The heat is now on Directors when it comes to climate change

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’ duties.

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 strategic response. 
• 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 here).
• 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 management roles.  

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 interest.

Jim Peterson, Ben Wood, and Anna Mott