Climate Governance for Micro, Small, and Medium Enterprises

Chapter 9 explores why management of climate-related risks can be particularly challenging for micro, small, and medium enterprises (‘MSME’) to address. MSME comprise about 99 per cent of all businesses globally and they often lack the infrastructure and resources to manage deep shifts in their business activities. This chapter explores how one could build financing and infrastructure to support the MSME sector to advance in their transition to net zero. It discusses how the European Union has taken the lead globally on microfinance for vulnerable groups that want to set up or develop their businesses and microenterprises. It is building the institutional capacity of microcredit providers and supporting development of social enterprises by facilitating access to finance. It also examines climate governance for MSME, offering examples of toolkits being developed for micro and small businesses. The chapter concludes with a discussion of contributions that women entrepreneurs and micro-business owners are making in the transition to net zero.

Regulatory Oversight of Climate Governance of Companies and Institutional Investors

Chapter 6 examines a number of regulatory challenges for climate change, particularly in terms of international regulatory oversight. It offers positive models from the European Union and explores why fairness and equity should inform regulatory choices. It discusses the emerging use of ‘green taxonomies’ as a tool to assure investors about where their capital is being directed and to encourage sustainable investing. The chapter engages in a discussion about carbon pricing as a regulatory tool, including low carbon benchmarks, carbon budgets, and statutory requirements for net zero carbon emissions. It explores the potential governance role of debt in the transition to net zero carbon and what the appropriate oversight role is for financial services supervisors. The chapter canvasses capacity building for women’s role in policy-making and examines the critically important issue of meaningful partnership with Indigenous communities.

Financial Risks of Climate Change

Chapter 3 examines a number of financial risks to the viability of businesses due to climate change. It describes how the acute and chronic impacts discussed in Chapter 2 create new business risks, both physical risks and transition risks. It explores technology risk, market risk, and investment risk, risk to the company’s reputation for failure to adopt a climate plan, and policy risk. It examines the implications for investors if assets are stranded or reduced in value. It introduces concerns regarding planetary boundaries and what impacts may be irreversible once they are crossed. This chapter also examines how women are disproportionately affected by climate change impacts and why Indigenous peoples are deserving of special attention and respect in developing policy and business practices related to climate change.

Effective Climate Governance

Having set out the legal duties of directors, officers, trustees, and investment managers in Chapter 4, this chapter discusses principles and frameworks that can inform effective climate governance. It offers advice on how to get started. It raises the notion of having climate competent directors and pension fiduciaries. Such fiduciaries may rely on engaging asset managers and engagement service firms, but they cannot delegate their fiduciary obligations. The chapter examines how boards can measure progress towards decarbonization. It examines the framework on climate governance proposed by the Taskforce on Climate-related Financial Disclosure (‘TCFD’), including disclosure of governance of climate risk, climate strategy, risk management, and metrics and targets. It examines two emerging tools—climate scenario analysis and integrated assessment models.

What the Science Tells Us about Climate Change

Chapter 2 offers an analysis of the state of science and its direct implications for business. It explores how the physical impacts of climate change are already evident, discussing impacts on human health and well-being; on food security and food production systems; on the ecosystems of oceans, lands, and wetlands; and impacts on freshwater resources and on the cryosphere. The chapter examines the concept of climate tipping points and the implications for businesses. It also explores why mitigation is crucially important to reversing the negative impacts of climate change and discusses why climate adaptation is important and necessary, but not, in itself, sufficient to change the current trajectory of global warming. The chapter focuses particularly on what companies need to know about the current science on climate change.

Fiduciaries’ Obligations and Climate Governance

Chapter 4 carefully examines the precise contours of the legal duties of directors and officers of companies, of pension fund trustees, their investment managers and service providers, and of asset managers and investment funds. It explores how these duties arise in respect of climate-related financial risk and opportunities. It discusses potential corporate law remedies for failing to address material climate-related risks, including liability for breach of directors’ duty of care and fiduciary duty, as well as oppression remedy provisions in the corporate laws of some countries. It examines fiduciary duties of pension fiduciaries and other institutional investors, exploring how these duties can be met with effective climate governance, oversight of managers, and proactive measures to address climate risk. It explores securities law disclosure requirements and the notion of materiality that guides what corporate officers need to disclose to investors.

Sustainable Finance and the Move to a Circular Economy

Ultimately, our goal is to move beyond ideas, beyond action to net zero and then to ‘climate positive’; to create a circular economy that relies on renewable energy, designs waste out of the system as much as possible, conserves and enhances biodiversity, and frames economic activity so that it is fair and equitable, and is good for the planet and society. This chapter is a forward-looking vision for sustainable finance to support these goals. It discusses scaling-up of resources to decarbonize and links sustainable finance with sustainable development. It explores the European Commission’s vision for a sustainable and climate neutral economy. It looks at Indigenous partnerships in green finance and green energy and the potential contributions of conservation finance. The chapter then turns to examples of sustainable finance in a number of sectors.

Effective Engagement and Current Litigation on Climate Governance

Chapter 7 examines various forms of engagement with companies to press them to decarbonize. It discusses direct engagement with corporate boards, shareholder proposals, and proxy voting. It examines divestment as an option to advance climate goals. It also discusses why it is important to engage with policy-makers as they design and implement policies to transition domestic economies, and looks at some creative ways in which climate democracy is being enhanced. The chapter then turns to the extensive, emerging litigation against companies and their directors for their failure to manage climate risks. There are lawsuits both in the United States and globally against companies and institutional investors. The chapter also canvasses recent judgments denying licenses and other economic activities harmful to climate mitigation and adaptation.

Conclusion

Chapter 10 concludes with some final observations on charting a path forward from ideas to action in the transition to net zero carbon emissions. It draws attention once again to the need for a just and equitable transition to a sustainable economy. It briefly reflects on the coronavirus pandemic lockdown that has commenced. The Appendix offers a governance checklist for directors, officers, pension fiduciaries, and asset managers as they begin to embed effective climate governance in their management and oversight. The Appendix can also be used by employees, investors, community members, and regulators to ask questions that help hold companies and institutional investors accountable for their actions to combat climate change and move towards a sustainable planet.

Introduction

Chapter 1 introduces the need for effective climate governance in businesses and financial institutions. A variety of concurrent strategies are required to tackle global warming through mitigation and adaptation internationally and domestically. The chapter introduces how the best of current scholarly and business literature on effective governance can guide this transition and offer a coherent normative and practical framework for moving forward. It offers some essential definitions so that readers understand how the terms are used throughout the book, including the Anthropocene, global warming and climate change, greenhouse gas emissions and carbon intensity, systemic risk, climate mitigation and adaptation, net zero carbon emissions, climate resilience, and the circular economy. It provides an overview of the book’s structure and objectives.