Gilbert + Tobin recently published an article providing directors with an overview of the emerging concept of directors duties to include disclosing nature-related financial risks, together with best practice guidelines for disclosing climate-related financial risks (which are now widely acknowledged as risks appropriate for disclosure).
The momentum on this issue continues to grow with the recent publication of a new supplementary opinion on directors’ duties to consider, disclose and respond to climate-related risks by Noel Hutley SC and Sebastian Hartford (2021 Opinion). The 2021 Opinion was published by the Centre for Policy Development (CPD) along with a range of new materials relating to directors’ duties and climate-related financial risks that emerged from a roundtable convened by the CPD in December 2020 (2020 Roundtable).
This article summarises the key takeaways from the 2020 Roundtable and 2021 Opinion.
The CPD’s 2020 Roundtable
The 2020 Roundtable examined challenges for directors and trustees seeking to meet their climate-related obligations by focusing on three hypothetical scenarios relating to (i) ‘greenwashing’ and selective corporate disclosure of climate-related risks; (ii) effective governance by superannuation funds in respect of climate-related risks; and (iii) competition law implications of industry-level collaborations on climate change.
The key conclusions for each of these scenarios were as follows:
‘Greenwashing’ on climate-related issues creates an acute legal risk
Greenwashing, the term now used to describe the practice of providing a false impression or misleading information regarding how a company's products or initiatives are more environmentally friendly than is in fact the case, can constitute misleading or deceptive conduct. Directors need to take care to ensure that their climate-related targets and risk analyses are underpinned by appropriate governance.
Superannuation funds have a major role to play in supporting the transition to a greener economy and should prepare for greater scrutiny of their climate-related risk management
Recent developments have highlighted that climate-related risks must now be a core focus of governance and risk management, especially as the investment risks and opportunities regarding climate change become increasingly complex.
Industry-level collaborations on climate change must consider the implications of competition law but, if properly managed, these issues should not impede collective action to address climate change
There is growing enthusiasm to collaborate across sectors to develop and roll out low-emissions technology, and to deliver industry-level net zero pathways. But any such coordination between competitors on climate change could potentially constitute cartel conduct. However, if collaborative initiatives are mindful of this possibility and proactively address it, there should be no major obstacles to industry collaboration on climate change.
New supplementary legal opinion by Noel Hutley SC and Sebastian Hartford
Following the 2020 Roundtable, Noel Hutley SC and Sebastian Hartford provided a new supplementary legal opinion on directors’ duties to consider, disclose and respond to climate-related risks in light of recent developments. The 2021 Opinion builds on their influential 2016 and 2019 opinions. The 2016 Opinion focused on the existence of the duty to disclose climate-related risks, which according to the authors, this duty is now uncontroversial. The 2019 Opinion observed that the liability risk for directors in this area is increasing exponentially as is the standard of care required by directors in discharging their duty on climate-related risks.
Merely considering and disclosing climate-related risks is no longer sufficient
The 2021 Opinion focuses on the impact of recent developments on the standard of care to be exercised by directors in discharging their duty in relation to climate-related risks. It argues that in certain sectors, those duties now extend beyond disclosure to taking reasonable steps to ensure that positive action is being taken to manage such risks. The major developments impacting this standard of care, include APRA’s issuance of draft guidance to banks, insurers and superannuation trustees on climate-related financial risk management; the emergence of the Taskforce on Climate-related Financial Disclosure and other industry-based initiatives. In the view of the opinion’s authors, these developments mean:
“it is no longer safe to assume that directors adequately discharge their duties simply by considering and disclosing climate-related trends and risks; in relevant sectors, directors of listed companies must also take reasonable steps to see that positive action is being taken: to identify and manage risks, to design and implement strategies, to select and use appropriate standards, to make accurate assessments and disclosures, and to deliver on their company’s public commitments and targets”.
Net zero emissions commitments and ‘Greenwashing’
Because of these recent development and stakeholder pressure, companies are increasingly making net zero emissions commitments. However, where such commitments are made without a reasonable basis, the commitments could potentially be regarded as ‘greenwashing’ and present litigation risk. In the view of the opinion’s authors, it is foreseeable that a company and its directors could be found to have engaged in misleading or deceptive conduct under the Corporations Act, and or the Australian Securities and Investments Commission Act 2001 (Cth) by not having reasonable grounds to support the representations contained within its net zero emissions commitment.
The 2021 Opinion also notes that a company’s failure to disclose certain facts relating to climate-related risks may constitute misleading or deceptive conduct through silence.
While net zero emissions commitments do present litigation risk, the opinion’s authors are clearly of the view that this does not mean it is safe for directors to avoid making such commitments given the recent developments noted above.
Reducing the likelihood of liability arising from a net zero emissions commitment: practical steps
The 2021 Opinion contains suggested steps that companies and their directors might consider taking to minimise the risk of liability arising from net zero emissions commitments, as follows:
- develop a net zero emissions strategy which is integrated with their company’s operational strategy;
- document the drivers of the company’s ability to decarbonise and the assumptions underpinning that strategy;
- if appropriate, have the strategy reviewed by external consultants;
- explain which emissions (scope 1, 2 or 3) the strategy encompasses and the relevant time-frame for achieving the targeted emissions reductions; and
- promptly disclose if the net zero emissions strategy is amended, not suitably fulfilled or affected by intervening circumstances.
With the 2021 reporting season just around the corner, directors will need to take heed of the matters raised in the 2021 Opinion when reporting on their climate change strategy.