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.
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.
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.
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.