Published in the AFR on Monday 26 April 2021
Companies and their directors could be sued for “greenwashing” their commitments to achieve their net zero carbon pledges or emissions reductions targets, according to a legal opinion backed by some of Australia’s top business leaders.
Amid a growing movement across industry to disclose to shareholders climate-related risks, Noel Hutley, SC, and Sebastian Hartford Davis warned boards might be liable for “misleading or deceptive conduct” for selectively disclosing exposures to climate change or declaring green goals while lacking credible plans to achieve them.
It comes as Prime Minister Scott Morrison looks to escalate the government’s carbon ambitions by the end of the year after the Biden administration warned on the eve of its global climate summit that co-operation with the White House could be hurt if Australia’s position did not shift towards firmer climate action.
The missive is the third in a series of opinions by the legal experts after a 2016 opinion said directors could be liable for failing to understand and disclose climate risks and a 2019 opinion saying directors could be liable if they failed to act on those risks once they were known.
The opinions have been backed by the Reserve Bank of Australia, the Australian Securities and Investments Commission, the Australian Prudential Regulation Authority, the ASX corporate governance committee and the Australian Accounting Standards Board, while the Taskforce on Climate-related Financial Disclosures is now seen as the global standard for notifying shareholders of the climate-related risks faced by companies.
The latest iteration, organised through the Centre for Policy Development, has been endorsed by Australian Institute of Company Directors chief Angus Armour, Business Council of Australia president Tim Reed and president of Chief Executive Women Sam Mostyn, who is also deputy chairman of the policy think tank.
The Centre for Policy Development is an independent think tank chaired by Terry Moran, former secretary of the Department of the Prime Minister and Cabinet between 2008 and 2011, which has been instrumental in an overhaul of the local business, financial and regulatory approach to climate change.
In just a few short years, the CPD’s work on climate-related financial disclosure, which encourages directors to consider global warming in how their businesses are run under threat of legal liability, has been endorsed by the RBA, the banking regulator and the corporate watchdog.
“‘Greenwashing’ on climate creates clear legal risks,” notes Mr Davis and Mr Hutley’s legal opinion.
“Care needs to be taken to ensure that climate-related targets and analysis are rigorous, underpinned by appropriate governance, strategy and action, and reflected in financial statements as required.
“Flawed or inaccurate disclosures may be regarded as misleading or deceptive, particularly those that rely on dated information or constitute incomplete or selective disclosure of findings.”
A 2020 report by then-Citi senior environmental, social and governance analyst Zoe Whitton, now executive director of consultancy Pollination Group, found more than 3000 big global companies have started to disclose climate-related risks, meaning two-thirds of companies are giving investors guidance on how climate change or the transition to a low-emissions economy could affect operations.
However, Citi found only a third of current market disclosures are “quality”, and the majority of disclosures are “highly variable”, “challenging to compare” and avoided “disclosing comparable financial impacts”, while often companies were producing lengthy sustainability reports that had little or no connection to company strategy.
Section 1041H of the Corporations Act prohibits conduct which is misleading or deceptive, or likely to mislead or deceive, Section 12DA of the ASIC Act, while Section 769C of the Corporations Act finds that individuals who make representation about a future matter without reasonable grounds are likely to be engaging in “misleading” conduct.
“Companies that make net zero commitments should expect close scrutiny of the structures and planning in place to achieve them,” notes the legal opinion, which said that while climate-related disclosures had improved significantly in recent years, little has been done to bed down operations to meet long-term climate commitments.
Mr Davis and Mr Hutley said superannuation funds were particularly vulnerable as they played a “catalytic” role in supporting a transition to a lower-emissions economy, while the sole purpose test likely required a focus on climate risks.
And while concerns around competition laws were valid, the competition regulator has previously granted authorisation for environmentally significant initiatives that may otherwise constitute cartel conduct.
The legal opinion was informed by a December 2020 roundtable discussion involving two-dozen business leaders, lawyers and policy experts, including Woolworths chairman Gordon Cairns, AustralianSuper boss Ian Silk, Rio Tinto director Simon McKeon and AGL director Patricia McKenzie.
In February, ASIC commissioner Cathie Armour said disclosing and managing climate-related risk was a key director responsibility, and that the regulator had already written to several companies that had come to its attention as potential “laggards” in the area of climate disclosure.
The world is fast adapting to a situation where the norm is for companies to disclose risks in line with recommendations under the Taskforce on Climate-related Financial Disclosures, which will soon be mandatory in some sectors in Britain and New Zealand.
Meanwhile, the United States, the European Union and China have stated commitments to achieve net zero emissions by mid-century, along with similar commitments by 14 of Australia’s top 20 trading partners.
While all Australian states and territories have various net zero targets, the Morrison government has faced pressure to make a formal commitment.
Late last year Rest Super settled a landmark court case that forced the fund to recognise the financial effects of climate change when making investment decisions. Several of Australia’s largest superannuation funds made similar commitments in the wake of the Rest case.
“The duty of care for directors on climate risks is now clear,” Centre for Policy Development boss Travers McLeod said.
“The focus is now on the gap between what needs to happen, or what is being promised, and what is being done.
“Directors must ensure net zero commitments are underpinned by proper information, governance processes, strategy and action.”
Ms Mostyn said the discussion was “a clear reminder of what boards need to do to manage climate risks” and that “better risk management, better industry-wide responses and better policy will be essential” to tackling climate change.
Mr Reed said board-level duties are “well understood” and “climate risk is an economic risk and requires a whole-of-economy response”.
Mr Armour said the Hutley legal opinions underscored the need for directors to consider how climate change may affect their organisation.
“There is clear momentum in the corporate sector towards more concrete climate commitments, with the topic now a mainstream item on boardroom agendas. The AICD looks forward to publishing guidance to assist directors in the middle of this year,” Mr Armour said.