Directors face greater exposure to liability for climate change risks

Directors face greater exposure to liability for climate change risks

The standard of care required of company directors with regard to climate change “has risen and continues to rise”, according to a new legal opinion.

The standard of care required of company directors with regard to climate change “has risen and continues to rise”, according to a new and public legal opinion. The latest development in increasing exposure of Australian company boards to regulatory scrutiny and potential liability for climate change disclosure concerns the problem of “greenwashing”.

As essential background information, two members of the NSW Bar, Noel Hutley SC and Sebastian Hartford Davis, produced in April 2021 their latest and third landmark legal opinion on boardroom responsibility for climate change matters under the law. Their latest joint opinion reinforces and builds upon their earlier commissioned opinions published in 2016 and 2019. All three opinions demonstrate the importance of corporate Australia proactively identifying, managing, and disclosing climate change risks.

Their latest opinion finds that directors can be liable for “misleading or deceptive conduct” for so-called “greenwashing”; the practice of making environmental or climate related-statements and disclosures, such as “net zero” commitments, without a reasonable evidentiary basis.

According to the 2016 opinion, company directors who fail to consider climate risks can be found liable for breaching their duty of care and diligence. The 2019 opinion observed that the risk of liability for directors on this front was “increasing, probably exponentially, with time”. The latest opinion observes that several coordinated developments led by Australian financial regulators, investors and industry bodies are driving the standard of care expected of directors to new heights.

Noting the growth in net zero commitments in Australia and internationally, the opinion emphasises that companies making such commitments require “reasonable grounds” to support the express and implied representations contained within their commitments. Without reasonable grounds, the authors observe that “a company (and its directors) could be found to have engaged in misleading or deceptive conduct”.

The opinion makes clear, however, that these risks “do not mean it is safer for directors to avoid making net zero commitments”. Instead, directors “need to consider in a robust way whether such a commitment is in the best interests of the company”, with the risks of inaction being “profound”. The opinion concludes by providing legal practitioners with practical steps to help to reduce the likelihood that a company, or its directors, will face an allegation of misleading or deceptive conduct as a result of making a net zero commitment.

The opinion comes as a result of a 2020 roundtable held by the Centre for Policy Development, which has been the commissioning client for all three published legal opinions, with MinterEllison as instructing solicitors. The roundtable was moderated by Centre for Policy Development CEO Travers McLeod and led by Noel Hutley SC, Sebastian Hartford Davis, Martijn Wilder (Pollination Group), and Sarah Barker (MinterEllison). Keynote participants included directors from major companies and banks, together with leaders from the Business Council of Australia, the Australian Chamber of Commerce and Industry, and the Australian Institute of Company Directors.

Other industry and legal experts were also present, including Professor Bryan Horrigan, Executive Dean, Faculty of Law, Monash University, and recent Monash University graduate Nicholas Young (LLB(Hons)/BA 2021), who also provided research assistance for the latest legal opinion, receiving a public acknowledgement for his assistance in the opinion too. Now a Monash University alumnus, Nicholas Young was also recently awarded an Australia-at-Large Rhodes Scholarship. In September 2021, he will commence an MSc in Law and Finance at the University of Oxford and further investigate the intersection between climate risk, law, and enterprise.

“The landmark 2016 and 2019 legal opinions by Noel Hutley SC and Sebastian Hartford Davis on the legal responsibilities of Australian company directors in managing and disclosing climate change risks have already contributed significantly to mass awareness-raising and acceptance of the legal position in the corporate, financial, and regulatory communities,” says Professor Horrigan.

“It is beyond question that managing climate change risks is a key boardroom responsibility, that directors who address climate change properly have the law’s protection, that directors who fail to do so risk legal liability, and that both regulatory expectations and the standard of care expected of directors on climate change matters are rising.”

Horrigan says the business and industry representatives present at the roundtable identified a range of issues that required further legal guidance. He says Hutley’s and Hartford Davis’s latest opinion addresses such issues, providing clear guidance to company directors.

“This third legal opinion provides crucial legal insight and practical suggestions on how company directors can lawfully make commitments and disclosures about net zero emissions without falling prey to liability for ‘greenwashing’,” says Horrigan.

