Climate Change & Directors’ Duties – Legal Opinion

A new legal opinion argues that directors should turn their minds to climate change risks as part of their duty of care.

As you may have seen in the financial press recently, leading work on the application of corporate laws to climate change risks of a long-standing facilitator of the AICD Company Directors' Course, Sarah Barker (B.Com LLB (Hons) M.Env MAICD, Special Counsel, Minter Ellison) has been echoed by one of the most senior members of the commercial bar.

MinterEllison (Sarah Barker, Special Counsel and Maged Girgis, Head of Superannuation) were engaged by the Centre for Policy Development and the Future Business Council to brief Mr Noel Hutley SC to provide his opinion on the extent to which the law permits or requires Australian company directors to respond to climate change risks.

The opinion, provided by Mr Hutley and junior counsel Sebastian Hartford-Davis, was presented at a roundtable of business, regulatory and investment leaders (including from BlackRock, CBA, ANZ, Citigroup, IFM, ACSI, Deutsche Bank, Qantas, ASIC, APRA and several of Australia's largest superannuation funds) on 21 October. Those present heard that, as a matter of Australian law, directors and boards must actively engage with the impacts of climate change-related risks on their operations and strategy in order to satisfy their duty of due care and diligence under section 180 of the Corporations Act. That duty of course sets out the core standard of competence to which company directors are held: that of the due care and diligence that would be exercised by a reasonable director in the relevant circumstances.

The full opinion can be downloaded here

In particular, the opinion states that:'climate change risks' represent, or are capable of representing, risks of harm to the interests of, and opportunities for, Australian companies and their business models, which would be regarded by a Court as being foreseeable at the present time;

such risks are relevant to a director's duty of due care and diligence, and directors can, and in many cases should, be considering the impacts on their business;

Conversely, the law does not prohibit directors from taking climate change and related economic, environmental and social sustainability risks into account where those risks are, or may be, material to the company's interests; and, critically

it is conceivable that directors who fail to consider the impacts of climate change risk for their business, now, could be found liable for breaching their statutory duty of due care and diligence going forwards.
In addition, Mr Hutley warned that directors who perceive that climate change does present risks to their business should also assess the adequacy of their disclosure and reporting of those risks.Mr Hutley's opinion is particularly prescient with the entry into force of the Paris Agreement on Friday 4 November, and the impending publication of the G20 Financial Stability Board's Taskforce on Climate-related Financial Disclosures this month.

1. Implications for company directors

Mr Hutley's opinion clearly confirms that, from an evidentiary perspective, risks associated with climate change have evolved from an 'ethical environmental' to material financial issues, and that directors who fail to grapple with them are legally exposed. There is simply no substitute for a proactive, robust governance of the impacts of relevant climate risks in the unique circumstances of each business. As a starting point to the exercise of due care and diligence, directors should inform they are adequately formed in relation to the scientific and economic issues, inquire of experts where appropriate, and critically evaluate the impact of these risks and their company's strategic response.

This does not mean that the law now requires directors to prioritise climate risks or sustainability over any other governance matter. However, it must be afforded the same robust consideration as any other issue that may have a material impact on financial performance, risk management and strategy.

2. Further information

The roundtable was widely reporting in leading newspapers including: The Australian, The Age and Sydney Morning Herald and the AFR. For further advice in your company's specific context, Sarah Barker can be contacted at sarah.barker@minterellison.com.

About the author

SARAH BARKER B.COMM, LLB (HONS), M.ENV (HONS), MAICD
Special Counsel Minter Ellison

Sarah has two decades' experience advising Australian and multi-national clients on governance, compliance, misleading disclosure and competition law (antitrust) issues. In addition to tertiary qualifications in commerce and law, she has undertaken postgraduate studies at the London School of Economics, and holds a Masters degree from the University of Melbourne (awarded with Dean's Honours).Sarah is an experienced director and advisory board member. She is currently a non-executive director of one of Australia's largest superannuation funds, the $24-billion Emergency Services & State Super, the Responsible Investment Association Australasia, and of NRCL Ltd. She has been actively involved as an examiner, lecturer and course materials author for the Australian Institute of Company Directors for more than a decade.

Sarah has particular expertise around ESG (environmental, social, governance) in financial services and investment. Her thought leadership on ESG and fiduciary duties is internationally recognised, with her work on responsible investment being cited from organisations from the Bank of England to the OECD and United Nations PRI. She sits on the Technical Working Group of the international Climate Disclosure Standards Board, and is an academic visitor at the Smith School of Enterprise and the Environment at Oxford University.