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Malaysian company directors warned of legal liability if they fail to consider climate issues

26 July 2022 – Directors of Malaysian companies are legally required to incorporate climate change considerations into their decision-making processes, according to a legal opinion released on 26 July 2022. A failure to do so may be a breach of a director’s legal duties and could expose them to litigation from shareholders or enforcement action from the regulatory authorities. 

Tan Sri Zarinah Anwar, the Chairman of Institute of Corporate Directors Malaysia and To’ Puan Janet Looi, Senior Partner at law firm Skrine, conclude that directors of Malaysian companies “are duty bound to proactively and urgently apprise themselves of all aspects of climate change that can affect their companies, take action to manage the full spectrum of climate related risks by integrating them into their corporate strategies, plans and actions, and ensure proper disclosure of such risks.” “On the other hand,” the authors opine, “directors who make climate-conscious decisions which may in the short term be less financially beneficial (such as investment in a lower emission asset with a longer-term profit horizon) could be protected by the business judgment rule as having acted in the best interest of the company.” Boards cannot “deny their obligation to take into account climate change risks in discharging their fiduciary duty”, write Tan Sri Zarinah Anwar and To’ Puan Janet Looi.

Datin Seri Sunita Rajakumar, the founder of the Climate Governance Malaysia, a peer network of non-executive directors focused on climate issues that was developed in collaboration with the World Economic Forum, said: “This legal opinion is an important contribution to directors’ understanding of their duties, as long-term stewards of the organisation, to manage the top financial risks we are facing as well identifying opportunities which will lead to the sustainability of businesses. This legal opinion clearly articulates why it will be difficult for any director to claim they were not aware of the material risks arising from the climate crisis. We will not be able to reverse the climate crisis one lawsuit at a time, however, boards of directors owning their roles and responsibilities and stepping up to act is a critical contribution towards keeping our adaptations options maximised.”

Ellie Mulholland, the Executive Director of the Commonwealth Climate and Law Initiative, a legal research group that commissioned the opinion, said: “Malaysia is the latest jurisdiction where we have sought independent opinion about whether directors could be exposed to personal liability if they fail to properly govern and disclose climate issues. Like in Singapore, India and Hong Kong, the authors have found that directors could be personally liable if climate issues are not addressed in the boardroom. For those directors that are already proactively considering climate issues and want to set emissions reduction targets and climate-aligned business strategies, the opinion finds that the business judgment rule could protect directors as they navigate the disruption of the net zero transition.”