Jaap Spier

It is almost commonly accepted that the world is heading towards catastrophe if the increase of global temperature cannot be kept well below 2 C. If reasonably possible an increase by more than 1.5 C must be avoided. From there onwards unity fades away.

There is little appetite to translate this commonly adopted goal into concrete steps. The Paris Agreement could be the perfect vehicle to stem the tide if countries would be willing to issue adequate Nationally Determined Contributions (NDCs). So far only few NDCs are truly ambitious. The current NDCs are a pathway to global catastrophe.

Why a focus on the obligations of enterprises matters

In an ideal world politicians would agree on legal instruments containing legal obligations that suffice to prevent global catastrophe. That may well happen at some stage. So far, many politicians do not go beyond rhetoric as a very recent “Leaders’ pledge for nature” (political leaders participating in the UN Summit on Biodiversity) illustrates. They “commit … not simply to words, but to meaningful action and mutual accountability to address the planetary emergency”. Let us hope that, this time, they will take appropriate action.

We cannot, however, wait for miracles. It is high noon. That implies: we need to explore additional strategies.

A focus on the corporate world is important. Enterprises can influence the entire chain from suppliers to their products and services. They can – and must – phase out their own enissions. Electricity companies can – and must – curb their emissions caused by combustion of fossil fuels. Indirectly this reduces the GHG emissions of people. Hence, enterprises have a pivotal role to (net) zero emissions. If enterprises could be brought to assume responsibility for emissions throughout their value chain we would not need politicians, although their support remains welcome.

With an increasing number of exceptions enterprises are unlikely to take bold action if they are not legally bound to do so. Hence, it is important to explore whether they have legal obligations to change course. An international group I’ll mention in a few minutes has no doubt that they do have such obligations. If that assessment is right, the law, if necessary the sword of the law, can majorly contribute to a carbon neutral world.

Concretisation of the debate bitterly needed

The European Brands Association, one of the most progressive corporate initiatives, issued a, what it labels, “contribution to the EU Mandatory Human Rights Due Diligence”. It emphasises the need to take “reasonable steps to prevent and address human rights”. The contribution does not reveal what is meant by “reasonable”.

Any initiative that can contribute to keeping the increase of global temperature well below 2 C can only be welcomed. It is, however, unlikely that our common goal can be achieved if we are unwilling or unable to concretise the debate: what must be done by State X and enterprise Y.

I am by no means suggesting that the great many laudable initiatives geared at averting global catastrophe are unimportant. They deserve our respect and support. Many of them have had a noticeable impact. That leaves untouched the paramount importance of making obligations concrete.

In many discussions with people at the wheel I have learned, and statistics show, that most – happily not all – key players prefer to wash their hands in ignorance. That is a risky game. It harms their self-interest and, more importantly, that of society at large (including future generations).

Why is it important to concretise the key obligations of enterprises:

  • without pertinent knowledge of their legal obligations enterprises cannot comply; and
  • it is impossible to assess whether a specific entity did comply;
  • meaningful disclosure requires knowledge of the disclosing entity’s obligations. Admittedly, if enterprise X has curbed its GHG emissions by Y% that enables us to compare its reduction percentage with that of others (competitors). However, it does not shed any light on the question whether Y% suffices from a legal angle;
  • non-compliance may give rise to liability for damages. Liability is in the air; central banks and many others have sounded the alarm. We strongly believe that emphasis should be put on prevention.

The updated Principles

An international group of experts from around the globe, initiated by Thomas Pogge and myself, has tried to map the core obligations of States (the Oslo Principles, OP) and Enterprises (the Principles on Climate Obligations of Enterprises, EP).[1] For the members of our group, their bios, and the many distinguished endorsers I refer to our group’s website: www.climateprinciplesforenterprises.org.

The OP were launched in 2015; the EP early 2018. Since, a lot has happened: alarming IPCC reports, new research by other climate experts, and further depletion of the already limited carbon budget, to mention just the “highlights”.

Our expert group believes that the EP no longer suffice. Hence, we have been working on an update which will be published within a few days.[2] This presentation focusses on the update.

