Australia: Climate change risk must now be on the Board agenda

Last Updated: 20 April 2017
Article by Elisa de Wit and Victoria Vilagosh

Introduction

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.

Last month, the Australian Securities and Investments Commission (ASIC) told a Senate committee hearing on climate change risk disclosure that it agrees with the view that directors must consider and disclose climate risks to fulfil their duties under the Corporations Act 2001 (Act). This communication followed a significant speech by APRA's Executive Board Member Geoff Summerhayes in February, in which he said "The days of viewing climate change within a purely ethical, environmental or long-term frame have passed."

Prior to this speech, a seminal legal opinion was produced by Noel Hutley SC which concluded that directors who fail to consider climate change risks now could be found liable for breaching their duty of care and diligence in the future. Against this backdrop, climate change disclosure recommendations have recently been published by the Task Force on Climate–related Financial Disclosures.

This legal update provides an overview of these recent developments and reinforces that now is the time for Boards and senior management to be giving proper consideration to the risks (which include both transitional and reputational, as well as physical) posed by climate change, with a view to ensuring that these risks are incorporated into strategic decision making, and appropriate consideration is given to the need for disclosure of relevant financial-related risks.

Climate risk disclosure inquiry

On 2 February 2016, the Senate referred an inquiry into carbon risk disclosure to the Senate Economics References Committee for inquiry and report. The inquiry lapsed at the end of the last Parliament but was re-established in October last year. The Committee was initially due to report by 31 March 2017, but has been given an extension to 21 April 2017. The Committee recently held public hearings, at which ASIC, amongst others, made statements.

In ASIC's oral statement, joint senior executive Kate O'Rourke referenced section 180 of the Act which requires directors to act with care and diligence. Importantly, section 180(2) provides that directors will fulfil this duty if they inform themselves about the relevant subject matter and believe their judgment is in the best interests of the corporation (known as the "business judgement" rule). O'Rourke recommended that further guidance was needed to assist companies disclose climate risks within the existing reporting framework.

At the same time that ASIC affirmed that directors have a duty to consider and disclose climate risks, Emma Herd, CEO of the Investor Group on Climate Change told the Senate inquiry hearing, that most of the top 200 ASX listed companies have significant gaps in their carbon disclosure. For example most companies do not report on their strategies to address climate related risks. This gap between the growing consensus that directors have a duty to consider climate risks on the one hand, and the current lack of disclosure on climate risks on the other, will likely be a key focus of the Senate inquiry committee's final report.

APRA speech

Not long before ASIC's statement, APRA's Executive Board Member Geoff Summerhayes delivered a speech on the need for carbon risk disclosure and announced that APRA will increasingly examine how banks, super funds and insurers respond to climate risks. In his speech, Mr Summerhayes referred to three recent developments as justification for the need to take action: the Paris Agreement, the Hutley Opinion and the report by the Task Force on Climate-Related Financial Disclosures.

Mr Summerhayes emphasised that there were two primary risks arising from climate change: physical risks and transition risks. He noted that the transition now in train to a lower emissions economy could potentially lead to significant repricing of carbon-intensive resources and activities and reallocation of capital, and that it is the transition risks which are likely to be particularly relevant to financial institutions. He also painted scenario analysis, particularly around a 2 degrees transition scenario, as the "new normal".

As Mr Summerhayes bluntly put it "if entities' internal risk management processes are not starting to include climate risk as something that has to be considered – even if risks are ultimately judged to be minimal or manageable – that seems a pretty reasonable indicator there might be something wrong with the process. Similarly, if you're an investor and you're not already asking questions about how the companies you invest in approach these issues – perhaps you should be."

Hutley opinion

In a recent legal opinion, barristers Mr Noel Hutley SC and Sebastian Hartford-Davis were commissioned by The Centre for Policy Development and the Future Business Council to consider the extent to which Australian company directors are currently required to respond to 'climate change risks' (Hutley Opinion).

The Hutley Opinion argues that climate change risks are capable of representing risks of harm to the interests of Australian companies, and would be considered by a court to be foreseeable risks at the present time. In other words, they would not be considered 'far-fetched or fanciful'. Further, a director's lack of belief in climate change, or whether it was human-induced, would not provide sufficient protection. "The Court will ask whether the director should have known of the danger"2.

As such, Hutley and Hartford-Davis concluded that directors who fail to consider climate change risks now could be found liable for breaching their duty of care and diligence in the future. They also concluded that there is no legal obstacle to Australian directors taking into account climate change risk where those risks are, or may be, material to the interests of the company and arguably the ASX Listing Rules already mandate this.

Task force on climate-related financial disclosures

Recognising the need for greater disclosure of climate related risks, in April 2015, the G20 asked the Financial Stability Board (FSB) to "convene public- and private-sector participants to review how the financial sector can take account of climate-related issues". The FSB is an international body that aims to promote international financial stability by coordinating national financial authorities and international standard-setting bodies.

In response, the Task Force on Climate-related Financial Disclosures (Task Force) was launched to develop recommendations for voluntary climate-related financial disclosures. It is chaired by Michael Bloomberg, and is made up of 32 members drawn from the private sector across G20 economies, including major companies, accounting firms, banks and insurers. Australia's member is Dr Fiona Wild, Vice President, Climate Change and Sustainability at BHP Billiton.