“Together, these three legal opinions are the touchstone for subsequent legal, business, and regulatory discussion, standard-setting, and practical action on climate change.”

The latest legal opinion is part of a series of recent and significant developments in the jurisprudence and governance of climate risks, with five other landmark developments occurring closely together in May and June 2021. On 27 May 2021, The Federal Court of Australia, in its judgment in Sharma by her litigation representative Sister Marie Brigid Arthur v Minister for the Environment [2021] FCA 560, found that the Minister for the Environment owes Australian children a duty of care when approving coal mining operations under the Environment Protection and Biodiversity Conservation Act 1999 (Cth). In his judgment - the first in Australia to recognise a ministerial duty of care arising from climate risks - Justice Bromberg described climate change as “the greatest inter-generational injustice ever inflicted by one generation of humans upon the next”.

That landmark Federal Court judgment was delivered only hours after the Hague District Court ordered Royal Dutch Shell to reduce the CO2 emissions of the Shell group by 45% of 2019 levels by 2030 - the first case in which a Court has ordered a corporation to pursue a more ambitious emissions target. Moreover, the 2021 AGMs of ExxonMobil and Chevron have demonstrated that companies considered to be too slow in responding to climate risks are increasingly likely to face director spills and to have their climate change strategies dictated to them by their investors.

The analysis of the latest opinion has also become more salient following the publication of the International Energy Agency’s Net Zero by 2050: A Roadmap for Global Energy report.

In the lead up to COP26 in Glasgow in November 2021, the report is expected to add further momentum to the net zero movement and, in turn, engender greater scrutiny of legal issues associated with greenwashing.

Most recently, and following on from the third and latest legal opinion from Noel Hutley SC and Sebastian Hartford Davis, ASIC Commissioner Cathie Armour signalled in early June 2021 that the Australian Securities and Investments Commission (ASIC) is giving enhanced regulatory oversight to the problem of ‘greenwashing’. This follows earlier advice from Commissioner Armour to corporate Australia about how to approach and manage climate-related risks and disclosures.

Working alongside colleagues in the Monash Sustainable Development Institute and ClimateWorks, the Faculty of Law continues to remain engaged in this developing and globally significant area of law and practice – one of the grand challenges of the age.

Related:

Read the latest opinion - “Climate Change and Directors’ Duties - Further Supplementary Memorandum of Opinion 23 April 2021” https://cpd.org.au/wp-content/uploads/2021/04/Further-Supplementary-Opinion-2021-3.pdf

Michael Roddan, “Directors liable for ‘greenwashing’ disclosures” (Australian Financial Review, 26 April 2021) https://www.afr.com/companies/financial-services/directors-liable-for-greenwashing-disclosures-20210423-p57lse

Anne Hyland, “‘Savage blow’: Coal companies hit back over banks’ flight from fossil fuels” (The Age, 15 May 2021) https://www.theage.com.au/business/companies/savage-blow-coal-companies-hit-back-over-banks-flight-from-fossil-fuels-20210513-p57rjw.html

Richard Gluyas, “ASIC’s ‘Greenwashing’ Crackdown on Dubious ESG Claims” (The Australian, 4 June 2021) https://www.theaustralian.com.au/business/leadership/asics-greenwashing-crackdown-on-dubious-esg-claims/news-story/f6e56b2e793db8af07e4742f3249cdf1

Commissioner Cathie Armour, “Managing Climate Risk for Directors’” (AICD’s Company Director Journal, February 2021) https://asic.gov.au/about-asic/news-centre/articles/managing-climate-risk-for-directors/

Bryan Horrigan, “Directors ignore climate change risks at their own peril” (Australian Financial Review, 4 November 2016) https://www.afr.com/companies/professional-services/directors-ignore-climate-change-risks-at-their-own-peril-20161101-gsf6lv

Bryan Horrigan, “Does corporate performance now include a social licence to operate?” (Australian Institute of Company Directors) https://aicd.companydirectors.com.au/advocacy/governance-leadership-centre/governance-driving-performance/does-corporate-performance-now-include-a-social-licence-to-operate