Climate Risk Toolkit for Directors

Australian company directors “who fail to consider ‘climate change risks’ now could be found liable for breaching their duty of care and diligence in the future” – Noel Hutley SC

Directors of Australian companies have a fiduciary duty to consider climate-related risks to their business according to the significant new legal opinion commissioned by the Future Business Council and the Centre for Policy Development.

The opinion, provided by Mr Noel Hutley SC and Sebastian Hartford-Davis, emphasises the need for Australian companies to treat climate change and the low carbon transition  as a core business concern to be managed at the highest levels, rather than a peripheral issue.

The legal opinion found that many climate change risks are “foreseeable at the present time” and that Australian company directors “who fail to consider ‘climate change risks’ now could be found liable for breaching their duty of care and diligence in the future”.

Because of the distinct vulnerability of Australian companies to the physical effects of climate change and exposure to risks stemming from regulatory change and the transition to a low carbon economy the Future Business Council has compiled the following information and resources for Directors and Executives seeking to better understand the legal, financial and physical risks of climate change to their business. Please contact our team if you would like to gain a deeper understanding or to secure a briefing on the topic for your team.

 

What are the risks and which companies are exposed?

Companies are materially exposed to two distinct risk types, the physical impact of climate change and the transition to a low carbon economy, which will have far reaching consequences for virtually every business sector, although some will be impacted harder and earlier than others.

The physical impacts of climate change on business includes the direct and indirect impacts of droughts, floods, and other extreme weather events that can destroy infrastructure, impact supply chains or damage production. This is a growing risk for all sectors, as recent extreme weather events have demonstrated, but particularly so for companies operating in industries like agriculture, insurance and infrastructure.

The transition risk to a low-carbon economy is the second risk and is rapidly becoming a major consideration for business as government regulation, changing consumer preference, and technology are accelerating the transition to a low carbon economy. Business that don’t adapt will be left exposed as markets collapse for carbon intensive products.

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This risk is coming sharply into focus following the ratification of the Paris Climate Agreement and the rising tide of the divestment movement globally. This poses a particular risk to carbon intensive sectors where low carbon alternatives are rapidly achieving scale such as transport, energy generation and extraction.

These are two types of material risks that must be considered at a minimum.

The third major risk, is the individual risk of personal litigation against directors who fail to consider and disclose the above two risks to their company.

The courts will have no time for a director’s belief or not in climate change. What they will ask what they should have known and when they should have known it. Boards of Directors that do not consider and disclose the risks are exposed.

These risks are not merely theoretical, for example Exxon Mobil Corporation is currently subject to a $12 billion (US) class action, launched in November 2016, for artificially inflating the stock price through poor transparency and reporting integrity with respect to environmental risks caused by global warming and climate change.

Future litigation against Australian directors on similar lines is not just possible, it is inevitable. The penalties are severe and include individual fines of up to $200,000 and disqualification from holding directorships.

Perceptions of what value creation means and the duty of care owed to shareholders are now shifting away from a myopic focus based purely on dividends. The long-term viability of a business is now becoming the predominant focus and this opens directors and individuals to risk under the Corporations Act 2001.

 

What should business do?

There are a number of steps that directors should take to address the risks outlined in the legal opinion.

The first step is to gain an understanding of your company’s exposure to both the physical impacts and the low carbon transition risk to your business. This may require investment in greater internal capabilities as well as greater board diversity to understand the risks for many companies.

The following actions are also critical and increasingly being demanded by investors.

Disclosure

Directors who recognise that climate change does present risks to their business should first consider the adequacy of the disclosure of those risks within the company’s reporting frameworks. The ASX Listing Rules require companies to include within their annual report a “corporate governance statement,” disclosing the extent to which the company has followed recommendations set by the ASX Corporate Governance Council during the reporting period.

Understanding the risk is not enough, you must ensure you are disclosing the risks to the market too.

Skills

Executive teams need to ensure they have the skills and capabilities internally to assess, address and report on exposure to climate change and the low carbon transition. should be educated on how to embed sustainability principles and skills to drive organisational change. Being informed ensures that individuals have less exposure to sudden changes, less barriers to adopting best-practice principles and allows them to spread the message in a proactive manner outside of workspaces.

The Future Business Council can help your organisation navigate the transition towards a more sustainable business model.

Reporting

Companies and directors who act proactively and ensure a high standard of transparency and reporting will be well placed to garner support from the modern, environmentally-conscious shareholder. Major investors, credit agencies, and banks are increasingly looking to disclosure and exposure risks when determining credit ratings and borrowing costs.

Additional resources and reading materials

The Future Business Council strongly recommends directors familiarise themselves with the following publicly available resources. These reports produced by leading global firms including MinterEllison, BlackRock, Moody’s and more outline the legal, investment and credit risks that facing companies that fail to understand, disclose and mitigate the risks of climate change exposure.

We also strongly encourage directors to read the Future Business Council’s landmark report, The Next Boom, which analyses the surge in demand for low-carbon and sustainable products and asks whether this demand is likely to continue growing at exponential rates.

Download The Next Boom

BlackRock: Adapting Portfolios to Climate Change

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PRI: 21st Century Fiduciary Duties Roadmap

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Schroders: Climate Change Risk in Portfolio Management

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MinterEllison:  Sustainability Governance & Disclosure

Read more

Mercer: Trillion Dollar Transformation

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Moody’s: Climate Change & Credit Risk

Read more

Contact the Future Business Council for quotes or further information. 

Future Business Council
490 Spencer Street, Melbourne, VIC, Australia
p (03) 8327 8427
e media@futurebusinesscouncil.com