20/12/2021

(AU AFR) Government Denies It Has Climate Disclosure Obligations For Bonds

AFR - Hannah Wootton

The government says it is not obliged to disclose climate change risk to sovereign bondholders, despite imposing similar duties on private companies and admitting that the national coffers could be tapped to support industries and communities hurt by rising temperatures.

In its defence in a landmark case alleging it misled or deceived sovereign bonds investors, the Australian Government Solicitor rejects the idea that climate risk should be disclosed to bondholders in the same way climate risk is disclosed to investors in privately owned financial products.

In the case, 24-year-old student and bondholder Katta O’Donnell is pushing for the Commonwealth to declare climate change risk associated with bonds, and for a ban on the promotion and sale of bonds until such a declaration is made.

The Commonwealth is fighting Katta O’Donnell’s claim that it is obliged to disclose climate risk to sovereign bonds. Josh Robenstone

It comes as regulatory and public pressure on companies and superannuation funds over climate disclosure and net zero commitments ramps up, and after the Australian Office of Financial Management (AOFM), which administers the sovereign bonds, conceded that ratings houses will likely force greater climate disclosure by the state.

The case is one of several cases in Australian courts in which applicants are trying to improve the conduct of those they are suing in regard to carbon emissions before the alleged harm occurs.

But the defence says the government does not treat sovereign bonds the same way corporations do corporate bonds, so it does not owe its bondholders the same disclosure obligations.

“The AOFM’s purpose is to manage [the Commonwealth’s] debt financing and cash needs, and support the domestic lending market,” the defence, which was filed on Friday, said.

The defence points out that the Commonwealth does not pay dividends, hold assets or make a profit.

Instead, the bonds exist “to facilitate the development of a deep and liquid corporate bond market” that is “in the interests of the community”.

The defence claims this means the disclosure obligations imposed by the Corporations Act do not apply to the government, and it therefore does not need to disclose risks in the information statements regarding bonds.

This was despite an admission in the defence that the information statements may reasonably be expected to have “a material interest on decisions by potential investors” to buy or sell bonds.

The defence also denies that any of the physical or transition risks posed by climate change would damage the Commonwealth’s “status and reputation as a reliable and safe issuer of sovereign debt securities”.

It denies its AAA status as a debt issuer was under threat, just months after Treasurer Josh Frydenberg admitted financial markets and lenders may sanction Australia if it does not move faster on cutting emissions.

It also makes the claim despite conceding that extreme weather will likely cause “significant” costs to the Commonwealth before Ms O’Donnell’s bonds mature, as would the need to help industries hurt by climate change.

The defence admits that the longer it takes to begin to implement net zero measures, the greater the cost of both doing so and countering any economic damage from the move will be. The government’s net zero plan has been widely criticised for its long timelines for energy transition.

The Commonwealth has already failed in an attempt to get Ms O’Donnell’s case thrown out, with the Federal Court last month slamming the attempt as “exaggerated” and having “little force”.

It was successful in having cases against the heads of both the Treasury and the AOFM dropped, however, with only the claims against the government remaining.

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