In December 2016, the Task Force published a set of draft recommendations which aim to assist businesses to analyse and disclose climate change risks. Following a consultation period, the Task Force's final report will go to the G20 in May 2017. The Task Force recommendations represent a strong push by an influential body of stakeholders to propel climate related risk reporting from the periphery to the core of public financial reporting. The clear hope is that, despite the challenges this poses because of the complexity of the issue, the area will develop and standardise rapidly and the Task Force are hopeful that a five year time horizon is achievable.

Recommendations for effective disclosure

The Task Force provides broad insight into what will be required for disclosure of climate change risk to be effective. Key takeaways for companies include:

  • Financial impact assessment will require senior management engagement. The Task Force considers the scenario testing recommended3 will lead to the need to assess impacts on core financial metrics such as cash flow analysis and asset valuation. As such, the expectation is that CFOs will need to be involved in the evaluation of climate-related risks and opportunities.
  • Disclosure needs to be useful. The Task Force is pushing the mantra of "forward looking, decision-useful information" as the basis for disclosure. It recognises concerns around scenario testing revealing commercially sensitive business strategies or being used as fodder for climate litigation, but considers these should be able to be managed rather than used as a basis for making limited disclosure.
  • Waiting for better data tools is not good enough. The Task Force is pushing for disclosure to work with the data and methodologies available and suggests that gaps and limitations are highlighted (rather than those gaps being used as the reason for not disclosing). In particular, the Task Force considers that asset owners and asset managers should engage with reporting metrics on GHG emissions associated with their investments.

In addition, the Task Force developed seven principles to assist in the achievement of high-quality and decision-useful disclosures. Disclosures should:

  1. represent relevant information
  2. be specific and complete
  3. be clear, balanced and understandable
  4. be consistent over time
  5. be comparable among companies within a sector, industry or portfolio
  6. be reliable, verifiable and objective
  7. be provided on a timely basis

A framework for disclosure

The Task Force has set out a framework for disclosure, which aims to identify the information needed by investors, lenders, and insurance underwriters to appropriately assess climate change and price climate-related risks and opportunities. Recommended disclosure requirements are structured around 4 themes as set out below.

Governance: Who should be responsible for assessing and reporting on climate-related risks and opportunities?

It is recommended that climate-related financial disclosures are subject to appropriate internal governance processes. For companies with publicly traded debt or equity securities, the Task Force suggests that internal governance for climate-related disclosures should be similar to existing public financial disclosure. This may involve review by the chief financial officer and audit committee. For other companies, climate related disclosures should follow similar review and approval protocols currently used for similar communications. Utilising existing governance systems will help companies to integrate climate-related financial disclosures. The Task Force recommends both disclosure of the board's oversight of climate-related risks and opportunities and management's role in assessing and managing those risks and opportunities.

Strategy: What are the actual and potential impacts of climate change?

Investors need to understand how climate change may affect company strategy. The Task Force recommends that companies analyse and disclose:

  • the climate-related risks and opportunities that the company has identified over the short, medium and long term;
  • the impact of climate-related risks and opportunities on business, strategy and financial planning; and
  • the potential impact of different climate scenarios, including a 20C-compatible scenario.

Risk management: What processes are used to address these impacts?

The Task Force recommends that companies disclose their processes for identifying, assessing and managing risk, and how these fit into the company's overall risk management strategy to allow investors and other stakeholders to assess the company's overall risk profile and risk management activities.

Metrics and targets: What data sources and methodologies can be used to measure these impacts?

It is necessary that companies disclose the metrics and targets that have been used in assessing risk to allow investors to analyse any disclosures made, and allow companies to be compared within a sector or industry.

In addition, the Task Force has developed specific guidance for the financial sector as well as certain non-financial sectors that are considered to be most affected by climate change – energy, transportation, materials and buildings, and agriculture, food and forest products. Companies operating in these sectors should consider the Task Force's recommendations in formulating a disclosure framework that best fits their business.

Moving forward

The Task Force's recommendations and the Hutley Opinion demonstrate it is clearly time for the Australian business community to elevate climate change considerations to the board room to ensure that all companies and directors are aware of, and prepared for, its short- and long-term impacts.

In the Task Force's view, the success of its recommendations depends on near-term, widespread adoption by organizations in the financial and non-financial sectors. Only then will climate change risk analysis become ingrained in business risk management and strategic planning processes.

Adopting the Task Force's recommendations may be a practical measure to help Australian companies adequately disclose climate-related financial risks, and assist directors to fulfil their duty of care and diligence. Such steps should ensure that the following does not come to pass: "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)4.

Footnotes

1 Hutley Opinion, page 22

2 Hutley Opinion, page 15

3 The Task Force report recommends disclosure assesses potential impacts of climate change related risk and opportunities under different potential scenarios, including a 2 degrees scenario, which is the global commitment enshrined in the Paris Agreement.

4 Hutley Opinion, page 22

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Elisa de Wit
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions