06/05/2017

Companies Must Take Climate Change Litigation Risk Seriously

The Australian - Jason Betts* | Peter Briggs*

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.

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