This article was written by Will Heath and Lauren Taylor.
Being an Australian company director isn’t easy in 2020. The role requires dealing with more prescriptive compliance burdens, increasingly aggressive regulators and demanding stakeholders. Business-as-usual directorship is tough. Added to this, Australian companies are under increasing pressure to recognise, manage and disclose climate risks as major natural disasters are seeing public and shareholder expectations grow fast.
Boards now more than ever need to consider strategies to manage climate-related risks – this is no small feat. Part of the complexity of climate-related risks is that they will invariably raise significant legal issues which have yet to be tested by the courts, and Boards cannot be guided by market practice in dealing with them. While the response to a climate-related risk is likely to be nuanced and require specialist advice, there are some common themes we encounter in advising Australian company Boards on risk management. Here are our seven key considerations that will help you navigate climate-related risk.
Directors’ duties set a high bar
Directors should always comply with their statutory and general law duties. In responding to a climate-related corporate risk (or any corporate risk, emerging or otherwise), the baseline duties of every company director are to act with reasonable care and diligence (section 180 of the Corporations Act) and in good faith in the best interests of the company and for proper purposes (section 181 of the Corporations Act). While it is always essential for company directors to act with integrity and honesty, doing so will not necessarily discharge these statutory duties.
Under Australian law, regulators and courts will judge directors’ acts and omissions by the objective standard of the reasonable company director and with the benefit of hindsight. And, as we have noted elsewhere, ASIC has a strong track record in prosecuting directors for breaches of statutory duties. In particular, the recent ‘stepping stones’ cases (including, most recently, the Vocation decision) illustrate that directors may be pursued for an alleged breach of their statutory duty of reasonable care where their acts or omissions have exposed the company to a breach of law. Although it is unlikely ASIC will pursue directors using the stepping stone approach for a breach of environmental laws alone (this falls outside of ASIC’s regulatory purview), ASIC could ‘piggy back’ its own actions against directors following successful prosecutions by environmental regulators of a breach of environmental laws.
It is also possible for directors to be personally liable for breaching their duty of care and diligence as a result of a failure to adequately consider reasonably foreseeable climate risk, even if the company is not in breach of the Corporations Act or other legislation.
Get your ASX disclosure right
In responding to climate risks, listed company directors will need to manage continuous disclosure obligations and keep the market informed of material developments. It’s not enough to make timely disclosures. Disclosures also need to be accurate and not misleading.
One of the biggest traps for Boards is to sign-off on disclosures that have not been subject to an appropriately robust review process, which is only made more difficult by the still developing requirements of climate related risk disclosure. In recent years ASIC and APRA have repeatedly emphasised the need for companies to address climate change risk as part of their governance and risk management frameworks and to make public disclosures where appropriate. The ASX Corporate Governance Council has also weighed in, now requiring listed entities to disclose whether they have any material exposure to environmental or social risks, and if so, how they manage those risks.”
We also know from the results in a long line of cases from James Hardie to Vocation that ASIC will not hesitate in pursuing (with a very high rate of success) directors who authorise misleading company announcements. Additionally, the recent Vocation case confirms the principle (rightly or wrongly) that the business judgment rule will not apply to directors’ decisions in relation to ASX releases and other compliance matters. Practically, this means ignorance or carelessness in climate-related risk disclosure will almost invariably lead to liability.
Don’t miss the shifting sands
The law is dynamic and Boards must not be complacent or adopt a ‘wait and see’ approach to dealing with climate-related risk. Boards need to consider the regulatory guidance including ASIC regulatory guides and international developments such as the Financial Stability Board Task Force on Climate-Related Financial Disclosures and actively monitor updates in this area, particularly in reporting and other disclosure obligations. Boards also need to keep their shareholders at front of mind. The 2019 AGM season saw the ASX200 have an increase from 2018 in (albeit unsuccessful) ESG-related shareholder resolutions. Being on the front foot of climate risks may allow companies to avoid shareholder activism of this kind.
