Climate change litigation is set to emerge as a significant risk for corporations across all sectors of the Australian economy.
This
is because of the fact that momentum is gathering for regulatory
investigations and shareholder class actions against companies that
fail to properly disclose the transition costs of moving to a lower
carbon economy.
The attraction of these
claims to regulators and litigation funders is that they won’t face the
traditional obstacle of “proving the science” of climate change.
They
can also be brought under existing disclosure laws that are used to
support the majority of regulatory investigations and shareholder class
actions in respect of disclosure practices.
It
is often overlooked that Australia has a history of climate change
litigation — but almost always in the form of environmental impact
assessment cases involving federal and state planning laws.
These
cases have challenged decisions to permit major construction projects
on the ground that there was a failure to properly assess the
environmental and climate change impact of the projects, such as
projected sea-level rises or coastal erosion.
This
species of climate change litigation is limited in its effectiveness —
the claims generally rely on administrative law, meaning courts cannot
reassess the environmental impact of the underlying project or impose
environmental sanctions. The main remedy is forcing the decision-maker
to reconsider the approval decision, this time having more detailed
regard to climate change issues.
That
is a slow, case-by-case process that has not really engaged with the
broader national and global debate over climate change impacts and
remediation.
Similarly, while “mass
tort” claims are possible, they generally also face major obstacles —
not everyone has standing to sue in tort, and even when they can,
establishing causation — the link between a particular defendant’s
conduct and an impact on the environment — requires difficult scientific
evidence.
The cases are fraught with
uncertainty and expense. None of these avenues is attractive to
promoters of class action litigation, nor do they raise issues within
the ambit of the Australian Securities & Investments Commission or
other financial regulators.
That may be
about to change. Regulators around the world (including ASIC) are
increasingly recognising the financial impact of the “transition risks”
of climate change.
What are these
transition risks? Examples include the increased frequency of extreme
weather events creating a greater risk that a business will lose access
to key inputs such as water and sewerage; or the increased risk of
power outages creating greater costs for companies that depend
significantly on energy transmission.
A
further risk arises from the likelihood of changes to environmental or
emission regulations that could cause fossil fuels to be repriced as
part of a move to a lower carbon norm, meaning the balance sheet value
of proven deposits in the extractive industry become unrealisable at
historical values.
This risk of
“stranded assets” is particularly topical, given Australia’s commitment
to the Paris Agreement and the impact that policies that limit global
warming will have on fuel reserves currently sitting in Australian
corporate balance sheets. All of these risks could be material to an
Australian company’s financial position and could affect the costs and
profitability of its core business.
Material
risks are required to be disclosed under a variety of Australian laws;
the ASX listing rules require the immediate disclosure of material risks
and the ASX has recently expanded its guidance to specifically include
the disclosure of “environmental and social sustainability risks”.
Most
shareholder class actions filed in Australia to date (especially those
supported by litigation funders) have involved allegations that a listed
entity failed to disclose its exposure to a material risk in a timely
fashion.
Often this information has
involved traditional business risks affecting profit and earnings
forecasts, but precisely the same principles could be applied to
companies that do not consider or disclose the impact of the transition
risks associated with climate change.
If
those risks ultimately do affect the company’s operations, it is easy
to envisage ASIC or a class action promoter initiating an investigation
into when it knew about the risk to its business and whether the risk
should have been disclosed earlier.
We
are seeing exactly that trend emerge in Britain and the US, with the
regulators in both jurisdictions initiating investigations in the past
24 months into listed entities regarding the adequacy of disclosure of
business risk from climate change in annual reports.
They
are looking at whether the balance sheet value of proven resource
reserves have been materially overstated in view of likely future
emission restrictions.
The focus of foreign regulators is often predictive of local trends — both regulatory and of the class action litigation risk.
The
result is a heightened need for all Australian companies to examine
closely their exposure to the transition risks associated with climate
change and the move to a lower carbon economy and to ensure that all
foreseeable risks are assessed and disclosed where necessary.
*Jason
Betts and *Peter Briggs are partners at Herbert Smith Freehills. This
article was prepared with assistance from London partner Silke Goldberg.
Links
- Class actions set to get bigger, become a greater risk for business and cover new ground in 2017, Herbert Smith Freehills predicts
- Increasing regulatory expectations heightens risk of cross border scrutiny
- Australian Labor Party Climate Change Action Plan
- 2017 review of Australian climate change policies
- Update on Australian Government's Direct Action climate change program: The Safeguard Mechanism
- Government's Innovation Statement puts renewables back on the Agenda
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