A 'high risk' jurisdiction: climate change and directors' duties

Your directors need to be aware of the key areas of personal exposure on climate change

Australian law requires certain standards of conduct of company directors, including that directors act in the best interests of the company and exercise care and diligence in performing their role.

To date, no Australian court has considered whether a director's duties require a director to take into account climate change-related risk that may be relevant to the company's business.

However, following the conclusion of the Paris Agreement in 2016, the Australian think tank, the Centre for Policy Development, commissioned legal opinions from barrister Noel Hutley SC to assess the extent to which Australian corporate law requires company directors to respond to climate change risks.

Hutley's opinions, the most recent of which was published in 2019, conclude that:

1. climate change risks are capable of being foreseeable risks to the interests of a company;
2. climate change risks may be relevant to a director's duty of care and diligence under s180(1) of the Corporations Act 2001 (Cth) to the extent that they interact with the interests of the company; and
3. company directors can and, in some cases, should be considering the impact of climate change risks on their business, or else risk breaching their obligation to exercise care and diligence.

The opinions are confined in their scope to a director's duty of care and diligence and did not consider other statutory or fiduciary duties of a director. Kenneth Hayne QC has subsequently remarked in a November 2019 speech that the duty of a director to act in the best interests of a company includes taking into account climate change risks relevant to that entity.¹

'Climate change risks' refers to physical risks associated with rising temperatures, such as property destruction, and to transitional risks associated with adjusting towards a lower-carbon economy, such as regulatory changes or shifts in investor behaviour that may impact a company's business. One type of transitional risk identified in the opinions is 'stranded asset risk' - the risk that companies will be unable to develop certain fossil fuel reserves if emissions targets are to be met. Climate change risk also extends to litigation risk, exposure to which Hutley SC considers will rise exponentially over time.

ASIC has endorsed the Hutley opinions. In a 2018 speech, ASIC Commissioner John Price considered that the opinions were 'relatively unremarkable' and said that, in ASIC's opinion, the view expressed 'appears legally sound and is reflective of our understanding of the position under the prevailing case law in Australia so far as directors' duties are concerned'.² Commissioners Sean Hughes and Cathie Armour further emphasised ASIC's agreement with the Hutley opinions, and stressed the importance for company directors of considering the impact of climate change on the company's business, and ensuring that strong effective corporate governance practices are sustained in the company.³

Key risks

Breach by a director of their duty of care and diligence (arising, for example, from a failure to give appropriate consideration to climate change risks) can give rise to personal liability. A director may also be found to have breached their duty if they do not appropriately disclose the risks posed by climate change to the business.

In addition, ASIC has recently used a 'stepping stone' approach to litigate against directors personally. This requires an action against a company for contravention of legislation (such as the Corporations Act), which then allows ASIC to launch a derivative civil liability claim against a director for breaching their duty of care in exposing the company to risk of prosecution.

Australia's directors nominated climate change and energy as the top issues they want the Federal Government to address in both the short and long term.⁷

One way to mitigate against the risk of exposure is to ensure that robust governance frameworks are put in place, supported by effective implementation, execution and accountability. Directors should be able to demonstrate that they have considered climate change-related risk in their decision making, and that they have done so in a way that is more than 'cursory acknowledgment and disclosure'.⁴ This means ensuring that directors have access to all necessary information, in an appropriate format and level of detail.

ASIC Commissioner John Price has spoken of a need for directors to adopt a 'probative and proactive' approach in gathering the information reasonably required to inform their decision making with respect to climate-related risk.⁵ Whether directors have considered such information adequately may affect their ability to rely on the defence that they exercised their business judgment under corporate law if their decision making is ever impugned.⁶

While ensuring they are properly informed is the primary duty of the director, in some circumstances, further action may be required where a climate risk is identified. The magnitude of the risk and the probability of it occurring must be balanced against the difficulty, expense and inconvenience of taking action to alleviate it.

Key questions

• Has the board, from a technical, financial and commercial perspective, been educated on the specific risks that climate change poses to your organisation, and their level of materiality?
• Is the board composition appropriate, considering the nature and materiality of climate-related risk to the organisation?
• Has the board established a system of regular review on climate-related risk, noting it is a dynamic area?
• Is a robust system in place to document the briefing and deliberations of the board in relation to climate-related risk?
• Is there a system in place to ensure material climate-related risks are reported up to the board on an equal footing with non-climate related financial risks?
• Is the board aware of the importance of accessing and considering such information as part of its decision-making processes?
• Have appropriate resources been made available, and governance frameworks established, to ensure that accurate, complete and timely information is provided to the board in relation to climate risk?