A Climate of Corporate Liability and Toolkit for Action

directors duty climate risk

Director liability and duties to consider climate risks

Directors of Australian companies who fail to consider, plan for and disclose foreseeable climate change risks on their organisation could be held personally liable for breaching their duty of due care and diligence under the Corporations Act 2001. This is according to an opinion provided by Barrister Noel Hutley SC to around 30 Australian business leaders. The legal opinion found many climate change risks “would be regarded by a court as being foreseeable at the present time” and Australian company directors “who fail to consider ‘climate change risks’ now could be found liable for breaching their duty of care and diligence in the future”.

Several legal and political movements demonstrate a push towards liability for company directors who fail to identify, plan for, and disclose climate-related risks which may affect their company’s operations and value. These include the Paris Agreement, which has helped galvanise action on all aspects of climate change and carbon management, and brings the transition risks (and opportunities) forward, given the policy and business changes necessitated by the agreement’s commitment to a sustainable economy. Nationally, in February 2016 the Senate referred an inquiry into carbon risk disclosure to the Senate Economics References Committee which is due to report by 31 March 2017. While organisations have different views on how disclosure frameworks should be developed, submissions agreed that it is necessary to improve Australian disclosure frameworks.

The Courts’ history of finding fault for inadequate responses to foreseeable risks, even where there is supposed uncertainty, combined with the recent political shifts led Hutley SC to conclude 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”.

Climate Risk Toolkit for Directors

Given the personal liability facing directors, and the push for greater transparency and disclosure of company actions to address climate change risks, The Future Business Council has released a timely Climate Risk Toolkit for Directors.

The toolkit includes three key steps businesses should undertake to address the risks outlined in Hutley SC’s legal opinion.

  1. Disclosure

The first step is to consider the adequacy of your company’s climate risk disclosure within the company’s reporting frameworks. Are you adequately disclosing risks to the market? Recent draft disclosure guidelines for financial disclosure recommend climate-related financial information should be included in “mainstream financial filings” and should generally be vetted by a company’s chief financial officer and audit committee. Sustainable Business Australia recent CEO Guide to Climate Risk Disclosure provides valuable information on the status of climate risk disclosure in Australia, the benefits of developing and communicating sustainability plans, and the need for common metrics and standards. To disclose your company’s exposure to climate risk and minimise their legal exposure, companies should tell investors and potential investors how their profits may be hit by climate change related weather events and emission targets underpinned by the Paris Agreement.

  1. Skills

Do you have the right skills and capabilities internally to assess, address and report on your exposure not only to climate change but to the low carbon transition? Do you have the means to embed sustainability principles within your company? Being informed will reduce exposure to sudden policy and technological changes and facilitate best practice principles in the company.

  1. Reporting

Is your reporting up to scratch? Companies with transparent, high quality reporting on climate risk considerations demonstrate leadership, showing they are proactively considering climate related and other risks to their business operations. Shareholders and investors are demanding greater transparency to analyse a company’s business risks and opportunities resulting from climate change. Without consistent, comparable and verifiable data it is difficult for investors to make comprehensive analyses they use to make investment decisions.

Currently the main Australian framework for reporting carbon emissions and exposure to risk include The ASX Corporate Governance Council’s Principles and Recommendations, The National Greenhouse and Energy Reporting Scheme (NGERS), and The Corporations Act 2001. ASX listed companies must disclose any information concerning them that a reasonable person would expect to have a material effect on the price or value of the entities’ securities. An appropriate approach to improving and streamlining the disclosure framework is a major focus of the current Senate Inquiry.

Popular international frameworks include the Global Reporting Initiative (GRI) and the Carbon Disclosure Project (CDP). Additional avenues such as We Mean Business and Science Based Targets provide a platform for companies to take the next step in demonstrating their commitment setting ambitious targets, reporting emissions and scaling up low carbon investment.

Combining the right skills to identify and analyse climate related risks and opportunities with transparent disclosure and reporting processes will place companies in a more competitive position to take advantage of a low carbon economy, and assist directors to fulfil their fiduciary duties.