Araya, the Supreme Court concluded last year that companies could be held liable for violations of customary international law.
A second possibility is that courts will allow personal actions against directors that allege insufficient action to improve environmental outcomes, based either on breaches of their corporate fiduciary duties or, more broadly, on general tortious obligations. In a 2008 decision, the Supreme Court alluded to the possibility of non-shareholder stakeholders initiating actions against directors based on tort-law principles.
In the area of legislation, reform measures are on the horizon. The government has already shown its commitment to making corporate practices more socially responsible. For example, a recent amendment to the Canada Business Corporations Act enables boards to consider environmental concerns when determining a corporation’s best interests. The government has also introduced the Canadian Ombudsperson for Responsible Enterprise, which reviews claims of human-rights abuses caused by Canadian businesses abroad. Foreign jurisdictions have already gone further by mandating businesses to engage in human-rights and environmental due diligence, with the trend expected to spread to other nations, as well. Moreover, with G20 leaders meeting to discuss climate change this year, national and international policies to combat climate change are gaining in importance. The greater desire by governments to further engage business in this regard will be one of the logical consequences of these efforts.
Finally, from the investor perspective, the trend toward Environmental, Social, and Governance (ESG) efforts is a key development in corporate-shareholder relations. Large institutional investors are pushing companies harder to improve ESG metrics. Their methods vary — and, one could argue, aren’t always the most effective or free from self-interest. Still, from informal behind-the-scenes pressures to shareholder proposals and proxy fights, institutional investors and smaller players alike are more serious than ever about environmentally conscious business practices. A stunning example is the recent replacement of two ExxonMobil board members with shareholder representatives vowing to force the company to lessen its impact on climate change. Chevron shareholders have similarly voiced their commitment to climate change, voting 61 per cent in favour of cutting the company’s Scope 3 carbon emissions.
How real or immediate are these threats to the Canadian energy sector? To be sure, the context of the Royal Dutch Shell case mentioned at the outset is currently limited, both legally and territorially. Legislative initiatives, on the other hand, tend to take time to materialize. Nevertheless, as the last few years have demonstrated, court decisions and regulatory developments that pertain to business tend to cross jurisdictions. Furthermore, if not via legal developments, the energy sector might still face a shareholder franchise that’s increasingly prepared to challenge traditional practices and models.
Although Shell has expressed its disappointment with the recent Dutch decision, the company — and others in the energy sector — might ultimately benefit from it. Given the legal, political, and social momentum behind climate-change initiatives, shifts in business models seem inevitable. The sooner courts establish precedents, or legislators enact regulations that set standards of conduct for corporations in relation to climate change, the easier it will be for businesses to adjust and plan for the years ahead.
Barnali Choudhury is a law professor at University College London and incoming professor at Osgoode Hall Law School. Martin Petrin is the Dancap Private Equity chair in corporate governance at Western University.
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