December 10, 2021

Directors’ Liability and Climate Risk: White Paper on Hong Kong

This White Paper complements and extends the analysis in the “Legal Opinion on Directors’ Duties and Disclosure Obligations under Hong Kong Law in the Context of Climate Change Risks and Considerations”.

It is well-established that climate-related risks pose a material threat to the financial performance of companies and the authorities in Hong Kong have issued or proposed a variety of measures to address these risks. Under Hong Kong law, directors are required to consider and address these risks. This is because directors are required to act bona fide in the best interests of the company. Applying this duty to the climate context, directors are required to monitor and manage the risks arising from climate change as the failure to do so will have an adverse impact on the business and operations of the company, and in turn, the financial interests of shareholders. Directors are also required to exercise reasonable care, skill and diligence in carrying out their functions. Applying this duty to the climate context, they are required to set up effective internal risk management systems, perform adequate due diligence, exercise supervision over those to whom they have delegated the monitoring and management of climate-related risks, ensure there is proper disclosure (of asset impairment and fair valuation) in the financial statements, and refrain from making greenwashing statements. Consistent with such common law and statutory obligations are those imposed by the Hong Kong Stock Exchange listing rules which require boards to bear overall responsibility for issuers’ environmental, social and governance (ESG) strategy and reporting, the obligations of which include but are not limited to detailed and granular disclosure of issuers’ policies and issuers’ compliance with regulations on carbon emissions.

Should directors be in breach of their duties under the common law or statutory law, the board may bring an action against those directors. The director may also be removed by shareholders by an ordinary resolution. If the board decides not to take action against that director, a minority shareholder can bring a derivative action on behalf of the company or may apply to the court for an unfair prejudice remedy. In addition to private enforcement by shareholders, there is public enforcement where the Securities and Futures Commission can apply to the court for an order if it finds that the company’s business or affairs have been conducted in a manner resulting in any of its members not having been given all the information with respect to its business or affairs that the member might reasonably expect; or unfairly prejudicial to any of its members.