The Centre for Policy Development (CPD) has released a legal opinion on the extent to which Australian corporate law permits, or requires, company directors to take climate change into account when making decisions about company strategy, performance and risk disclosure. The opinion (which was commissioned by CPD in partnership with the Future Business Council (FBC), and provided by Noel Hutley SC and Sebastian Hartford-Davis on instruction from MinterEllison) finds that:
- 'climate change risks' are capable of representing risks of harm to the interests of Australian companies, which would be regarded by a court as being foreseeable at the present time;
- 'climate change risks' may be relevant to a director's duty of care and diligence to the extent that those risks intersect with the interests of the company, for example in so far as they present corporate opportunity or foreseeable risks to the company or its business model;
- company directors are not legally prohibited from taking into account climate change and related economic environmental and social sustainability risks where those risks are or may be material to the interest of the company, and to 'the contrary, company directors certainly can, and in some cases should be considering the impact on their business of "climate change risks"'; and
- it is conceivable that directors who fail to consider 'climate change risks' now could be found liable for breaching their duty of care and diligence in the future.
The term 'climate change risks' is defined to include the physical risks associated with rising aggregate global temperatures, as well as the transition risks associated with developments that may or may not occur in the process of adjusting towards a lower carbon economy. These transition risks, the opinion explains, constitute the indirect financial risks that might arise from changes in regulatory policy, technological innovation and social adaptation (eg changing consumer preferences, which can include reputational damage associated with poor sustainability practices). In relation to regulatory risk, the opinion asserts that change in the regulatory environment in Australia is 'certainly foreseeable, and probably inevitable', in light of Australia's commitments under the Paris Agreement which entered into force on 4 November 2016.
According to the opinion, directors turning their minds to the impact of 'climate change risks' on their business will need to form their own assessment and make their own decisions as to what action, if any, is to be taken, which 'is likely to include obtaining and relying on information and advice provided by employees or experts'. It adds that directors who are 'proactive in this regard, even if they decide on a properly informed and advised basis not to act', may have the protection of the business judgment rule in s 180(2) of the Corporations Act 2001 (Cth). The opinion also emphasises the importance of disclosure, and argues that 'whether or not they decide to act, directors who perceive that climate change does represent risks to their business should also consider the adequacy of the disclosure of those risks within the company's reporting frameworks' (noting that in effect this is required by the ASX Listing Rules). The opinion concludes that it 'is likely to be only a matter of time before we see litigation against a director who has failed to perceive, disclose or take steps in relation to a foreseeable climate-related risk that can be demonstrated to have caused harm to a company (including, perhaps, reputational harm)'.
In order to discuss the opinion 'and its far-reaching implications for boards and directors', CPD and FBC convened a 'high-level' business roundtable attended by over 30 senior business leaders, fund managers, legal experts and regulators (which included representatives from HESTA, Australian Council of Superannuation Investors, MinterEllison, BlackRock Australia, APRA, ANZ, ASIC, CBA, QBE, Qantas, Australian Ethical, Aurizon, Citibank Australia and Deutsche Bank). According to CPD, participants at the roundtable 'emphasised the importance of the legal opinion, and agreed that many Australian companies are particularly exposed to the physical, transition and liability risks posted by climate change'. Although, says CPD, 'many boards and directors are already actively considering these issues', the discussion 'highlighted the challenges many faced in terms of managing and disclosing sustainability-related risks at the level of sophistication increasingly being demanded by regulators and markets'. It notes that possible responses included: greater investment in risk analysis and integrated reporting; a focus on technical support and consolidating measurement of sustainability-related risks; diversifying voices at the board table; embracing transparency and disclosure of all risks rather than just those specified by regulators; and stepping up concerted public advocacy on these issues on chairs, directors and regulators.
In an opinion piece in The AFR, Professor Bryan Horrigan (Dean of Monash University's Law Faculty and a participant in the CPD-FBC business roundtable) asserted that the key messages from the 'landmark' opinion are that managing climate change risks is now a 'key boardroom responsibility', that directors who tackle climate change have the law's protection, and that directors who fail to do so risk legal liability for negligence. In his view, the opinion is 'both mind-focusing and game-changing', and 'should become a touchstone for subsequent Australian legal, business, and political debate on this topic'. He adds that '[a]s with past asbestos and tobacco lawsuits and President Nixon's mishandling of Watergate, the accusation to directors will be "what did you know and when did you know it?"', and that in light of the 'overwhelming public knowledge available to directors about climate change and its associated risks…being a climate change sceptic is a luxury that no reasonable Australian company director can afford'.
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