Directors' duty to consider and respond to climate change risks – a perfect storm brewing? Directors' duty to consider and respond to climate change risks – a perfect storm brewing?

Directors' duty to consider and respond to climate change risks – a perfect storm brewing?

9 March 2018 | Professional Indemnity & Financial Lines

Climate change risks are at the forefront of recent commentary regarding key risks for private and public companies. Climate related risks and the rising bar for directors in recognising foreseeable risks were considered by Graeme Howatson in his January 2018 article Directors’ duty to consider and respond to climate change risks in Wolters Kluwer, CCH’s Australian Commercial Law Tracker.

Howatson considers the October 2016 legal opinion released by the Centre for Policy Development (CPD) on climate risk and directors’ duties. The author of that opinion, eminent Sydney silk Noel Hutley SC, opines that “it is likely to be only a matter of time before we see litigation against a director who has failed to perceive, disclose or take steps in relation to a foreseeable climate –related risk that can be demonstrated to have caused harm to a company” (p22).  

The key findings of the opinion include:

  • Climate change risks would be regarded as foreseeable by courts, and relevant to a director’s duty of care and diligence, to the extent that those risks intersect with the interests of the company (for example, by presenting corporate opportunity or risks to the company or its business model).
  • Company directors are not legally restricted from taking into account climate change and related economic, environmental and social sustainability risks, where those risks are, or may be, material to the interests of the company.
  • Company directors certainly can, and in some cases should be, considering the impact on their business of climate change risks – directors who fail to do so now could be found liable for breaching their duty of care and diligence in the future.

The Australian Prudential Regulation Authority (APRA) and the Australian Institute of Company Directors (AICD) have also released recent articles which suggest that climate related risks for companies are no longer future concerns but rather “foreseeable, material and actionable now”. Further, directors who fail to consider the impact of foreseeable climate change risks on their companies may be held personally liable for breach of due care and diligence under s180(1) of the Corporations Act 2001. 

All of these developments lead to the inevitable conclusion that Australian directors need to be aware of the impact of climate change risks on their companies. A failure to do so may expose them to a risk of personal liability for breaching the duty of due care and diligence they owe to their companies and shareholders. This risk was recently demonstrated by Federal Court proceedings brought by two shareholders of the Commonwealth Bank, who asserted a failure by the bank to adequately disclose climate change risks to financial performance in its annual reports. Whilst the proceedings were not pursued, it is clear that climate-related risks and the potential liability of directors who fail to recognise those risks will become increasingly relevant to D&O and management liability policies. A perfect storm may well be brewing.

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Georgia Hancy

Georgia Hancy

Senior Associate