09 March 2017

Directors in the gun for climate change risks

This article was written by Will Heath and Evelyn Peter.

In recent months, there have been prominent media reports on landmark climate change litigation.

In the USA, youth activists have launched a climate change lawsuit for failing to protect them from the harmful effects of climate change.

In Australia, the Centre for Policy Development published an opinion (available here) by two barristers which concludes that Australian company directors who fail to consider climate change risks could be found liable for breaching their duty of care and diligence.

While the motivations and merits of climate change activists and litigators will not be examined here, the prospect of litigation against company directors is a salient reminder that climate change risks cannot be ignored. This note:

  • summarises how climate change risks can expose directors to claims for breach of duty; and
  • outlines strategies for directors to mitigate the risk of climate change litigation against them.

What’s all the fuss about?

Australian company directors owe various duties to the company, including the statutory and general law duties to exercise reasonable care and diligence.

A breach of the statutory duty of care can be prosecuted by (amongst others) ASIC, and it can give rise to pecuniary penalties and/or disqualification from acting as a director.

As reported in Directors Duties Update – ASIC track record on civil penalty proceedings continutes to be impressive, we observed that ASIC has successfully won at least 22 cases against company directors who breached their statutory duty of reasonable care and diligence.

These cases have created valuable precedents for ASIC and others – including, potentially, climate change litigators – to sue company directors in the future.

The cases establish the following general principles:

  • For a director’s act or omission to be capable of constituting a breach of the duty of care, there must be actual damage caused to the company by reason of the breach or it must otherwise have been reasonably foreseeable that the relevant conduct might harm the company’s interests.
  • Relevant to the question of breach of duty is:
    • whether a reasonable person in the director’s position would have foreseen that the director’s conduct in question involved a risk of harm to the company; and
    • if a risk of harm was reasonably foreseeable, what a reasonable person in the director’s position would have done by way of response to the risk, taking into account the magnitude and degree of probability of the risk, along with the expense, difficulty and inconvenience of taking alleviating action.
  • The risk of harm to the company is not confined to financial harm, but includes harm to all interests of the company, including its reputation and its compliance with law: Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023 at [483].

In this context, it is possible that a director who takes or fails to take action without adequate regard to climate change risks may be exposing the company to a risk of harm and, in turn, a breach of duty.

‘Climate change risk’ can include:

  • physical risks associated with changing climatic conditions (eg severe weather events and rising sea levels damaging property and other assets and disrupting trade); and
  • transition risks, being indirect financial risks that might arise from a transition (which may or may not occur, or may occur in unpredictable ways) to a lower-carbon economy (eg changes in policy, technological innovation and consumer or investor preferences that could impact a company’s business strategy or the value of its assets).

What should directors do?

Company directors cannot control the actions of regulators and climate change litigators.

However, company directors can take a prudent and measured approach to climate change risk like any other business risk faced by a company, including by:

  • establishing adequate processes to keep the board informed of climate change risks and the impact on the company’s business and strategic plan;
  • monitoring the effectiveness of those processes; and
  • ensuring timely and balanced disclosure of climate change risks to shareholders and timely and effective responses to risks where action is appropriate. In particular, directors of ASX-listed companies should note the ASX’s Guidance Note 9, ‘Disclosure of Corporate Governance Practices’, which recommends that companies should disclose ‘material exposure to economic, environmental and social sustainability risks’.

Directors should also be aware that disclosure practices in relation to climate change risk are evolving. The Task Force on Climate-Related Financial Disclosures published best practice recommendations in December 2016, aimed at aligning the approach to disclosure in this area. The Task Force recommends disclosure around 4 key areas: (1) the types of climate change risk that are relevant to the company; (2) the potential impact of those risks on the company; (3) how the company identifies, assesses and manages climate change risks and; (4) the metrics and targets used to assess relevant climate change risks and opportunities.

While there’s no way to bulletproof a board from climate change litigation, implementing and monitoring appropriate measures to manage climate change risk should reduce the risk of such litigation being successful.

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