CPD has released a new legal opinion on the extent to which Australian corporate law permits (and indeed requires) company directors to take climate change into account when making decisions about company strategy, performance and risk disclosure. The opinion was commissioned by CPD in partnership with the Future Business Council, and provided by Noel Hutley SC and Sebastian Hartford-Davis on instruction from Sarah Barker and Maged Girgis of Minter Ellison Lawyers. CPD and FBC convened a high-level business roundtable in Melbourne on 21 October to discuss the opinion and its far-reaching implications for boards and directors.
Legal opinion: directors’ duties and climate risk
The legal opinion shows that the bar for directors is rising as the links between social and environmental factors and financial risks and performance come into sharp focus. It demonstrates that directors who fail to consider the impact of foreseeable climate change risks on their business properly could be held personally liable for breaching the duty of due care and diligence they owe to their companies.
Key findings of the opinion include:
- Climate change risks would be regarded as foreseeable by courts, and 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, by presenting corporate opportunity or risks to the company or its business model).
- Company directors are not legally restricted from taking into account climate change and related economic, environmental and social sustainability risks, where those risks are, or may be, material to the interests of the company.
- Company directors certainly can, and in some cases should be considering the impact on their business of climate change risks – and that directors who fail to do so now could be found liable for breaching their duty of care and diligence in the future.
In Mr Hutley’s view, “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.”
Key documents and media coverage
‘Paris Agreement a watershed moment for corporate Australia‘ Adele Ferguson, Australian Financial Review
‘Business leaders heed warning on climate change risks‘ Damon Kitney, The Australian
‘Company directors to face penalties for ignoring climate‘ Jessica Irvine, The Age/SMH
‘Directors ignore climate risks at their own peril‘ Bryan Horrigan, Australian Financial Review
‘The Paris climate agreement is a game-changer – and business risks being left behind‘ Sam Mostyn, The Guardian
‘Company directors can be held legally liable for ignoring the risks from climate change‘ Sam Hurley, Travers McLeod and John Wiseman, The Conversation
‘Big changes looming across the world but Australian’s could be left behind‘ Charis Chang, Daily Telegraph
‘Australian business woefully underprepared for climate change post Paris‘ Julian Vincent, The Age/SMH
This legal analysis reaffirms that directors are permitted to take a wide range of considerations into account when deciding what is in the best interests of a company, rather than focusing solely on immediate shareholder value maximisation. This includes climate risks and a range of other environmental, social and governance issues that influence the near and long-term performance of companies and of wider economy.
By exploring directors’ duties and sustainability through the prism of climate risk, we are seeking to highlight how crucial it is to elevate these issues to the boardroom level – and open up a constructive conversation about the skills, tools and strategies directors and boards need to improve sustainability risk management and disclosure. Encouraging and supporting directors to have proper regard to these issues is a key step towards ensuring that business is geared towards creating sustainable, long-term value and building an economy that recognises the interrelated economic, social, human and environmental drivers of prosperity and wellbeing.
***New: on 20 December, the Australian Institute and Company Directors Governance Leadership Centre released a special newsletter on the implications of climate change for corporate governance, building on many of the issues discussed in the opinion and CPD-FBC roundtable. This included a discussion of the legal opinion by Sarah Barker, and a call for corporate leadership on climate by CPD fellow Ian Dunlop. The AICD work is available here: http://aicd.companydirectors.com.au/advocacy/governance-leadership-centre
CPD-FBC Business Roundtable on Directors’ Duties, Climate Risk and Sustainability
CPD and FBC convened over 30 senior business leaders, fund managers, legal experts and regulators to discuss the implications of the legal opinion at a business roundtable co-hosted by Minter Ellison Lawyers in Melbourne on 21 October. The roundtable, conducted on a Chatham House basis, considered the legal opinion and also heard from former Bank of England Executive Director Dr Paul Fisher, who highlighted how financial market participants and regulators internationally are stepping up their efforts to understand and respond to climate-related risks.
