Australia’s fall from grace as a global leader in the fight against dangerous climate change was rapid and inglorious.
But any Australian business leaders who think they got away with sticking their heads in the sand should think again.
New legal advice by senior Sydney silk Noel Hutley being released on Monday, suggests it is almost certain that directors of an Australian company will one day face legal action for neglecting to properly account for the potential impact of climate change on their business.
“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 (including, perhaps, reputational harm),” the advice, commissioned by the Centre for Policy Development and the Future Business Council, titled “Climate Change and Directors Duties” concludes.
Politicians who fail in their endeavours to combat climate change can simply retire on a taxpayer-funded scheme.
For company directors who fail in their duties, the penalties are much more severe, including fines of up to $200,000 and disqualification from holding directorships.
Under the Corporations Act, directors have a duty to apply care and diligence in considering all the risks that might apply to their company.
They are required to take into account all “foreseeable” risks.
Given the weight of scientific evidence of climate change, Hutley’s advice is that it will not be sufficient for company directors to argue they could not reasonably have believed that climate change was real or human induced.
In considering the risks posed by climate change, directors are not required to become green-caped climate change crusaders.
But many are failing in their most basic duty to consider and disclose the potential risks or to form a business case about whether action is needed to protect their company.
There are two classes of risk posed to Australian companies by climate change.
First, there is physical risk. Rising sea levels, for example, make writing mortgages on coastal properties a riskier business for banks. Rising incidence of severe weather events makes writing insurance products riskier. In a more recent example, power outages resulting from severe weather may affect power supply to all sorts of businesses. Companies that fail to take into account these risks will suffer lower profits.
But the risks are even greater than that.
There is also “transition risk” that must be taken into account. As the world inevitably moves to a lower emissions footprint, governments are likely to make sudden rule changes that will adversely affect firms. Consumers will also dictate the pace of change. It depends what question you ask them, but citizens are demonstrating a greater preference for more sustainable “green” products.
If this means less demand for emissions-intense products, company directors who fail to take account of this would be failing in their duty to protect their company into the future.
Diligent directors can still make a “business judgment” that their company is still best served by continuing with potentially risky activities. But they must at least consider it.
Many people are rightly disappointed by the inadequacy of the Australian government’s current policies to reduce emissions.
But regardless of what actions policymakers take, this new legal perspective leaves some hope.
Rather than a top-down approach by government, company directors facing legal action if they fail to plan for the risks of climate change should help drive bottom-up reforms to Australian business that will assist in the transition to a lower emissions economy.
If they don’t, they will be sued. Already actions are being brought against US firms, such as Peabody Coal, for failing to take into account the risks of climate change to business as usual.
Company directors looking to avoid a similar fate need to act now.
“To consider climate change risks actively, and disclose them properly, will reduce exposure to liability, and maximise the potential for activating the ‘business judgment’ rule,” the legal advice states.
The penalties for a breach of fiduciary duties are listed in the Corporations Act and include a maximum penalty for individuals of $200,000, potential disqualification from being a director and payment of compensation to a corporation for damage suffered.
Mark Joiner was the chief financial officer of NAB when it was subject to several class actions. He is now a director on a number of boards and agrees it’s only a matter of time before an Australian firm is sued for failing to take climate change into account.
“Australia hasn’t found a way to advance the progressive values of business. You have got to realise that social values are changing all the time.”
It is no longer good enough for companies to make money and spend some of it on progressive issues, like charities. Companies today must earn their “social licence” by finding a purpose that fits with societal values.
The Paris Agreement will enter force on November 4. Current policies are inadequate to achieve even the modest emissions reduction target pledged under the Paris agreement.
Bank of England governor Mark Carney has warned this presents serious “transition risk” for companies as it brings forward the need for action to meet targets.
Australian companies are highly exposed to climate change risk.
It’s time Australian company directors realised they are too.
Press link for more: Jessica Irvine smh.com.au