February 7, 2023

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Directors must ensure that the Company’s operations do not harm the environment.

According to a white paper commissioned by the Commonwealth, directors of local companies should consider risks related to climate change in the performance of their duties in order to fulfill their companies’ long-term legal, economic, moral and social obligations to their shareholders and other stakeholders involved in the climate and legal initiative (CCLI).

The opinion states that under Philippine corporate law, the risks arising from climate change are within the scope of directors’ duties to act in the best interests of the company and its shareholders. Directors owe their duties to stakeholders more broadly and have a stewardship role to ensure that the Company’s operations do not harm the environment or violate environmental laws.

“It is now globally recognized that climate change poses serious physical, transition and liability risks for businesses and that climate change needs to be integrated into the corporate risk management framework for businesses,” the paper reads.

“According to the ‘Comply or Explain’ approach of the Philippine corporate governance framework for publicly traded companies, directors are encouraged to promote the company’s long-term success and maintain its competitiveness and profitability in line with its corporate objectives and ‘the long-term best interests of its shareholders and other stakeholders’.”

The cited paper was authored by Cesar L. Villanueva, Lily K. Gruba, Angelo Patrick F. Advincula, and Joyce Anne C. Wong.

Regulators, including the Securities and Exchange Commission (SEC), have taken detailed and specific steps to make banks, insurers and public companies aware of the risks of climate change. For example, the Sustainability Reporting Guidelines for Public Companies provide a sustainability reporting framework that public companies in the Philippines are required to adhere to on a compliance or statement basis.

The new legal analysis finds that if sustainability reporting is fully mandated by the Philippine SEC, as projected in 2023, failure to comply with reporting rules may constitute gross negligence or bad faith in the management of the company’s climate-related affairs Risks of change to which the company may be exposed or regarding the company’s obligation to refrain from polluting the environment.

Boards of both private and public companies should prepare for increased reporting standards and consequent changes in identifying and managing climate-related risks, and employ value creation processes that incorporate ESG or environmental, social and governance issues.

“This independent report from a Filipino lawyer complements and supplements reports we have commissioned in Malaysia, India, Hong Kong and Singapore. It notes that managing foreseeable financial risks from climate change is part of directors’ responsibilities and that directors have a leadership role to ensure the company’s operations do not harm the environment,” said Alex Cooper, attorney at CCLI.

“The report finds that directors can be held liable for gross negligence in the performance of their duties, but are generally able to take steps to mitigate the impact of climate change on their business without exposing themselves to business liability risk to suspend the Judgment Rule.

“With climate change taking center stage at COP27 in Egypt last month, it is inevitable to continue to be deeply embedded in sustainability reporting over the long term,” said Carlos Gatmaitan, CEO of the Institute of Corporate Directors.

“It is therefore imperative that the climate change framework is reviewed to a global standard as part of sustainability reporting. This release is an important step toward formalizing an SEC memorandum circular on the proper duties and responsibilities of directors and disclosures and obligations of publicly traded companies.”

“The legal opinion offers a unique opportunity to have crucial conversations about the role of the private sector, particularly corporate leaders, in addressing the climate crisis. It is essential reading for attorneys and business leaders on the legal framework for managing climate risks and pursuing opportunities in the Philippines’ transition to a net-zero carbon economy. We believe this will result in more companies in the Philippines establishing and delivering on net-zero transition plans within a Paris-compatible timeframe,” said Joyce Melcar Tan, senior counsel at environmental rights NGO ClientEarth.