The Need of Introducing Mandatory Climate Change Risk Disclosure by Companies in India

The Need of Introducing Mandatory Climate Change Risk Disclosure by Companies in India

Climate change is the primary and most pressing concern humanity has come across since the dawn of the 20th century.  The problems of climate change have notoriously affected India and have steadily induced repercussions to many fields. According to ‘Assessment of Climate Change Over the Indian Region: A Report of the Ministry of Earth Sciences (MoES), Government of India

 In 30 years between 1986-2015, warmest day and coldest night temperatures have risen by about 0.63°C and 0.4°C, respectively. By the end of the 21st century, the frequency of warm days and warm nights is projected to increase by 55% and 70%, respectively

India’s first-ever climate change report revealed that India’s average temperature would shoot up by 4.4 degrees by the end of this century. These changes will not just affect the quality of life or health, but the entire economy at large. From 1999 to 2019, India has lost over USD 80 billion due to climate change, and going by statistics, the same could multiply in the coming years. It is suggested that Indian companies stand to lose 7.14 lakh crore to the impact of climate change in the next five years if the companies do not take measures to decrease the same. These statistics show us that climate change affects health and liveability and can shake the bricks and mortars of the economic food chain by creating losses to the companies. Now the primary question that has to be dealt with is how climate change can affect companies and the economy?

Effect of Climate Change on Companies

Often climate change is perceived as a geographical disaster that pollutes and destroys the earth. But the very same climate change can cause economic seesaw and large scale disruption to the fluent working process of the corporate world.  Climate change risks can affect business in multiple ways, from disrupted supply chains to rising insurance costs to labor challenges.  Companies are asked to set up emission control systems and comply with other requirements to mitigate climate change. This requires capital expenditure and non-compliance of the same leads to hefty fines. In fact, it is to be noted that mega PSUs such as Indian Oil and NTPC were fined 400 crores for pollution and non-compliance in 2020.

Climate change also leads to change in demands and challenges in obtaining raw materials. For example, an overall increase in temperature in certain regions may result in less to no use of oil heaters and other winter supplies.  Upgradation of regulations leads companies that produce high levels of emissions to invest in substantial funding to upgrade their facilities to reduce, capture or eliminate them. Apart from financial risk, companies might also face destruction due to natural disasters such as floods, hurricanes, and tsunamis. In 2016, giants such as Sony, Honda and Toyota were forced to suspend operations due to severe earthquakes in Japan. To cope with this natural disaster, companies need to buy ‘disaster insurance’, which is also quite expensive. The buildings need to be modified to withstand strong breeze and water currents as climate change has made natural disasters more prevalent. We have established that climate change has a decisive say in a company’s overall development and running.

The second question to be answered here is ‘Why do companies need to take up climate change risk disclosure?’ One of the standout reasons for the necessity of disclosure is increased awareness regarding climate change. Businesses’ investors, customers, and other stakeholders demand greater transparency by exposing their climate change risks. Non-disclosure against this demand might lead to serious jeopardy of the company’s reputation and goodwill. In 2015, Exxon Mobil had to undergo an investigation for deceiving investors and the public about its climate change risks. Better scenario analysis, climate change risks forecast, and presentation of possible threats and opportunities give stakeholders and potential investors a broader picture, leading to greater transparency and fulfilment of sustainable goals.

Current Legislation and Obligations on Climate Change Risk Disclosure in India

2015 was a critical year when it came to climate change; the Paris Agreement was the first-ever international summit to open up companies’ dialogue on climate change disclosure. The primary aim of the Paris Agreement has been to limit the threat of climate change by keeping the global temperature rise to well below 2 degrees Celsius above pre-industrial levels, until the end of this century and to pursue efforts to limit the temperature increase even further 1.5 degrees Celsius. In the Paris Agreement, the United Nations Financial Stability Board (“FSB”) launched the Task Force on Climate-related Financial Disclosures (“TCFD”). The TCFD was handed the job of drafting recommendations for voluntary, consistent climate-related financial risk disclosures; the same was done in 2017. The TCFD recommendations discussed four important climate-related financial disclosures – governance, strategy, risk management, and metrics and targets. These recommendations started on voluntary adoption basis. But the recent years have seen countries mandating or planning to mandate the TCFD regulations with Britain, Switzerland, and New Zealand leading the way.