Our 49 Principles are accompanied by an extensive commentary which elaborates on their meaning. The commentary also provides a legal underpinning based on a myriad of sources: human rights, environmental, liability and company law, declarations, pledges, authoritative reports, codes of conduct and governance, case law and academic writings. We do not only focus on the law as it “stands” (which requires an interpretation of all these sources), but also how it will likely develop. The reason for including the likely development of the law is that it will be shaped in future judgments. In the absence of clear and pertinent black letter law and precedents courts tend to “find” the law as they believe it is at the time of rendering the judgment. Without much ado that law is applied to the case in point, de facto often with retroactive effect. Hence, it is important to assess how the law will likely develop.

Critics may argue that the interpretation of – in their view –non-existing law is nothing else than a political or moral judgment which should be left to the legislator. This view confuses unchartered territory and a lawless realm. The administration of justice does not come to a standstill at the boundaries of unchartered terrain. Since time immemorial judges try to keep pace with the changing demands of society. The law is a “living instrument” as the European Court of Human Rights puts it. Yes, that means that moral views, and a desirable outcome play a role in shaping the law. That is nothing new. Don’t make a mistake: conservative judgments are no less influenced by these features.

“If we were to acknowledge such things as moral values, “that would be the beginning of hope””, as Gordon Brown, referring to Albert Camus, put it.[3]

Ambition and realism

Our Principles aim to pair ambition with realism. It would have been possible to map more stringent obligations. In our assessment that would not have been a brilliant idea. At the end of the day each initiative aims to have an impact. Time for idle talk has elapsed. We need action; not tomorrow, but right now. That means: we need to get the ears of those at the wheel. Overly activist principles will be ignored by the corporate world, investors, politicians and courts.

In his auto-biography Gordon Brown, who wrote a very kind preface to our update, discusses the only way a progressive party can succeed:

“by being both radical and credible. It can be radical without being credible, but it will never be a successful party of power. It can also be credible without being radical, but it will no longer be progressive. In neither condition will it achieve anything truly worthwile.”[4]

That is not any different for principles. We have not been working for the paper box.

Difficult choices

We couldn’t avoid making difficult choices. A few examples:

1.5, 1.75 or 2 C?

According to the Paris Agreement the increase of global temperature must be kept well below 2 C and preferably below 1.5 C. The latest Special Reports issued by the IPCC leave no room for doubt: passing the threshold of 1.5 C is fraught with serious risks. 1.5 C is already too high seeing the increasing number of ever more devastating natural catastrophes. In that respect Julia[5] and I are on the same page.

In our assessment it is unrealistic to set the bar below 1.75 C. It would require emission reductions at a rate that do not stand any realistic chance of acceptance. Our approach already requires steep reductions of enterprises in most developed countries. Enterprises keen to set the bar higher would do the world and themselves a great favour: it will greatly add to their reputation, attractiveness to the brightest people and investors.

On paper the problem is solvable by betting on technology to achieve negative emissions at a major scale. We did not want to bet on technology that is not yet available at a scale required to stay below 1.75 C.

This approach leaves untouched the desirability to return to less than 1.5 C if possible and reasonably affordable. Because our update focusses on what needs to be done in the, say, 10 years to come we do not need to discuss the more distant future.

The 2050 paradigm

It rains pledges to effectuate net zero emissions by 2050, although they rarely indicate how they will be achieved. Based on extensive research mentioned in the commentary we are afraid that the carbon budget will be depleted well before 2050. That makes net zero-pledges by 2050 no less welcome, but those who issue these pledges should realise that there is a fair chance that they won’t suffice.

We are not in a position to say when the carbon budget will be depleted. That depends on future developments: the global reductions to be achieved, non-anthropogenic emissions, new insights from climate science and tipping points. That is the reason for our stance that the global carbon budget has to be reassessed every five years.

Precautionary principle

Naturally, we embrace the precautionary principle which has become a cornerstone of environmental law. It can play a valuable role in the context of impact assessments and f.i. the exploitation of new oil or gas fields. For the remainder strict application would imply formulating obligations that will never be accepted by those in a position to bring about the bitterly needed change. In this respect we were guided by realism. Others, in particular NGOs, may make a different choice. I can only hope that they will be successful.