Participants included senior representatives from CBA, ANZ, BlackRock, Deutsche Bank, Aurizon, ASIC and APRA, leaders from some of Australia’s largest fund managers, and special guests former High Court Justice Kenneth Hayne AC QC and Shadow Attorney General Mark Dreyfus QC.
Key conclusions and next steps
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. While 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. 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.
Following the constructive discussion at the roundtable, we will continue our policy work on these issues in coming months, with a focus on three priorities:
- Increasing awareness in the director community of the importance of properly considering climate change and other sustainability risks – including, but by no means solely, to avoid possible breaches of directors’ duties.
- Encouraging regulators to raise expectations about proper management and disclosure of environmental, social and governance risks, by providing clearer guidance on disclosure requirements and by stepping up supervision and stress testing for systemic sustainability-related risks or shocks.
- Promoting constructive engagement by business leaders on long-term policy challenges, to support policies that can avert the need for sharper and riskier adjustments to inevitable trends and challenges like climate change.
Quotes from roundtable participants:
We need to somehow put aside all the political considerations about whether people believe in climate change or whether its man-made. A lot of that is now irrelevant. This is a hard-headed commercial business risk issue, particularly for firms in the financial sector, which they need to be taking into account…
You don’t need to believe that climate change is man made, you just need to believe that governments are going to do something about it – which they are. Previously people have said climate change is going to take a long time to come through – 30, 50 years, plenty of time to take action. But of course, financial markets are forward-looking, and as news accumulates they tend to jump and overshoot. The risk that we see, and that Mark Carney has been talking about, is that you get a sudden repricing of assets across the board in relation to news on climate – and that could generate financial stability concerns.
Dr Paul Fisher, former Executive Director of the Bank of England
The roundtable was significant because of the quality of people in the room, the calibre of the legal opinion, and the collective recognition that climate and sustainability risks are becoming more pressing for directors, fund managers and regulators. Directors now have little choice but to understand how important climate change and sustainability risks are for them personally and for their companies, and act accordingly.
Many forward-looking directors and executives have started grappling with this. There is only upside if everyone else gets up to speed, but we don’t have much time. Boards must ensure they have the targets, skills and processes in place to identify, disclose and respond to these risks – not just for legal or environmental reasons, but because the market demands we do so. One part of that equation is having a diverse set of voices around the table. Another part is working together so we can ask the right questions and get better answers. The roundtable and legal opinion have kickstarted the right conversation about how Australian directors, investors and regulators can be better prepared and show greater leadership as the issues come into sharper focus.
Sam Mostyn, Chair of Citigroup Australia
“I was impressed to see such high level representation at the round table from investors, corporate leadership, academia and the legal world, reflecting a recognition of the pervasive nature of climate change risk. The very practical focus on the foreseeability of climate change risk, not just physical but also transitional and regulatory, and the implication of this for me as a director right now, made me think about this issue afresh. A timely and compelling reminder that it is my duty as a director to review the steps being taken now by my companies to identify, assess, disclose and mitigate climate change risk.
This is not a recipe to abandon energy intensive and resource industries but neither is it a matter to push off to the future. The question to me as a director from investors and from the courts (heaven forbid) will not be whether I considered climate change risk but how I did so. I need to be able to answer that question appropriately.”
Russell Caplan, Director of Aurizon and former Chair of Shell Australia.
CPD would like to thank all those who participated in the roundtable and in providing the legal advice, with special thanks to Noel Hutley SC, opinion co-author Sebastian Hartford-Davis, instructing solicitor Sarah Barker of Minter Ellison and our partners at the Future Business Council.
Related reading on this issue:
Breaking the tragedy of the horizon – climate change and financial stability - Mark Carney, 2016
Adapting portfolios to climate change – BlackRock Investment Institute, 2016
Directors personal liability for corporate inaction on climate change - Sarah Barker, 2015
The Next Boom - Future Business Council, 2015