There is a battle being fought over how businesses operate, and many businesses owners and executives have no idea it is happening. It occurs at a high level, through international treaties, intergovernmental organizations, and in the courts. It involves new phrases like sustainability and net-zero, plus acronyms including ESG, CSDDD, and CSRD. It is a complex web of legal development that will fundamentally change the business sector. I have written extensively about these developments as they occur, but it is worth taking a step back to look at the full picture. Ultimately, it comes down to one question. Do businesses have an obligation to prevent climate change?
It is difficult to pinpoint an exact starting point for this movement. It has existed in some form for decades. However, the Paris Agreement signed at the 2015 United Nations Climate Change Conference, commonly referred to as COP21, was the major catalyst for change.
The Paris Agreement is a legally binding international treaty to address climate change. The agreement set clear goals to reduce carbon emissions, or greenhouse gases, by 45% by 2030 and to reach net zero by 2050. According to the UN, “net zero means cutting carbon emissions to a small amount of residual emissions that can be absorbed and durably stored by nature and other carbon dioxide removal measures, leaving zero in the atmosphere.” The overall goal is to limit the rise in global temperature to 2° C (3.6 F) from pre-industrial levels, with an effort to achieve only a 1.5° C (2.7 F) increase.
As a result of the agreement, nations, intergovernmental organizations, and nongovernmental organizations began working on plans to implement a new regulatory framework to work towards the net zero goal. While we rank GHG emissions by country, the reality is that the governments of those countries are not the major emitters of GHG. It is the people who live in those countries, through their consumption of goods and services, that emit GHG.
Strategically, any push to net zero must be taken through the regulation and control of the businesses that provide the goods and services used by the consumer to emit GHG. To enact these changes, a multi-pronged approach is being used. It starts with controlling businesses’ access to resources, including loans, insurance, and bank accounts.
Drafted in 2012, the UN Principles for Sustainable Insurance “serve as a global framework for the insurance industry to address environmental, social and governance risks and opportunities.” In 2021, the UN PSI formed the Net-Zero Insurance Alliance, where members signed a pledge to use their portfolio to encourage businesses and other clients to implement net-zero actions. Simply put, insurance companies pledged to not provide coverage to businesses who are not meeting GHG emissions standards. The NZIA started to fall apart in 2023 as questions began to rise as to if the alliance violated antitrust laws.
Similar principles and organizations were formed for the banking sector. The UN Principles for Responsible Banking led to the Net-Zero Banking Alliance. The NZBA includes Bank of AmericaBank of America
, CitigroupCitigroup
, and HSBCHSBC
. The NZBA members pledge to “transition the operational and attributable greenhouse gas (GHG) emissions from their lending and investment portfolios to align with pathways to net-zero by 2050 or sooner.” Basically, banks pledged to not loan money to or open accounts with companies and industries that don’t meet GHG emission standards. The NZBA faces similar antitrust questions and updated their guidelines in March 2024 to avoid litigation.
In effect, businesses and industries who do not reduce their GHG emissions will find themselves unable to obtain insurance, business loans, or a checking account.
The next moving part relates to the financial markets and investment strategies. This is the area where the most regulatory developments have occurred. Following the same path as the banking and insurance industries, the UN developed the Principles for Responsible Investing. UN PRI set the same goal for fund managers to move their investment portfolio to be carbon neutral by 2050.
Fund managers quickly adopted this practice. The result was called environmental, social and governance investing. ESG created a new investment strategy where non-financial factors were considered. While ESG is not exclusively about climate change, the consideration of GHG emissions falls under the environmental category and climate action receives most of the focus.
For fund managers to make investment decisions based on ESG factors, the companies need to provide that data. Sustainability and ESG reports became a staple of publicly traded, and some privately held, companies starting by 2021. However, any reports used for investment purposes are highly regulated to protect the investor. With the lack of official reporting standards, companies were left to their own discretion as to what to disclose and in what format.
