Climate change and the role of directors in the Philippines

Climate change poses significant threats to businesses — in the Philippines, the wider region, and the globe. Businesses and their value chains are being impacted by climate risks, and as custodians of companies’ assets, directors play a critical role in managing these risks, as well as in fulfilling the companies’ social responsibilities towards protecting the environment.

A new opinion by attorneys Cesar L. Villanueva (Senior Founding Partner, Villanueva Gabionza & Dy), Lily K. Gruba (Senior Partner, Zambrano Gruba Caganda & Advincula), Angelo Patrick F. Advincula (Senior Partner, Zambrano Gruba Caganda & Advincula) and Joyce Anne C. Wong examines how climate risks form part of directors’ legal duties to their company and wider society.

The opinion finds that under Philippine corporation law, the risks arising from climate change are—like other foreseeable financial risks—within the scope of directors’ duties to act in the best interest of the corporation and its shareholders.

Given the unequivocal scientific evidence that the climate is warming, and considering the unprecedented impacts of climate change on economies, the climate risks corporations face are foreseeable and belong to the category of financial risks that directors are duty-bound to address and manage.

Additionally, directors owe their duties to stakeholders more broadly, and hold a stewardship role to ensure that company operations do not degrade the environment or contravene environmental laws. Where directors are grossly negligent or act in bad faith in directing the affairs of the corporation, they can be held personally liable.

Increasingly, regulatory authorities, including the Philippine Securities and Exchange Commission (SEC), have taken detailed and specific steps to bring climate change risks to the attention of banks and insurers, amongst other listed companies.

For example, the Sustainability Reporting Guidelines for Publicly-Listed Companies (PLCs) provide a Sustainability Reporting Framework to which Philippine PLCs must adhere on a ‘comply or explain’ basis.

The opinion finds that if sustainability reporting is made fully mandatory by the Philippine SEC, the failure to comply with the reporting rules may demonstrate gross negligence or bad faith in directing the affairs of the corporation in relation to climate change risks that the company may face, or regarding the company’s obligation to refrain from harming the environment. Directors of for-profit corporations can take measures to minimise climate risks and protect the viability of their companies in the long term, even if these measures cause the company to incur expenses in the short term.

Carlos Gatmaitan, Chief Executive Officer of the Institute of Corporate Directors, Philippines, says: “With climate change being at the forefront of COP27 [the UN Climate Change Conference] in Egypt last month, it is inevitable to continue to be deeply embedded in sustainability reports for the long term.

“It is essential therefore that the framework for climate change as part of Sustainability Reports be reviewed towards a global standard. This publication is a major step for formalising an SEC Memorandum Circular for proper duties and responsibilities of directors as well as disclosures and obligations of  PLCs.”

Alex Cooper, Lawyer at the Oxford-based Commonwealth Climate and Law Initiative (CCLI) says: “This independent opinion of Philippine counsel adds to and complements opinions which we have commissioned in Malaysia, India, Hong Kong and Singapore. It finds that governance of foreseeable financial climate change risks forms part of directors’ duties, and that directors have a stewardship role to ensure that company operations do not degrade the environment.

“The opinion finds that directors may be held liable for gross negligence in performing their duties, but generally are able to take actions to mitigate the impacts of climate change on their company without exposing themselves to the risk of liability due to the business judgment rule.”

Joyce Melcar Tan, senior lawyer at ClientEarth’s Asia Climate and Energy programme, observed: “The legal opinion provides a unique opportunity to drive crucial conversations regarding the role of the private sector, particularly company directors, in tackling the climate crisis. It is essential reading for lawyers and company directors on the legal framework for managing climate risks and pursuing opportunities as the Philippines transitions to a net zero carbon economy. We believe this will lead to more companies in the Philippines establishing, and fulfilling, net zero transition plans within a Paris-compatible timeframe.”