Heatwave on Climate Change for Company Executives this Summer

Australian courts and regulatory authorities are making it clear that director liability for climate change risk management is not a short-term threat.

The heat is rising on senior corporate executives in relation to climate change risk management.

Last year, the class action against Volkswagen in relation to its diesel car emissions scandal experienced some serious judicial action in Australia. The Australian Federal Court in the Volkswagen case has now reportedly ordered the company to reveal the names of relevant directors and executives of Volkswagen to the Court by 1 February 2019.

Court action taken against Volkswagen in other jurisdictions across the world has resulted in the prosecution of a number of senior executives and employees in those countries. Although Volkswagen is one of a handful of major cases in the headlines, this is indicative of a broader shift towards potential director liability for the management of climate change risk.

For example:

• 2017 The Environmental Justice Australia (EJA) sued the Commonwealth Bank of Australia¹ on behalf of the bank’s shareholders for concealing major climate change risks and painting a deceptive picture on climate change strategies in its 2016 annual report. Although the case was ultimately dropped, it highlighted the gravity of the threat on companies and their boards and created an urgency for companies to consider and manage climate change risks.
• 2019 The Federal Court on January 17, 2019 once again acted on a law suit filed by EJA involving Super fund REST². Justice Perram reflected upon the sensitivity of these cases and stated that the case appears to raise a socially significant issue about the role of superannuation trusts and trustees in the current public controversy about climate change. It is legitimate to describe the Applicant’s litigation as being of a public interest nature.

It is highly likely that the spell of climate change related cases will continue to rise in the future and the fate of all those holding fiduciary powers will turn if appropriate corporate strategies are not adopted. Australian courts and regulatory authorities are making it clear that director liability for climate change risk management is not a short-term threat.

Are director liabilities on climate change a foreseeable risk or a material risk?

Regulators have been identifying climate change risks as not only foreseeable but material and actionable now. The Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) are together working on a broader movement towards adequate and consistent reporting on climate change risks and indications are that company directors could be liable for failure to disclose these risks.

Are you or your company exposed to climate change risks?

Considering recent developments in the legal and regulatory space, no company can afford to ignore climate change risks. There are not only the physical risks but also the transition risks that trigger the fiduciary duties of directors. The Centre for Policy Development (CPD) together with Future Business Council commissioned legal advice on liabilities of directors in relation to climate change. CPD reported that the directors need to act on climate change before it’s too late. As pointed out in the CPD Opinion, Directors who fail to consider climate change risks now, could be found liable for breaching their duty of care and diligence in the future.

How to mitigate the risk of getting sued

According to ASIC’s Report³ issued in the second half of 2018, directors and officers of listed companies are recommended to adopt a probative and proactive approach to emerging risks of climate risk. In relation to rising investor litigation cases on companies relating to inadequate disclosures on climate risks, ASIC reported that the voluntary framework developed by the Taskforce on Climate-related Financial Disclosures⁴ can assist in this regard.

The scope of director’s duty of care and diligence is broad enough to hold directors individually liable for risks relating to climate change. Legal strategists and policy-makers are formulating frameworks and methodologies to effectively handle this issue and make the climate change journey smooth for corporates and their executives.

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