It is also important to follow litigation trends – in Australia, we’ve already seen climate change litigation for approvals for developments in fossil fuel-related projects. There have also been actions to hold companies that have been either directly or indirectly affected by climate change to assess and effectively disclose those risks. In the not too distant future, we may see investors and regulators pursue directors and officers who have not proactively dealt with climate change or are responsible or significant emissions. In these evolving circumstances, being ignorant of the state of the law in relation to climate risks can be its own disaster.
So, where’s your plan?
As with any material corporate risk, companies should consider formulating a risk management plan that will allow the Board to deal with climate risks head-on. In this context, the Board’s role is to oversee the implementation of an appropriate plan and periodically test it against a range of potential risks that may affect the company’s business and operations in both the short and long term. Climate risks go beyond the physical risks of flooding or fires that can have a financial and operational impact on companies that are vulnerable to these risks. Reputational risks as a result of engaging in or supporting carbon intensive activities, the premature devaluation of carbon heavy assets, and the financial and resource strain as a result of responding to litigation, regulatory scrutiny and compliance must also be front of mind.
You need a legal adviser who you can trust
By their very nature, major corporate risk incidents raise significant legal issues. Directors need to adopt a proactive approach to considering climate risk in their corporate strategies and will need legal advice on resulting issues from an adviser they trust. This has two aspects. First, internal legal counsel should be empowered to assist the Board’s response to a climate-related crisis. Crisis and risk management should not be limited to operational executives. Second, Boards will typically need external advice and support on a broad range of legal issues that may arise from a climate risk including continuous disclosure, directors’ duties, environmental protection laws and in relation to non-Australian operations or foreign stakeholders, among others.
Boards and their risk committees should also ensure sufficient time is dedicated to learning from climate-related incidents in corporate Australia and abroad. To this end, Boards of listed entities should be aware that if a climate-related risk affects their business, the ASX Principles require them to review any material incident involving a breakdown of the entity’s risk controls and the “lessons learned”. Boards should engage with management to determine what could be done better and should be fed back into risk management planning. It may be necessary to engage external consultants to determine how these risks feed into the company’s crisis and strategic planning.
Look for the opportunities
It’s not all bad news. Taking a more holistic view, Boards are in the driver’s seat for assisting in the transition to a lower carbon economy. To that end, the current focus on climate risk also provides an opportunity for corporates to seek out and hire specialists that will assist the company to successfully navigate the increasingly ESG focussed landscape. Moreover, companies that have well thought out, well progressed approaches to climate change (and sustainability more generally) – be it net zero pledges (with transparency and clear metrics on how targets are to be achieved), production or investment in low carbon products or provision of services that contribute to a lower carbon economy – will be a more attractive investment for ESG minded investors.
 In an opinion published by Noel Hutley SC and Sebastian Hartford-Davis in October 2016 (and updated in March 2019), the authors opined that Australian courts will most likely consider that climate change risks are foreseeable, and that directors who fail to consider those risks may be liable for breaching their duties of care and diligence.
 ASIC expects companies to include in their annual directors’ reports a discussion of climate risk when it could affect the company’s achievement of its financial performance or disclosed outcomes (underpinned by sophisticated scenario analysis), including any relevant comments as to how risk factors that are within the control of management will be managed. See further, ASIC Report 593: Climate risk disclosure by Australia’s listed companies (September 2018); Final Report from the G20 Financial Stability Board’s Task Force on Climate Related Financial Disclosures (June 2017) which ASIC has endorsed.
 ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (fourth edition) (February 2019) (“ASX Principles”).
 Australian Securities and Investments Commission v Meredith Hellicar & Ors  HCA 1
 Australian Securities and Investments Commission v Vocation Limited (in liquidation)  FCA 807.
 See ASIC Regulatory Guide 228 (in relation to prospectuses) and ASIC Regulatory Guide 247 (in relation to directors’ reports).
 Gloucester Resources Limited v Minister for Planning  NSWLEC 7Gloucester Resources Limited v Minister for Planning  NSWLEC 7.
 Guy Abrahams v Commonwealth Bank of Australia VID879/2017; Mark McVeigh v Retail Employees Superannuation Pty Ltd ACN 001 987 739.
 ASX Principles, Recommendation 7.1.