Australia: What does the Paris Agreement on climate change mean for Australian business?

Services: Property & Projects
Industry Focus: Property

What you need to know

  • The Paris Agreement came into force on 4 November and was ratified by the Turnbull Government just under one week later, on 10 November 2016.
  • While many might think the Paris Agreement appears on its face to be fairly innocuous, as it does not fully bind its signatories, it is likely to have a significant impact on how countries and the private sector respond to climate change.
  • For Australian businesses, there is an increasing focus on the relevance of climate change risks to a director's duty of care and diligence, and therefore the need for directors to get informed and understand how to respond to those risks.

The Paris Agreement, the world's first comprehensive climate agreement, entered into force on 4 November 2016. Just under a week later, Australia ratified the Agreement on 10 November. Australian businesses now need to consider the legal implications of the Agreement's ratification.

This article explores the effects that the implementation of the Paris Agreement will have on Australia, and more particularly, what the Agreement means for Australian businesses.

What is the Paris Agreement?

The Paris Agreement seeks to achieve three things:

  1. Stop global average temperatures from rising more than 2°C above pre-industrial levels
  2. Increase the ability to adapt to the adverse impacts of climate change, and foster climate resilience and low greenhouse gas emissions development
  3. Make finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.

In addition, the Agreement aims to reach global peaking of greenhouse gas emissions as soon as possible.

Although the Paris Agreement is governed by international law, not every provision creates a legal obligation. In fact, the Paris Agreement is a mix of mandatory and non-mandatory provisions. There was a practical reason for structuring the Agreement in this way; the intention was to limit the extent to which the Agreement was legally binding in order to ensure greater participation amongst states. This approach worked; the Paris Agreement was ratified by member signatory states in record time. However, the fact the Agreement does not fully bind its signatories does not reduce its significance. Indeed, the authors of the Paris Agreement did not consider it necessary for the Agreement to be legally binding. Rather, they saw the Agreement's importance being to establish a process for achieving the action necessary to respond to climate change.

One of the key ways the Agreement does this is through the introduction of a model of voluntary 'nationally determined contributions', referred to as NDCs. NDCs publicly outline what post-2020 climate actions the signatory countries intend to take under the Agreement. For example, Australia's NDC includes reducing greenhouse gas (GHG) emissions by 26–28% below 2005 levels, and to do so by 2030. Australia has been criticised for pledging what is arguably a relatively unambitious target. More broadly, two of the main criticisms of the Paris Agreement are that the combined NDCs will not yet meet the long-term temperature goal of the Agreement, and that technically, the parties are not required to meet their pledges.

One mandatory provision of the Agreement is, however, the inclusion of a mechanism for ratcheting up collective action, such that each signatory state is required to strengthen its national targets every five years, starting no later than 2020. Again, this doesn't mean that the NDCs become national law, but it does mean the promise to review and revise the NDCs every five years is legally binding.

What are Australia's obligations?

While Australia was not obliged to ratify the Paris Agreement, not doing so could have risked isolating Australia from the other climate concerned states including its top trading partner, China. It is however feasible that a country that has ratified the Agreement could withdraw. In particular, the result of the US election has prompted speculation about whether or not the US might withdraw from the Agreement. While that remains a real possibility, it would have little effect on the Agreement's implementation given the number of other countries that have ratified it.

Having ratified the Paris Agreement, Australia is now legally bound to progressively increase its efforts to reduce greenhouse gases, improve climate change adaptation, and provide climate finance. Nevertheless, and overall, the legal obligations of the Paris Agreement on Australia are limited and mainly procedural.

For example, Australia will need to provide information about the efforts being made to keep account of GHG emissions, but this has already been done in the past. Australia will have to submit increasing commitments but it won't be bound to achieve them. However, there are consequences if Australia does not meet its intended NDCs, and indications are that it will not be able to meet its pledge because its policies are inadequate to meet the goal.

When Australia abolished carbon pricing, its emissions rose. Victoria, the ACT and South Australia have all committed to net zero emissions by 2050, with Queensland currently developing a transition strategy to a low carbon economy, so at least at state and territory level there is an appetite for further reductions. It may be that in order to meet its pledge, Australia will need to consider reintroducing a carbon pricing mechanism.