India does not have any formal laws or regulations that mandate climate-related disclosures. However, an advocacy group called Climate Disclosure Project (“CPD”) has been monitoring climate-related disclosures of companies in India. CDP’s reports have constantly showcased the social responsibility of companies concerning climate disclosures. But after TCFD recommendations in 2017, companies are trying to keep up with the same as non-compliance or sheer disregard of recommendations of a global watchdog would give out adverse effects on the goodwill and stakes of the company. As per reports, “in November 2020, 24 Indian companies signed a pledge to work with the government toward achieving the 2015 United Nations Paris Climate Change Conference (Paris Agreement) goals”. With the rise in importance and caution about the menace of climate change, Indian companies are gradually accepting risk disclosure. However, the standard of disclosure in India is agonisingly below a satisfactory level, and companies are struggling to keep up with the global pace.

This is where the mandatory climate change disclosure comes into the picture. Current Indian legislations have no ambit or provisions that mandate companies to give climate-related risk disclosure. The Companies Act, 2013 (“the Act”) does not deal with climate change risk disclosure by companies. However, there have been opinions that risk disclosure shall form a part of “Duties of Directors” which has been mentioned in Section 166 of the Act Under Section 166, a director is supposed to act in good faith to promote objects of the company, keeping in mind the best interests of the company and the protection of the environment. However, the absence of strongly-worded, mandatory climate-related risk disclosure law has significantly played a role in increased climate crisis across India, making it high time for the legislature to add provisions mandating climate change risk disclosure by the companies.

Mandating Climate Change Risk Disclosure under the Companies Act, 2013- Need of the Hour

The Act has ushered in a new era of corporate governance across India. The principal aim of the Act was to bring greater transparency and accountability. Risk disclosure has been given great emphasis under the Act. Going by the undermining aspects on which the Act is founded, climate change risk disclosure fits right into its purpose. Considering the situation realistically, disclosure of climate change risk has become a dire necessity. The Act is the regulation that predominantly looks after corporate governance across the country. Therefore, the question of “whether the Companies Act the right regulation to bring in disclosure of climate change risk mandate” invariably does not exist. There is a necessity of climate change risk disclosure to two ends. The first is the necessity on the company’s part, and the second is the country’s necessity.

A Necessity on the Part of the Company

Climate change risk disclosure helps companies to achieve their sustainability goals and involve themselves in climate change mitigation. Even though these actions have positive results, companies have not kept up with the same. Therefore, companies around the world are now facing pressure to disclose their climate change relates risks due to number of reasons.  

Increasing power of shareholders in the company – With companies raising capital and inviting multiple investors, external sources are constantly gaining strength over the company’s control. With shareholders holding the power to appoint and remove directors,  directors are under an obligation to act and heed the opinion and advice of the shareholders. Increased environmental awareness and involved financial risks have made shareholders constantly push for climate change disclosure, providing a great push for the companies to do the needful.

Possibility of scenario analysis by climate change risk disclosure – Scenario analysis is a well-established method for developing input to strategic plans to enhance plan flexibility or resiliency to a range of future states.  The purpose of scenario analysis is to consider and understand how a business might perform under different conditions in the forthcoming period. Various companies have used the same as part of a process for generating and evaluating their strategic options. Recently, this established technique was used to forecast climate-related risk disclosure by some non-financial companies such as BHP Billiton. The success of these firms has led to the implementation of scenario analysis for climate-related risk forecasting. This would help companies to prepare themselves for possible climate-related adversities and opportunities. To apply this technique, climate risk disclosures become necessary. Hence to adapt and stay secure, companies need to disclose the climate change risks.

Clarity and security to investors – The principal purpose of climate change disclosure is to avoid financial risks. A company that can satisfy and secure its investors has scope for growth and expansion. With multiple countries pushing for compulsory TCFD recommendations, Indian companies cannot attract international investors without climate change risk disclosure. Investors are more likely to feel confident that companies are on top of climate-related risks when transparent about their risk management process and findings. Hence, businesses need to disclose their climate change risk to keep investors, shareholders, and customers happy and intact.

A Necessity for the Country

While discussing climate change risk disclosure, we discuss companies, shareholders, customers, investors, etc. Still, we often overlook that the entire country’s interest is at stake while countries disclose climate-related risks. Non-adherence to carbon emission guidelines or other requirements leads to an excess of pollution and release of other toxic substances, which affects the health and safety of the masses.