Obligations towards future generations

In the debate about sustainability obligations towards future generations pop up time and time again. We do not deny at all that such obligations exist. So far, however, the debate got stuck in abstract discussions. We could not discern any concrete guidance.

In our view we do not need obligations towards future generations to accept far-reaching obligations of all kinds of States and enterprises. Obligations towards the current generation, part of which will still be alive by the end of this century, suffice.

We believe that our Principles are on the brink of “the acceptable”. Mapping more stringent obligations would be counter-productive. The law is not a beauty contest.

Common but differentiated responsibilities and capabilities

Throughout the Principles we have adopted the common but differentiated responsibilities and capabilities maxim. The most vulnerable countries and people in these countries are hugely affected by climate change. They only minimally contributed to the global mess. Hence, it is only fair that local enterprises in those countries have limited obligations.

A bird’s eye view of the 49 Principles

It is impossible to properly present our 49 Principles and the 300 pages of the commentary in the remaining 20 minutes or so. A few highlights.

Reduction obligations

As a rule, the primary reduction obligation of enterprises is linked to the reductions to be achieved by the States in which they operate. The idea behind this approach is that countries cannot achieve their reductions if the corporate world does not assume responsibility for its share. However, States have some manoeuvring room to reallocate the reduction burden within their countries.

The reductions to be achieved by States are based on the global carbon budget per capita.

It must be avoided that enterprises opt for major future reductions and little reductions right now, if not for other reasons because present day business leaders will no longer be at the wheel in the future; they cannot bind their successors. In our view reductions must be effectuated along the lines of a “glide path”, i.e. proportionally over time.

The lion’s share of the reductions must be achieved by enterprises in affluent countries. Domestic enterprises in developing countries[6] “only” have to curb their emissions at the rate of their country’s NDC. If they don’t there is little chance the State can meet its NDC.

In addition enterprises have to take reduction measures that can be achieved without incurring relevant additional costs. F.i. switching from fossil fuel-energy sources to renewable energy if the price is by and large the same, or switching off lamps and heating if an office is not in use.

Measures that incur costs have to be taken if the costs will be offset by future savings or gains. F.i. installing solar panels.

Products and services

It would be against the odds if all – arguably even most – States and enterprises are going to curb their GHG emissions to the extent required to keep climate change below fatal thresholds. Climate science is in the dark when tipping points will be passed. That could be anywhere between right now and at the time global temperature has increased by 2 C. That means that we should not confine ourselves to the direct emissions of enterprises.

The update puts significant emphasis on suppliers, products and services, in line with the strongly emerging view that enterprises bear at least some responsibility for scope 2 and scope 3 emissions.

Excessive emissions of products and services must be avoided, unless countervailing measures are taken. As a rule, emissions will be deemed excessive

  •  if they are much higher than those of the enterprise’s competitors;
  • if the cost of taking countervailing measures could reasonably be offset by increasing the price of the products or services, or
  • if the profits generated by the products or services easily allow for taking these measures.

Hence emissions caused by luxury products will often qualify as excessive.

There is no room for new coal fired power plants, unless the excessive emissions are offset by countervailing measures.

Consideration of suppliers’ GHG emissions

When selecting its suppliers an enterprise has, to the extent reasonable and feasible, to ascertain and take into account whether its suppliers comply with the Principles.

That, we realise, is a slight overstatement because our Principles are not “law”, but our group’s interpretation of the law. Naturally, enterprises may challenge our interpretation. In that scenario they have to explain what, in their view, their legal obligations are. They have to comply with these “alternative” obligations.

The selection of a supplier that provides energy from coal fired power plants, or other excessively GHG emitting fossil fuels, requires a compelling justification. It will be very difficult to justify such a choice.

Enticing consumers

In our view advertising of excessively emitting products, or products of which the manufacturing caused excessive emissions, requires a compelling justification. This includes products from deforestation.

Fossil fuel companies

The oil majors are increasingly labelled as the one and only problem. That view has some merit, but it is not self-explanatory. In our view it could even be counter-productive. The chance to initiate successful litigation against many of these enterprises is remote, seeing in which countries many of them are based. Hence, if they would be the only or most important perpetrators, and only they could be sued, the battle against climate change would be lost.

