Authors
Will Heath,
Daisy Mallett, and Emma Newnham work at the international law
firm King & Wood Mallesons.
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At its annual general meeting in May, Rio Tinto’s board supported two shareholder-requisitioned climate change-related resolutions, in an Australian first. Each resolution passed with 99 per cent support.
Other major ASX-listed entities have also committed to putting their climate reporting to a non-binding vote at their 2022 AGMs.
Driving this momentum are initiatives like the Say on Climate campaign. It seeks to compel listed companies to adopt climate targets, transition plans and rolling status reporting through AGM agitation.
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Rio Tinto chairman Simon Thompson: listed companies and their
boards face a hard task in engaging with climate activists and
managing shareholder expectations. Trevor Collens
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In this context, listed companies and their boards face unenviable jobs in engaging with those activists and managing shareholder and community expectations.
At King & Wood Mallesons, we’re telling our clients and their boards to keep in mind two key considerations: first, work out what you are going to disclose in relation to climate targets and transition plans; and, second, understand the risks of disclosure.
Who says what?
Climate change disclosure is a particularly complex and rapidly evolving area. There are a range of voluntary reporting frameworks and standards.
Certain regulators publicly support the framework developed by the Task Force on Climate-related Financial Disclosures (TCFD). However, none of the frameworks or standards have been definitively adopted by governments or regulators in Australia, leaving listed companies and boards to navigate the thicket.
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At the Rio Tinto AGM in Perth in May, shareholders requisitioned
two climate change-related resolutions that passed with 99 per cent
support. Trevor Collens
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Grappling with various voluntary benchmarks against which to make disclosure is only part of the problem. Other issues for listed companies include how to undertake scenario analysis and how individual scenarios should be applied in particular industries, locations and circumstances.
More work is needed to simplify and conform the reporting frameworks and standards to reduce the reporting burden for listed companies and increase the consistency of climate-related disclosures.
The International Financial Reporting Standards Foundation recently announced plans to establish an International Sustainability Standards Board. This complements the publication of a prototype climate-related financial disclosure standard by a group of standard setters, including the GRI, CDP and International Integrated Reporting Council.
More disclosure for directors As listed companies and boards move to report voluntarily on climate change targets, they expose themselves to a real threat of litigation.
It is no secret that Australia’s securities and disclosure laws impose liability without regard to fault. Liability can be imposed for honest, inadvertent mistakes in ASX releases. Moreover, liability for directors is unnecessarily and anomalously duplicated so that directors can be held liable for breaching their statutory duty of care, despite being found innocent of disclosure breaches.
In this context, it is no surprise that two barristers recently published an opinion confirming that, in their view, companies and boards who make disclosure on climate targets face potential liability for misleading and deceptive conduct (and other breaches of law) if they do not have reasonable grounds to support the express and implied representations contained in disclosures on climate change commitments.
This risk of litigation is no longer a matter of opinion.
We have been reporting on climate change litigation in Australia, which is now seen as the second most active jurisdiction for such litigation after the United States. While this may be a badge of pride for plaintiff lawyers, it should ring alarm bells for listed companies and boards.
To date, most climate litigation in Australia has been commenced by groups wanting to bring about behavioural change rather than to extract damages. However, lawsuits in the United States illustrate that claims for compensation are in the climate activist’s playbook.
Finally, when it comes to directors’ duties, Australian law outdoes the United States. The courts of Delaware – where many major US-listed companies are incorporated – recognise a business judgment rule that essentially protects directors who act rationally and in good faith in the company’s interests.
In contrast, Australian law and courts do not appear to defer to directors’ commercial judgments in relation to compliance risk management and disclosures. In particular, recent Australian court decisions have held that company directors cannot rely on the business judgment rule defence in relation to ASX disclosures and other compliance matters.
Until there is a rebalancing of disclosure and governance rules and reform on litigation funding, we think litigation on climate-related disclosures will continue to heat up.
Links
- (AU) Top Judge Urges Lawyers To Take Stand On Climate Change
- (AU) Companies, Directors, Governments Face Wave Of Climate Change Lawfare
- (AU) 2020 Climate Year in Review: Legal Insights
- Boards brace for ‘say on climate’ resolutions
- (AU Business Insider) APRA Has Doubled Down On Its Climate Warnings, Urging The Business Community To Take Stock Of The 'Unprecented' Risks
- A changing landscape: Climate change risk disclosures and governance of the ASX50 in 2020
- The Centre For Policy Development: “Climate Change and Directors’ Duties” (pdf)
- 3 Ways CEOs Can Tackle Climate Change And Build A Net-Zero Economy
- Surge In Court Cases Over Climate Change Shows Increasing Role Of Litigation In Addressing The Climate Crisis
- (AU) Corporate Watchdog Puts Climate Change Warnings Into Action
- (AU) Why Climate Change Is Keeping Directors Awake
- AU) Corporate Climate Risk Disclosures Must Show More: IGCC
- (AU) 'Breakthrough Moment': Woodside Investors Revolt On Climate Change
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