Embracing the climate change challenge: directors’ obligations

Recently, there has been far greater scrutiny of the role that company directors play in managing climate change risks. In the wake of the Australian Prudential Regulation Authority (APRA) public warning to Australian financial institutions about the risks of climate change, and the Paris Agreement coming into force, the risks to business from not considering climate change are starting to crystallise. In particular, there is an increasing awareness of the potential legal culpability (under Corporations Act 2001 (Cth)) of company directors who fail to consider climate change risks.

Directors duties – What could directors be liable for?

Under the Corporation Act 2001 (Cth), a director owes a duty of care and diligence to the company. The duty of care and diligence requires a director to consider, adapt and mitigate “foreseeable risks”. A risk is foreseeable if it is not far-fetched or fanciful. Accordingly, directors of companies may be held liable where the company suffers a loss as a result of foreseeable climate change risk.

This is supported by a recent legal opinion on this point titled, “Climate Change and Directors’ Duties” (the Opinion), commissioned by Centre for Policy Development in partnership with the Future Business Council. The Opinion concluded that:

  • directors can and should consider and, where appropriate, take action in relation to climate change risks;
  • directors who fail to actively engage with climate change risks could be legally exposed for a breach of their duty, particularly in relation to a foreseeable climate change risk that caused harm or loss to the company;
  • an individual director’s view on climate change is unlikely to provide a defence. Rather, the Court would likely consider whether a director should have known of the danger the risk presented;
  • in determining whether the duty of care and diligence has been breached, the Court would balance the foreseeable risk of harm to the company with the action (or inaction) of the director. This would involve consideration of factors such as the magnitude of the climate change risks, the probability of its occurrence, the inconvenience to the company of taking action, and any conflicting responsibilities which a director may have; and
  • directors that are proactive with respect to climate change risks may be able to rely on the protection provided by a director under the ‘business judgment rule’ in the event of a claim for breach of duty.

Has there been any litigation to date?

While there has not yet been any litigation of this kind in Australia, there is potential scope for such litigation within the existing framework of directors’ duties under Australian law. The likely sources of such legal proceedings are:

  • the regulator (Australian Securities and Investments Commission);
  • liquidators; or
  • shareholders by way of statutory derivative actions (potentially public interest groups such as environmental groups).

Practical steps for directors

At this stage, directors need not take any immediate or drastic action, and any action should be considered in the context of the company’s specific situation and potential risk. As a starting point, directors would be wise to:

  • consider the possible impacts of climate change risks on the business – this may require directors commissioning an expert report or obtaining expert advice;
  • analyse climate change risks in the same manner as financial and operational risks;
  • identify potential strategies for managing climate change risks; and
  • consider the adequacy of disclosure of these risks under the company’s current reporting framework.

Undertaking such steps may provide protection to a director under the business judgment rule (section 180(2) of the Corporation Act 2001) in the event of a claim for breach of duty.

Conclusion

Potential climate change risk is one of a plethora of factors a director should have regard to when discharging their duty of care and diligence owed to the company. Where appropriate, these risks may need to be factored into business strategies but this will depend on a company’s specific situation and potential risk.

If you’re interested in detailed advice or if you have any other queries about this article, please contact:

Catherine Scott
Partner
M: 0438 283 129
E: cscott@pageseager.com.au

Sarah Wilson
Lawyer
M: 0428 102 712
E: swilson@pageseager.com.au

Declan Clifford
Lawyer
T: (03) 6235 5913
E: dclifford@pageseager.com.au

Published: 16 June 2017

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