Heat remains on climate change – climate risk and directors’ duties

The importance of Australian company directors paying close attention to their directors’ duties, particularly in the context of climate risk exposure, continues to feature strongly on the governance agenda. The impact of climate change on both national and international levels came to a head with the implementation of The Paris Agreement, taking effect in 2016. Australia’s aspirational target under The Paris Agreement sees Australia committing to reduce its greenhouse gas-emissions from 26-28% on 2005 levels by 2030.

More recently and of concern, the 2018 Global Risks Report at the World Economic Forum indicated that a failure of climate-change mitigation and adaptation was one of the top five threats to the global economy in 2018.

Positively, some Australian companies, including the likes of Australia and New Zealand Banking Group, have come out in support of the Task Force on Climate-Related Financial Disclosures (TCFD). The TCFD is an international organisation seeking to develop recommendations for voluntary climate-related financial disclosures that are consistent, comparable, reliable, clear and efficient, and provide decision-useful information to lenders, insurers and investors. Although the Australian government has made it clear that the recommendations by the TCFD are non-binding and that no further law reform is required to adopt them, it has agreed in principle with two of six recommendations made by the Senate Economics Reference Committee, that:

• the Australian Securities and Investments Commission (ASIC) should review its guidance to directors to ensure that it provides a proper understanding of the manifestations of carbon risk and reflects evolving asset measurement implications of carbon risk, and
• ASIC should provide guidance regarding the circumstances in which a listed entity’s exposure to carbon risk requires disclosure under Recommendation 7.4 of its Corporate Governance Principles and Recommendations.

Numerous other industry bodies including the Governance Institute of Australia, the Australian Council of Superannuation Investors and the Australian Prudential Regulatory Authority have also recently put company directors’ liability for climate risks into focus. Directors should certainly not close their minds to the duties that they owe (both at general law, and under the Corporations Act 2001 (Cth) (Corporations Act)). It is also critical that directors’ duties are duly considered in conjunction with the ASX Listing Rules (for listed entitles) to prevent and manage liability which may otherwise arise in the climate risk space.

Recap on directors’ duty of care

Directors owe a general law duty of care, skill and diligence, as well as statutory duties arising under the Corporations Act. In particular, under section 180(1) of the Corporations Act, directors must exercise their powers and discharge their duties with due care and diligence.

A director breaching these duties can face numerous penalties, from pecuniary orders to compensate the company for the loss or damage arising from the breach, to the imposition of banning and disqualification orders (to remove a director from office and restrict them from managing corporations) from ASIC or the courts.

Intersection of directors’ duties and climate change

In 2016, Noel Hutley SC and Sebastian Hartford-Davis wrote an opinion piece on the intersection of directors’ duties of care and climate change, Climate Change and Directors’ Duties. Hutley and Hardford-David note that ‘climate change risks’ are twofold, being:

• physical risks – risks associated with rising aggregate global temperatures, and
• transition risks – risks associated with the developments that may occur in the processing of adjusting towards a lower-carbon economy.

Key arguments put forward by the authors are that:

• the foreseeability element of duty of care is satisfied because climate change risks are considered to be foreseeable by the courts, and
• directors can and should consider theses risks, as a failure to consider them could amount to a breach of a director’s duty of care.

Significantly, in the decision of ASIC v Cassimatis (No.8) [2016] FCA 1023, his Honour Edelman J suggested that section 180(1) of the Corporations Act was not confined to financial harm but also the foreseeable risk of harm, which includes harm to all the interests of the corporation (which captures sustainability practices).

In addition, as mentioned in one of our previous blogs, Shareholders turn the heat up on director suing over a failure to disclose climate change risk, shareholders have taken companies to court over a failure to disclose material risks that climate change poses to financial systems, being risks that investors reasonably require to make an informed assessment of a company’s operations, financial position, business strategies and prospects under section 299A of the Corporations Act.

What is clear, therefore, is that directors must take active steps to inform themselves of climate-related risks, and appropriately disclose them in company material to reduce their potential liability (and exposure to investors, in light of recent case law).

For listed entities, ASX Listing Rule 4.10.3 (in conjunction with Guidance Note 9) makes clear that any material exposure to economic, environmental or social sustainably should be disclosed. This requirement has been followed closely by Australian companies including the likes of Woodside Petroleum, Rio Tinto, and BHP Billiton, in particular by disclosure of potential climate risk exposure in company annual reports.

The risk climate change presents to both national and international economies reinforces the importance of Australian directors carefully considering their strict duties of care. Even if environmental and climate risk reporting recommendations continue to remain non-binding in Australia, the issue has certainly remained on the radar of regulators and key industry stakeholders. As such, a compelling case can certainly be made that companies need to address climate change risk far more proactively, including by considering climate risk exposure in the same robust manner as any other issue, particularly with regards to disclosure (such as in a company’s annual report).

As always, McCullough Robertson will continue to watch this space with great interest.

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.