Boards and management obliged to consider climate change: Norton Rose Fulbright

Board directors and senior management must give proper consideration to the risks of climate change, “with a view to ensuring that these risks are incorporated into strategic decision making, and appropriate consideration is given to the need for disclosure of relevant financial-related risks,” says a report from global law firm Norton Rose Fulbright.

Risks that companies should consider include transitional, reputation and physical. Norton Rose Fulbright pointed to statements by the Australian Securities and Investment Commission (ASIC) last month at a Senate Economics References Committee public hearing for an inquiry into carbon risk disclosure. The report was issued late on Friday of this week.

In ASIC’s oral statement by joint senior executive Kate O’Rourke, ASIC agrees with the view that directors must consider and disclose climate risks to fulfil their duties under the Corporations Act 2001. Specifically, Norton Rose Fulbright noted, O’Rourke referenced section 180 of the Act which requires directors to act with care and diligence. Importantly, section 180(2) provides that directors will fulfil this duty if they inform themselves about the relevant subject matter and believe their judgment is in the best interests of the corporation (known as the “business judgement” rule). O’Rourke also recommended that “further guidance was needed to assist companies to disclose climate risks within the existing reporting framework.”

“I think what ASIC’s done is just confirm the views that have been expressed – particularly in the Hutley opinion – that directors have a duty to consider and disclose climate change risk,” said Elisa de Wit, a partner at Norton Rose Fulbright and head of the Australian climate change practice. “What ASIC also said is that there needed to be further guidance to assist companies disclose climate risks within the existing reporting framework., and the big open question mark is if there are any changes that need to be made to to ASIC regulatory guidance or supporting material.”

The comments made by ASIC come after similar statements by the Australian Prudential Regulation Authority last month. Geoff Summerhayes, executive board member of APRA, said that the prudential regulator will emphasise to regulated entities that they should conduct stress testing for “organisational and systemic resilience in the face of adverse shocks” from climate risk, as part of APRA’s evolving view on climate risks as part of the agency’s “broader approach to prudential risk management and supervision.”

Australia is being impacted by both domestic and international developments that are guiding the legal views of what fiduciary responsibilities company directors have in disclosure climate risks. In his speech, Summerhayes cited the Paris Agreement, a report by the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD). He recommends a global framework for improving a wide spectrum of climate-related disclosures, as well as the legal analysis, Legal Opinion on Climate Change and Directors Duties from the Centre for Policy Development and the Future Business Council. This opinion on company directors’ legal obligations to consider the impacts of climate change is authored by barrister Noel Hutley SC.

De Wit referenced both the TCFD and the Hutley opinion in her analysis of the obligations on corporate directors. The TFCD draft recommendations is a framework aimed at putting climate change risk related reporting at the core of public financial reporting in a way that is both flexible and standardised. De Wit noted that it is not, in her view, necessary to amend the Corporations Act in order to emphasise climate change risk-related reporting, but it may be necessary to adjust ASIC regulatory guidance. De Wit also noted that there are existing recommendations, such as the ASX’s Corporate Governance Council’s Principles and Recommendations, particularly Recommendation 7.4 which says “[a] listed entity should disclose whether it has any material exposure to economic, environmental and social sustainability risks and, if it does, how it manages or intends to manage those risks.”

“There is the existing recommendation 7.4 which talks about how you should assess social and environmental risks, and my view reading that guidance, and certainly this is what Hutley said – climate change risk disclosure is encompassed in terms of what’s there in the guidance. … One of the issues is that climate change is seen as this far off risk, something in the longer term. However, there is a reference to the longer term in the guidance. The other key aspect coming out is this idea that climate change is not just a physical risk – you have to look at the transitional risk and how well that’s being done, and whether that’s encompassed through the existing guidance.

The TCFD’s draft recommendations are currently out for comment, with a final draft due later this year.

“I do think it would make sense [for directors] to wait and see what the taskforce releases b/c it may be that the material is enough to give corporates the guidance they need,” de Wit said. “[For directors], this is still this iterative process. A bit like, ok, we’re being told we’ve got to look at climate risks – what does that even mean? How do we even start to do that assessment?”

Many corporates are still coming to the issues of climate-change related risk from a “standing still start,” de Wit said, which means that they need to assess what their issues are, and perform scenario testing to model potential impacts. The most common planning scenario is the scenario by which government target capping global warming at 2 degrees above pre-industrial levels.

“I’m aware that there are a number of different consultants out there that offer a service for the two-degree planning and the target- based assessment approach,” de Wit said. “We’ll see more of that external support needed to help companies really work through the issue and get to the point where they need to be in the assessment and the consequential disclosure process.”

Rachel Alembakis is the publisher of The Sustainability Report a weekly digital publication that provides reporting into Environmental, Social and Governance (ESG) issues related to companies listed on the Australian Stock Exchange.