In our view the more promising approach is to focus on the obligations of all enterprises and buyers of fossil fuels. According to the update purchasing coal for production purposes requires a compelling justification.

In addition: an enterprise is only allowed to increase its purchasing of coal for the purpose of increasing production during the shortest possible period to allow the materialisation of its transition to renewable energy.

As time progresses the same will go for oil and gas.

Governance

Governance is an important feature. The update introduces a series of principles to the effect that the board of enterprises has to take appropriate steps to cope with the challenges of climate change; both for the enterprise and the world at large.

The board of an enterprise should ensure that it has access to sufficient knowledge, skills, and experience to effectively debate and decide on climate-related risks and opportunities.

This includes knowledge of the enterprise’s legal obligations in the face of climate change. That does not mean that our Principles have to be applied. However, the board should genuinely aim to discern the enterprise’s obligations. If the answer to their questions would be: enterprises do not have legal obligations, they should make further inquiries. If the answer on this further inquiry is: we do not know, the board should go at pains to find experts who have a keen understanding of the law. I’ll come back on this point in the context of obligations of attorneys.

As a rule, and whatever the legal opinion tells them, the boards of enterprises should understand that, at the very least, they should reduce their GHG emissions at a significantly higher rate.

In addition, the board should ensure, among other issues, that:

(a)    the management assesses on an ongoing basis the short-, medium- and long-term materiality of climate change related risks to the enterprise;

(b)   the enterprise’s climate change-related accounting assumptions and reporting procedures are robustly tested;

(c)    the enterprise does not engage in lobbying irreconcilable with keeping the increase in global average temperature below 1.75 degrees C.

The board shall ensure that executive incentives, such as bonuses, are not linked to profits generated from or otherwise linked to activities or actions that are irreconcilable with keeping global warming below 1.75 degrees C.

Disclosure

The disclosure obligations are in essence left unchanged. They align with the authoritative TCFD report.

Environmental impact assessment of new facilities

This is a tremendously important topic. It is one of the very few realms of the law where courts in many countries have shown willingness to assume a role to stem the tide.

The Principles on impact assessments are, though important, not ground breaking. So I refer to the text.

Investors

Investors can play an important role to put pressure on enterprises to scale up their efforts to avoid catastrophic climate change. Their unwillingness to buy an enterprise’s equity – bonds or shares – may have an adverse impact on the enterprise’s reputation. Happily, investors are increasingly active.

The difficulty is that many investors, in particular pension funds, need a return on invested capital to pay the pensions of their insureds. That is quite a challenge seeing the extremely low, if not negative, interest rates of the financially soundest States.

This means that mapping the legal obligations of investors requires a delicate balancing of the diverging interests.

Any investor must ascertain and take into account whether or not the entity in which it aims to invest or has already invested complies with its obligations under the Principles. 

I refer to what I already observed about our Principles not being “law”.

Investment in a non-complying entity requires a justification. Because there are not many fully complying entities, in the short term it will not be overly difficult to justify such an investment. That will hopefully change soon.

Even right now this obligation is not meaningless. If investors have the choice between non-complying entities they should opt for the best in class, or, at least, refrain from buying the worst in class.

It belabours the obvious that investment in coal-fired power plants, enterprises engaged in energy generation from other excessively emitting fossil fuels, or in otherwise excessively GHG emitting enterprises requires a compelling justification. The meaning of “excessive” will change over time. It will probably be different in developed and developing countries.

Investing in non-complying entities comes at a price. In such a scenario the investor has to forcefully promote compliance with their obligations by making use of its power as investor. That is already increasingly happening.

Major investors should appoint, vote for, or, if they are appointed by others, promote appointment of auditors familiar with among other issues the legal obligations of enterprises and their boards. I’ll come back to this point in the context of accountants.

Other key players

Seeing the apathy of the greater part of the corporate world we must explore strategies to bring the boards of enterprises to their senses. Accountants, credit rating agencies, insurers and attorneys can and have to play a role to stem the tide.

