In a recent ASIC liaison meeting, a number of corporate
governance items were flagged as being a current focus of ASIC. Of
particular interest is the emerging focus on climate change risk
management by directors and implications for directors'
The opinion 'Climate change and directors'
duties' published by the Centre for Policy Development in
October 2016 (download
here) promoted wide spread discussion about the implications of
climate change risk for directors. It argues that Australian
company directors who fail to consider such risks now could be
found liable for breaching their duty of care and diligence under
section 180 of the Corporations Act in the future.
A director will breach this duty when damage is caused to the
company by reason of the breach, or where it was reasonably
foreseeable that the conduct might harm the company's
interests. Harm is not limited to financial harm but includes harm
to all interests of the company, including its reputation and
compliance with the law. It is possible that a director who has
failed to perceive, disclose or take steps in relation to a
foreseeable climate-related risk, which can be demonstrated to have
caused harm to a company, will amount to a breach of duty. Risks
include physical risks such as severe weather events, and
transition risks such as financial risks that might arise from a
transition to a lower-carbon economy (such as investor preferences
that could impact the valuation of a company's assets).
An expert panel was convened to discuss the role company
directors need to play in response to climate-related risks to
their business. It was noted that the spectre of litigation will
likely force company directors to account for climate risk,
irrespective of their personal beliefs. It was also noted that
Australia's corporate sector has particular vulnerability to
climate risk, given the amount of Australian business activity with
connections to natural resources.
The Australian Prudential Regulation Authority
(APRA) has also recently commented on the issue,
declaring that it is 'unsafe' to ignore climate risks
merely because the topic is controversial and that climate risk is
something that has to be more actively considered.
Implications for directors
Directors should ensure they are adequately informed in
relation to the scientific and economic issues, obtain and rely on
information provided by experts where appropriate, and critically
evaluate the impact of climate change risks and their company's
Where they do perceive that climate change presents a risk to
their business, directors should consider the adequacy of
disclosing those risks within the companies reporting frameworks in
determining what action, if any, is to be taken. The Task Force on
Climate-Related Financial Disclosures has published best practice
recommendations aimed at aligning the approach to disclosure in
this area (download
Critically, it is conceivable that directors who fail to
consider the impacts of climate change risk for their business now
could risk being found liable for breaching their statutory duty of
due care and diligence in the future.
Moving forward it is crucial that company directors consider
whether they are turning their mind appropriately to 'climate
change risks' in the exercise of their strategic and risk
Climate change and risk management strategies are likely to
remain on the radar of the regulators and various stakeholders
going forward, and should be afforded the same robust consideration
as any other issue that may have a material impact on the financial
performance and strategy of a company. It is certainly a developing
area, which McCullough Robertson will continue to watch with
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