In 2021, governments and regulatory bodies began the long process to develop reporting standards to meet the demand. The first round of standards were released in the middle of 2023. The International Financial Reporting Standards, the independent body that drafts global accounting standards used by 168 jurisdictions, developed climate disclosure standards through the International Sustainability Standards Board. The IFRS Sustainability Standards created a clear method for businesses to disclose GHG emissions, climate-risk, and other environmental factors.
Simultaneously, the European Union, as part of the European Green Deal, developed the European Sustainability Reporting Standards. The ESRS are inclusive of the broader ESG reporting requirements but institute the IFRS sustainability standards for the environmental aspect. The ESRS will require reporting from both publicly traded and privately owned businesses in the EU. Under the ESRS, companies will report direct GHG emissions, those of their energy supplier, and their supply chain. Forcing companies to gather data from businesses who may not be obligated to report under the requirements, but who will have to create reports to meet the demands of reporting businesses.
The U.S. Securities and Exchange Commission developed their own reporting standards focused exclusively on climate risk. Those standards were adopted in March 2024, but postponed due to legal challenges.
The creation of reporting standards, as adopted by the relative jurisdictions, creates a legal liability to accurately and timely report the information to the appropriate governing body. Failure to comply will result in penalties and possible criminal prosecution. However, a next step of legal liability has been created in the European Union.
The Corporate Sustainability Due Diligence Directive establishes a due diligence standard on sustainability issues for businesses operating in the EU. Companies will have to take certain steps to ensure compliance with sustainability requirements. In this case, sustainability most directly applies to environmental concerns, climate change, and human rights. The new liability requirements apply not only to the direct actions of the company, but also to their subsidiaries and supply chain. Information gathered and shared in the company’s sustainability reports. Thus, creating a pathway for individuals to sue a company for failing to address climate change.
Other legal liabilities are also beginning to emerge relating to climate and marketing. Greenwashing, or the exaggeration of environmental action by a company, and its subset of climate washing, the exaggeration of climate change action, is becoming more regulated globally. In the US, multiple states have begun to enforce greenwashing through existing consumer protection laws. In the EU and the UK, new regulations have been adopted to directly address greenwashing, going as far as preventing the generic use phrases like “green” and “climate friendly.”
For countries who are adopting the new legislation, climate change has quickly moved from a marketing consideration to a required part of business. For countries like the U.S. who are fighting the changes, it will be important to watch a case before the International Court of Justice. The UN General Assembly asked the ICJ to draft an advisory opinion on the legal obligations of states to act on climate change. The ICJ could find that the Paris Agreement requires countries to take certain measures, including the adoption of sustainability reporting requirements and creating legal liability. If so, the US will be forced to act or leave the agreement.
The debate over whether businesses should be legally required to consider climate change in their businesses decisions is ongoing. There are a lot more moving pieces than I was able to address in this article. For the ones I touched on, I was only able to give general concepts. However, given the current legal development, it appears to be heading in the direction of making businesses consider climate change. The question then becomes how this will impact small businesses. I’ll use my friend Joe as an example.
Joe’s family owns a chain of Ace Hardware stores in the Jacksonville, FL area. They are retail stores where people can buy plants, tools, gardening equipment, paint, and general hardware supplies. The stores are large, he has a lot of employees, and they generally do well. For now, when Joe makes a business decision, the only thing he has to consider is if it will be profitable.
If the plan that is currently being followed goes into place, Joe will soon have to change the way he does business. He will no longer be purely focused on his profits and losses. His businesses will have to calculate, or most likely pay someone to calculate, the GHG emissions for his business. He will have to look at the GHG emissions of his suppliers and calculate the GHG emissions of products he sells when they are used by the consumer. He will then have to make business decisions based on keeping his GHG emissions low enough to prevent climate change. If his GHG emissions are too high, he will not only face enforcement action from the government but could also lose access to loans, insurance, the ability to have a bank account, and be sued for damages.
For those who are concerned about climate change, this most likely will appear reasonable. If climate change is a serious threat to the survival of humanity, then all measures must be taken to prevent it. However, for the business community and those who are skeptical, then the changes are an unreasonable overreach into how businesses operate.
