What are the legal duties of companies and directors concerning climate change?

The increasing importance of climate change for companies and directors

Photo of Eduard Ferreira

Written by Eduard Ferreira, Director

In 2008 the economist Rob Garnaut AC wrote in his climate change report: “…fire seasons will start earlier, end slightly later, and generally be more intense. This effect increases over time, but should be directly observable by 2020.”

In 2019 -2020 this prediction became true for Australia with the Black Summer fires causing damages of 103 billion dollars. This event influenced companies over the whole spectrum from large multinationals to small SMEs.

Climate change is no longer something companies, and directors can ignore or consider as relevant only to future generations. Companies and directors face an increased risk of litigation if they do not consider and deal with climate change.

The science behind climate change is no longer in dispute

On 9 August 2021, the IPCC, the most authoritative body on climate change science in the world, reported on climate change. The report said in its first headline statement, that it is unequivocal that human influence has warmed the planet and that widespread and rapid changes have occurred.

In Sharma v Minister of the Environment [2021] FCA 560, [30] – [31] the Federal Court found climate change was a foreseeable risk. The Minister (first defendant) and Vickery Coal Pty Ltd (second defendant) did not dispute the science behind climate change.

Climate change risks directors and companies should consider

Directors and companies need to consider how climate change will influence their business. They should consider the impacts of physical risks such as extreme weather events, rising sea levels, and a hotter climate on the company. Obvious examples of companies subject to these risks are insurance, agricultural, tourism, and investment companies.

Secondly, directors should consider transitional risks caused by the adaption to a carbon-neutral economy. Companies that will face changes are those in the automotive and fossil fuel industries.

Lastly, directors and companies should have regard to litigation risks. The highest instance of climate change litigation outside the USA is in Australia, and activists are increasingly using it as a form of protest. Proceedings are commenced against companies based on inaccurate statements regarding climate change in their statutory reports or to object against exploitation of fossil fuel reserves.

On what grounds can directors and companies be held liable

Pursuant to section 180 of the Corporations Act, a director must exercise its powers and discharge its duties with care and diligence. To discharge these duties, a director should obtain knowledge about climate change, identify and manage climate risks, implement business strategies to survive climate impacts, and ensure disclosures in the company’s financial statements are accurate.

According to section 181 of the Corporations Act, a director must exercise its powers and discharge its duties in good faith in the company’s best interests and for a proper purpose. Directors will compromise the future interests of a company if they fail to take climate change risks into account. In June 2006, the Australian Parliamentary Joint Committee on Corporations and Financial Services said that acting socially and environmentally responsible would benefit a company in the long run.

Under the Corporations Act, both a company and its directors must ensure that its financial report gives a true and fair view of its financial position and performance. The directors’ report must provide details of significant impacts on the company’s operations in future financial years and whether its operations are subject to notable Federal or State environmental regulation.

Under s.344 of the Corporations Act, a director must take all reasonable steps to comply with or secure compliance with the company and its obligations regarding the financial report and the directors’ report.

ASIC requires a company’s operating financial review to include a discussion of climate risks if it could materially affect the achievement of its performance.

Pursuant to s. 1317E of the Corporations Act, s.180, 181, and 344 are civil penalty provisions. Under s. 1317H of the Corporations Act, a court can order a director to compensate the corporation for damages suffered due to a contravention of a civil penalty provision. According to s.1041H(1) of the Corporations Act and s.18 of the Australian Consumer Law, directors can be held liable for false and misleading statements in a company’s financial statements. A claim can further be commenced against a director for a breach of its common law or equitable duties to exercise reasonable care and diligence.

Lately, climate activists’ dominant litigation strategy is based on human rights. Successful claims have been brought against governments and companies on the basis that their efforts to reign in or combat climate change violate the right of life.

Cases concerning climate change

In Sharma v Minister for the Environment [2021] FCA 560, eight Australian children commenced proceedings against the Minister for the Environment and Vickery Coal Pty Ltd concerning an application to extend a coal mine. The court found that the Minister has a duty to take reasonable care not to cause harm when deciding whether to approve the extension. The court accepted that releasing additional carbon into the atmosphere would contribute to climate change and cause foreseeable harm to the children.

In Abrahams v CBA and Mark McVeigh v Retail Employees Superannuation Pty Ltd shareholders commenced proceedings against a bank and a superannuation fund, respectively alleging that they failed to disclose climate change risks pursuant to the Corporations Act in their financial statements. Both cases did not proceed after the bank and the superannuation fund agreed to amend their financial statements to disclose climate change risks.

In Friends of the Earth v Royal Dutch Shell the Hague Court in the Netherlands ordered Shell to reduce its scope 1,2 and 3 emissions by 45% by 2030 on the grounds that its insufficient steps to address climate change violated the human rights of life and private family life.

In 2020 Youth Verdict commenced proceedings against Waratah Coal Pty Ltd alleging that its planned coal project would contribute to climate change and adversely impact the right to life, culture, and children’s protection enshrined by the Human Rights Act 2019 (Qld). The case is still to be decided.

In August 2021, the ACCR initiated proceedings against Santos Ltd alleging its financial statements are misleading and deceptive because it states that the natural gas Santos produces is a clean fuel and that it has a credible plan to achieve net-zero emissions by 2040. The case has not yet been decided but indicates the claims that may be brought against companies.

What can be done

Several organisations have published reports providing guidance to directors and companies on how to comply with their fiduciary and disclosure duties.

In 2019 and 2021, the Centre for Policy Development published opinions by Noel Hutley SC and Sebastian Hartford Davis that give advice to directors on how to comply with their obligations relating to climate change.

Acting on a request of the G20 Finance Ministers and Central Bank Governors, the Financial Stability Board created the Task Force on Climate-related Financial Disclosures (“TCFD”), which published recommendations on how companies should report concerning climate change risks and opportunities. Both ASIC, the ASX and the Australian Prudential Regulation Authority recommend that companies follow the TCFD recommendations.

In April 2019, the Australian Accounting Standards Board published information concerning climate-related and other emerging risks disclosures in a company’s financial statements.

Given the gravity of the effects of climate change, companies and directors cannot afford not to consider and deal with these issues. In a lecture to the Anglo Australian Law Society in 2019, Lord Sales of the UK Supreme Court suggested that companies should appoint a designated board member dealing with climate change.

If you need any further information or guidance, please contact us.

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