Claim against Commonwealth Government highlights climate-related corporate governance risks

A class action has launched in the Australian Federal Court suing the Government for failing to disclose climate-related risks when issuing Treasury bonds.  This will (and should) cause ripples in the wider business community.  The claim is evidence of a growing movement where investors and consumers are demanding more accountability from companies on climate change.  In the post-Hayne Royal Commission environment, directors and boards should seriously consider climate-related risks and whether disclosures need to be made, or if actions must be taken in accordance with applicable guidance and frameworks. This article also considers how companies can manage the variety of climate-related risks.

O'Donnell vs Commonwealth of Australia & Ors

On 23 July 2020, Kathleen O’Donnell, a student and investor in Australian government sovereign bonds, filed a class action in the Federal Court of Australia against the Commonwealth of Australia, the Secretary of the Department of the Treasury and the CEO of the Australian Office of Financial Management, alleging that the government breached its duties when issuing the bonds.

The claim adds to the increasingly large body of principles and recommendations, regulations and lawsuits relating to climate change risks.

The claim also raises broader questions relating to corporate governance. Regardless of what sector a business operates in, directors and decision-makers must question more than the legality of their decisions and must align with their communities’ expectations.

Lord Sale of the UK Supreme Court has perhaps put it best, when he observed that the “direction of travel” in both the UK and Australia is clear in that “environmental considerations may and, increasingly, must be taken into account by directors”.

Claims made by O’Donnell

The claim has been brought by O’Donnell on behalf of holders of the bonds. She alleges that the government should have detailed the risks that climate change poses to Australia’s economy in the investor information statements and information memoranda published when the bonds were issued, as this could affect the value of the issued bonds and make it difficult for Australia to repay its debt.

O’Donnell has put forward two key arguments:

1. the government breached its duties under the s 12DA(1) of the Australian Securities and Investments Commission Act 2001 by engaging in conduct that is misleading or deceptive in respect of its duties of disclosure as a promoter of the Bonds by failing to disclose any information about Australia’s climate change risks; and
2. as a result of those breaches, the respondents breached their duty under s.25(1) of the Public Governance, Performance and Accountability Act 2013, which required them to exercise their powers, perform their functions, and discharge their duties, with reasonable care and diligence.

If successful, the case could establish a precedent that the government has a duty to disclose how climate change could impact on Australia’s economic future, and that such disclosures must be sufficiently accurate and complete so as not to be misleading or deceptive.

Judicial commentary will be important for both public sector directors regarding their duty to consider climate risk in the performance of their duties, and for private sector directors, who will compare it to their directors’ duties.

Relevance to private sector

O'Donnell vs Commonwealth of Australia & Ors is the first time such a claim has been brought against a sovereign nation, but the case builds on an emerging trend of climate litigation globally.

The Grantham Institute of Research on Climate Change and the Environment says 1,587 climate litigation cases have been brought worldwide since 1986, as “a way of either advancing or delaying effective action on climate change”.

O’Donnell’s claim is made against the backdrop of the 2016 opinion on company directors’ duty and climate change by the head of Australia’s Bar Association, Noel Hutley SC, and Sebastian Hartford-Davis. This opinion said company directors should consider all relevant climate change risks and take any necessary actions accordingly – or risk being held liable for breaching their legal duty of care and diligence.

The 2019 supplementary opinion found an elevated need for directors to consider climate risks and opportunities. It reinforced the urgency of improved board-level governance of this issue, and highlighted increased litigation risks.

This particular risk is highlighted by O’Donnell’s claim, and other recent climate-related cases. In the ongoing Federal Court of Australia case McVeigh v Retail Employees Superannuation Trust (NSD1333/2018), the plaintiff is claiming that superannuation trustees must disclose climate-related risks under both the Corporations Act 2001 and the Superannuation Industry (Supervision) Act 1993.

Another (albeit discontinued) claim, brought by Guy and Kim Abrahams against the Commonwealth Bank of Australia in 2017,[1] asserted that the bank was aware that climate change posed a major risk to its business, but failed to adequately disclose the extent of these risks in its 2016 annual report, in contravention of relevant provisions of the Corporations Act.

Australian regulators and the Australian stock exchange have taken a much more active role than they previously have in tackling climate change. In February 2019, the ASX Corporate Governance Council released its fourth edition of Principles and Recommendations, with a revised recommendation 7.4 concerning “material exposure to environmental or social risks”.

Under the Principles and Recommendations, listed entities must disclose whether they have any material exposure to environmental or social risks, and, if they do, how they manage or intend to manage those risks.

Further, APRA has undertaken the first climate risk survey of banks, insurers and superannuation trustees, and says that it will embed the assessment of climate risk into its ongoing supervisory activities.

ASIC has recently published updates to clarify its expectations of its existing regulatory guidance to the disclosure of climate change-related risks and opportunities (e.g. RG 247 and RG 228). There has been commentary that proper action on climate change risks must be taken for directors to prove they’re meeting standards of due care and diligence.

A number of listed companies, both in Australia and internationally, have adopted or intend to adopt the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). ASIC itself included the language of the TCFD recommendations in its updated RG 247 and RG 228.

The TCFD recommendations report was published in 2017, and updated in August 2019, to provide context, background and the general framework for climate-related financial disclosures. Two accompanying supporting materials, an annex and technical supplement, were also published to provide further detail in order to help companies implement the recommendations of the report.

The point of the TCFD framework is to encourage companies to not just produce a report on climate risk, but to develop and implement good internal (i.e. how climate risks are incorporated into the company’s strategy process) and external (i.e. how the company communicates these risks to stakeholders) processes.

Managing risk

In the post-Hayne Royal Commission environment, good corporate governance dictates that companies must consider not only whether their decisions are legal, but also if they are right. The difficulty for boards and executives is understanding what those community expectations are and how expectations will evolve. O’Donnell’s claim, the ongoing McVeigh case, and the ASIC, APRA and ASX publications and the TCFD report all show that community expectations in relation to corporate climate risks are changing. Further, the TCFD framework indicates that disclosure is not an end in itself, it is an output of consideration of climate change risks and opportunities in corporate governance, strategy, risk management and metrics.

Investors, consumers and the public are demanding more accountability from decision-makers on climate change. So decision-makers, in both the private and public sector, should seriously consider climate risks and whether disclosures need to be made, or if actions must be taken.

How can companies manage the variety of climate-related risks?

• Carry out a risk assessment to ensure that you understand how climate change might impact your business and develop a framework that will respond to and minimise the risks that you identify.

• Adopt a zero tolerance for unmanaged conduct risk policy, where staff are positively encouraged to be alert and respond to risks, rather than zero tolerance for conduct risk.

• When it comes to initiatives, emphasise openness, transparency, accessibility and safety, and reward efforts such as identifying and resolving policy deficiencies, rather than solely punishing breaches as they happen.

• Consider what disclosures should be made in disclosure documents and consider the materiality threshold that should apply.

• Review and update information-gathering and verification procedures so businesses can react to new climate-related risks, regulatory updates and evolving community attitudes.

The above actions should all be assessed and implemented in accordance with the TCFD framework. For example, by ensuring that specific climate change disclosures are included in prospectus and OFRs (external process) but as an output of a proper, business-wide effort and not just a generic formulation (internal process).