Right to a safe and healthy environment – The Constitution of India, 1950 provides every citizen a fundamental right to a safe and healthy environment under Article 21. The Supreme Court of India, in the case of Municipal Council, Ratlam v. Shri Vardichand, has held that the right to life under Article 21 also includes a pollution-free environment for the full enjoyment of life. This suggests that violation of pollution norms, discharge of toxic waste or any other forms of climate-related adverse acts by a company would affect the public’s interest at large.  In the case of Association for Protection of Democratic Rights v. The State of West Bengal and Others, the Supreme Court highlighted that conservation and development need not be viewed as binaries but as complementary strategies that weave into one another. In other words, conservation of nature must be considered to be part of the development and not as a factor stultifying development, as also reiterated in the case of Chandrabhal Singh v. Union of India. These Supreme Court cases suggest that the right to a healthy environment is inherent, and any misdeed by companies will also violate the same. Therefore, climate change risk disclosure is necessary on the part of the country, too, as the interests of billions of people are involved.

Should India mandate TCFD Recommendations or bring up new provisions under the Companies Act, 2013?

Up until this point, one thing is certain. India needs to hold companies liable for non-disclosure of climate-related risks, and proper regulations to guide the exact needs to be introduced. Now another question that needs to be dealt with is the mode of introduction. Several countries like the UK and New Zealand have passed orders to mandate the recommendations of climate change disclosure. However, one must note that the TCFD Recommendations Report ( “TFCD Report”) is elaborate, discursive, and provides high discretion while disclosing climate-related risks.

Another central point that must be considered here is that the TCFD Report was drafted as a guideline and not as a piece of legislation, which makes liability and enforcement cumbersome. The introductory part of the Report clarifies that organisations should make financial disclosures following their national disclosure requirements. This requirement explains that the TCFD expects countries to have mandatory financial risk disclosure legislation apart from the TCFD’s recommendations. Hence, it is suggested by the authors that India needs to bring specific legislation under the Companies Act as well. Pushing companies to adhere to this particular legislation along with the TCFD Recommendations would get a new regime of climate risk disclosure that is not only persuasive but vigilant and adoptive.

Risk-Benefit Analysis of Compulsory Climate Disclosure

It is important to also look at the possible and realistic challenges the companies face by bringing up compulsory disclosure.  The most significant challenge is that currently, no single corporate governance model exists that has wide-scale acceptance. Without a globally accepted governance model there cannot be a practical global disclosure framework. Another critical challenge is the accuracy and truthfulness of disclosures. False and inaccurate disclosures might lead to adverse effects, and keeping check of hundreds of companies and their data would in itself become a challenging task. The third challenge is disclosure in itself: as per Griffin and Jaffe, “mandatory disclosures could intensify anxieties about energy transition climate risk and could prompt investors to flee the oil and gas sector as a herd” These possibilities have to be considered and analysed before mandating climate change risk disclosures.

The benefits, as previously discussed, range from achieving the Sustainable Development Goals to protecting investors and global economical structures. The disclosures will also help in uncovering risks and opportunities and tracking the companies benchmark progress.

The said act of mandatory disclosure consists of risks and opportunities, but given the pace of climate disaster and global carbon emissions mandating is a move in the right direction. The benefits of disclosure overlap the risks, and the companies need to take these risks for the company’s welfare, investors, shareholders, customers, and most importantly, the public at large.

Conclusion

Due to the rise in pollution through carbon emissions, industrial effluent disposals, e-wastes, etc, disclosure of climate change risk by the companies shall play a vital role in the corporate sector’s contribution towards a better world. The practice of voluntary disclosure by the companies followed in India has failed to keep up with the global pace. With more countries turning towards mandatory climate disclosures, India needs to step up and bring in elaborate amendments under the Companies Act. These amendments should spur the companies to take up risk disclosure as a part of corporate social responsibility or customer satisfaction and a duty towards the environment and sustainable development at large. Also, at this juncture, we cannot take a backseat regarding environment protection and achieving sustainable goals. Many Indian companies are already taking climate risk disclosure seriously, and this is the right time to mandate the same. It will ensure that the countries’ vow to uphold the Paris Agreement and champion environmental protection causes can finally come true.


This article is authored by Nilesh Beliraya K, student at Chanakya National Law university, Patna.

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