All these entities cannot do a proper job if they don’t have a clue about the obligations of the enterprises they have to audit, rate, advice, or insure. Without a keen understanding of these obligations insurers, accountants and rating agencies cannot assess the inherent liability and reputational risks of non-compliance with the enterprise’s obligations.

They do not only have fiduciary obligations towards their clients, but in our view also to those who – as they know or should know – rely on their opinions and reports.

According to the update credit rating agencies must assess whether the rated enterprises comply with their legal obligations. If a rated enterprise does not comply, the inherent liability risk has to be assessed. The outcome of the assessment must be reflected in the rating, along with a transparent explanation on the way the assessment was executed.

Attorneys have to investigate the material climate change consequences of any activity in which they are engaged and inform their clients about these consequences. If enterprises seek a legal opinion about their legal obligations, attorneys have to provide a state of the art answer. That requires a keen understanding of the relevant realms of the law.

There is much reason to believe that most of these entities do not have the required knowledge and do not want to have it either. Thus they expose themselves to liability. Apart from hopefully a deterrent effect their liability is of no avail to the climate. The more important issue is that they must comply with their fiduciary duties.

Our update aims to provide guidance about key obligations of enterprises. I reiterate that our Principles are not “law”. Accountants et alios may arrive at the conclusion that, in their assessment, “the law” is different in one or more respects. It would, however, be irresponsible towards their clients, society and themselves to assume that, in the absence of pertinent black letter law, enterprises do not have (enforceable) obligations.

The “nicety” of climate change as a global issue is that enterprises and the other players I have mentioned can often be sued before courts in multiple countries. Betting on a global judiciary that will abstain from rendering useful judgments is a very risky game.

Obligations to reduce GHG emissions apply even if minimal

Enterprises unwilling to accept the idea that they have legal obligations and hoping that courts will grant victory to them can harp on their very small contribution to climate change. Unless one would attribute emissions from the entire chain to single enterprises, each enterprise’s contribution is very small indeed.

From a doctrinal angle this minimal contribution is not unproblematic. It is, however, even more problematic to honour a defence based on the absence of legally relevant causation. If that argument would have to be honoured, only the emissions of a very few States would – perhaps – qualify as legally relevant. That would mean that climate change would basically be a lawless realm.

The idea that the law is toothless in relation to the greatest challenge to mankind, the environment and other living species is so appalling that it is unavoidable to explore solutions, if necessary by means of magic words. In line with an emerging view our Principles reject the submission that an enterprise is  relieved of its obligations if its contribution to the global GHG emissions is minimal.

The reception of the current version

Authoritative reports, such as David Boyd’s brilliant Safe Climate,[7] refer to the EP. Our website is visited daily by people from around the globe (from all European, almost all Asian, Latin American, and many African countries, the US, Canada, Australia and New Zealand). Some international law firms explicitly refer to our Principles on their websites and otherwise.

Finally

The choice between (hugely) insufficient measures or compliance with legal obligations like our Principles is not between the devil or the deep blue sea. For now, compliance is possible and affordable as recent reports illustrate.[8] The alternative is the devil and the deep blue sea. It is astounding how many people seem believe that is an attractive option.

[1] Www.climateprinciplesforenterprises.org. 

[2]  https://www.boomdenhaag.nl/en/webshop/principles-on-climate-obligations-of-enterprises-1.

[3] My life, our times, p. 431.

[4] O.c. p. 437.

[5] Julia Olsen, the first speaker at “my” session.

[6] Most BPQ countries, as defined in Principle 1, are developing countries.

[7] https://www.ohchr.org/EN/Issues/Environment/SREnvironment/Pages/SafeClimate.aspx.

[8] See f.i. Simon Dietz, Alex Bowen, Baran Doda et al., The Economics of 1.5 C Climate Change, Annual Reviews Environmental Resources, 2018 43, https://www.annualreviews.org/doi/abs/10.1146/annurev-environ-102017-025817 and Ruth DeFries, Ottmar Edenhofer, Alex Halliday et al., The missing economic risks in assessments of climate change impacts, Policy insight, September 2019, https://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2019/09/The-missing-economic-risks-in-assessments-of-climate-change-impacts-1.pdf.