Australia already stands out as having the largest relative gap between current policy projections for 2030 and its NDC target. Australia risks criticism from countries that meet their pledges, which could bring pressure both domestically and internationally to impose even more stringent measures (effectively delaying action while increasing the inevitable pain). Still, this is exactly the logic behind the Agreement and the reason why the path of a hybrid legally / non legally binding agreement was taken.

How will the Paris Agreement affect businesses in Australia?

Corporations typically look for signals of a shifting market when deciding whether to change their operations, research and development, and strategy.

The Paris Agreement's success in achieving its aims could depend on how well it has recognised the need to send strong signals to the market. The Agreement urges signatory states to uphold and promote regional and international cooperation in order to mobilise stronger and more ambitious climate action. However, it also recognises the role of non-party stakeholders, including the private sector, financial institutions, and other subnational authorities, in influencing the states' commitments to NDCs.

The Agreement has therefore been seen as having the potential to send a strong signal by encouraging private sector involvement, and by holding the private sector accountable. However, outside of the Paris Agreement, there are two other noteworthy (albeit related) ways in which the governments and the private sector have been directly encouraged to embrace accountability.

  1. In a decision made by the Hague District Court last year, relating to climate change, the Court recognised the expansion of the principle of 'open norms'; that is, the law's capacity to change over time, in line with societal values. The Court found that the duty of care held by the Dutch government was to be characterised as an open norm, and therefore the extent of a government's duty of care could change depending on societal values.
  2. Of particular relevance to Australian businesses, this month we saw an important legal opinion emerge from a leading Australian barrister. The opinion noted the risks presented by the possibility of shifts in investor or consumer behavior and preferences, including due to potential reputational damage associated with poor sustainability practices. This opinion advised that climate change risks may be relevant to a director's duty of care and diligence, and 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)'.1

For directors of Australian businesses, the key is foreseeability. Directors have an obligation to inform themselves about climate change risks and the extent to which those risks may intersect with the interests of the company. Importantly, directors can rely on expert or professional advice to learn about the impact of climate change risks. Relief for directors also comes from the statutory defence of the business judgement rule, but there is a process to be followed to be able to rely on that defence. This includes exercising judgement and actually making a decision, even if that decision is not to act.

Commentary

Internationally, corporations are increasingly claiming that unabated climate change is impacting corporate operations.

The World Economic Forum rated failure of climate change adaptation and mitigation as the risk that will have the most impact on the global economy over the next 10 years. Mark Carney, governor of the Bank of England, has warned that global warming could become one of the biggest risks to economic stability in the future. Mark Wilson, Group CEO, Aviva PLC, has said that sustainability is arguably the world's most significant contemporary market failure. And the Australian Council of Superannuation Investors this year stated that, '[t]hose companies that fail to meaningfully address their long-term sustainability risks and opportunities – or that merely pay lip service to these issues through a minimalist compliance stance – will be increasingly exposed'.2

Despite the Paris Agreement mandating little more than a reporting process, it places further impetus on corporate Australia to consider and manage the risk of climate change. Targeted litigation and investigations, like that carried out by the Securities and Exchange Commission into an alleged failure by ExxonMobile to report climate risk, are not inconceivable here in Australia.

Key takeaways

The real impact of the Paris Agreement may not be the direct obligations it imposes, but rather its reinforcement of a perception that private corporations should be taking into account the effects of climate change on their operations.

Therefore, to put themselves in the best position to take advantage of the business judgement rule, directors should take steps to inform themselves about climate change risks that may apply to their business. This includes engaging experts if required. Once informed, directors should act in good faith for a proper purpose, without material personal interest, and make decisions in relation to relevant risks they rationally believe are in the best interests of the company.

Whilst the Paris Agreement might appear, on its face, to be fairly innocuous, it is likely to have a significant impact on how countries and subnationals, including corporations, respond to climate change.

Footnotes

1 Hutley, N SC et al, 'Climate Change and Directors' Duties'. 2016.
2 Australian Council of Superannuation Investors, Submission to Senate Inquiry into Carbon Risk Disclosure, 2016.

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories

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