Australia’s peak regulators, including the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Australian Securities Exchange (ASX), the Accounting Standards Review Board and the Reserve Bank of Australia, are exerting increasing pressure on private companies to report on climate change risk in accordance with guidelines issued by the Financial Stability Board’s Taskforce on Climate-related Financial Disclosure.
The push for greater disclosure is primarily to facilitate investors’ and other stakeholders’ assessment of the risk profile of companies. It has been embraced by leading private companies, including BlackRock which believes regulators, insurers, and the public need a clearer picture of sustainability risks. In addition, hypothetical failures to disclosure have sounded ominous intonations of liability for breach of directors’ duties by legal experts (and ASIC), class actions and activist investor risk.
In this febrile setting, relatively minimal attention has been paid to the public sector, including councils, agencies and government-owned corporations (GOC). There are several reasons, including the absence of highly motivated private investors to hold them accountable. This state of affairs will not last. Public sector entities are also exposed to climate change risk, including coastal erosion and flooding.
As public sector entities begin to prepare for their annual reporting season at the end of 30 June 2020, they need to engage now with identifying and disclosing climate change risks.
II. The black swan – breach of directors’ duties
In 2016, Barristers Noel Hutley SC and Sebastian Hartford-Davis published an influential opinion (and then restated it in 2019) in which they advocated that many climate change risks would now be regarded by a court as foreseeable. They argued that company directors who failed to consider climate change risks could be found liable for breaching their director’s duty of care and diligence. (There are no cases directly on point yet.) It is a position ASIC publicly agrees with. Care needs to be taken here. After all, what in fact is ‘climate change risk’ when plucked from the aether of public discourse? One useful conceptual framework is to break down climate change risk into one or more of three categories:
Plaintiff law firms are another major risk. Former High Court Chief Justice Robert French has warned of increasing litigation linked to climate change and major litigation funders have long been exploring this area as a source of revenue.
Within this rubric, which is completely agnostic to the question of whether climate change is man-made or otherwise, as a matter of corporate law there is nothing special about climate change risk. It is like any other risk that needs to be recognised and mitigated by company directors, for example liquidity risk. Both the materiality and likelihood of the risk engages the director’s duty of care and diligence. If the climate change risk, falling into whichever of the above three categories it does, is foreseeable then the director must take proportionate steps to counter the risk. They are entitled to the ‘business judgment rule’ in this regard, a safe harbour which deems that the director has acted with care and diligence if they meet certain criteria, including that they rationally believe that the judgment is in the best interests of the company. A court will assess the duty on an objective basis i.e. what decision a hypothetical ‘reasonable’ person in the director’s position would make based on the relevant facts.
A word of caution needs to be given about the business judgment rule in the context of disclosure. In Australian Securities and Investments Commission v Vocation Limited (in liquidation) the Federal Court determined that the Defendant Vocation breached s.674(2) of the Corporations Act 2001 (Cth), which requires listed companies to continually disclose events which may affect their share price, by not disclosing certain information relating to its subsidiaries’ funding contracts. Certain of the directors’ failures prevent this continuous disclosure breach were, in turn, found to be a breach of their duty of care and diligence under s.180 of the Corporations Act 2001 (Cth) (Act). Critically, the business judgment rule was not able to be used in their defence as the Court determined that decisions relating to continuous disclosure are not ‘business judgments’. The decision is important, as it permitted ASIC to personally hold those directors accountable for their company’s breach of its continuous disclosure obligations.
III. The goose – private sector disclosure
Subsections 299A(1)(a) – (c), of the Act requires listed entities to undertake an operating and financial review as part of the annual directors’ report. ASIC has stated that it ‘considers that the law requires a discussion of climate risk when it could affect the entity’s achievement of its financial performance or disclosed outcomes’. In this context, ASIC RG 247 requires directors to consider the requirement to include any relevant analytical comments and specify how risk factors that are within the control of management will be managed. Similar requirements exist for prospectuses under RG 228. Elsewhere, ASIC has recommended that directors and advisers ‘adopt a probative and proactive approach‘ to climate risk and consider reporting under the framework developed by the Taskforce on Climate‑Related Financial Disclosures. At the time of writing, ASIC was conducting a climate risk governance surveillance program targeting companies which do not adequately disclose these risks.
APRA currently intends to develop and consult on a climate change financial risk prudential practice guide. The guide is intended to assist entities in complying with their existing prudential requirements, mainly reposed in CPS 220 Risk Management. That prudential guide requires businesses to ‘maintain processes to coordinate the identification, measurement, evaluation, monitoring, reporting, and controlling or mitigation of all material risks across the group, in normal times and periods of stress.’ APRA has stated that it expects climate risk disclosure from companies that is specific and comprehensive, following an industry survey that it completed in March 2019.
The 4th edition of ASX’s Corporate Governance Principles and Recommendations released in February 2019 substituted the definitions of ‘economic sustainability’, ‘environmental sustainability’ and ‘social responsibility’ with ‘environmental’ and ‘social’ risks to expand the risks to be disclosed. Recommendation 7.4 records that ‘a listed entity should disclose whether it has any material exposure to environmental or social risks and, if it does, how it manages or intends to manage those risks’.
In summary, private companies, particularly those in the financial services sector, have a weighty expectation of climate-risk disclosure placed on them. Where they do not meet a deemed threshold, which will be highly fact specific in each instance (carbon emitters and, separately, insurers exposed to Australia’s extreme weather events through their premium distributions are likely to be the canaries in the coalmine here) they may face unwanted regulatory, plaintiff law firm or activist investor scrutiny.
IV. The gander – public sector disclosure
There is a disparity in the regulatory requirements and public expectations placed on public-sector agencies and entities to disclose climate change risk and those placed on private sector entities.
As Queensland GOCs are established under the GOC Act, they are not subject to many of the reporting and disclosure requirements and guidelines set out in the Act. For Queensland GOCs, the Government Owned Corporations Act 1993 (Qld) (GOC Act) and Financial Accountability Act 2009 (Qld) (FAA Act) are the key pieces of legislation. S. 16(c) of the GOC Act records that ‘Government monitoring of the GOC is intended to compensate for the absence of the wide range of monitoring to which listed corporations are subject by, for example, the sharemarket and Commonwealth regulatory agencies’. Thus, Queensland GOCs answer predominantly to their relevant Ministers, who become the shareholders for the GOC and exercise the key monitoring function.
S. 120 of the GOC Act specifies matters to be included in annual reports, not one of which (understandably) pertain to climate change risk. That section also provides that a GOC’s annual report must ‘contain the information that is required to be included in the report by the shareholding Ministers to enable an informed assessment to be made of the operations of the GOC and its subsidiaries’ and ‘this section does not limit the matters that are required to be included in, or to accompany, a GOC’s annual report by the Corporations Act or another Act.‘ There does not appear to be other relevant guidance on including climate change risk in GOC annual reports, including within the ‘Company Financial Reporting in the Queensland Public Sector’ guidelines.
As Queensland government ministers are accountable to the public, they are likely to face increased public pressure in the future to ensure the GOCs for which they are responsible are addressing climate change risks. The ministers themselves may also be concerned about how climate change risks affect the operation and profitability of their GOCs. As a result, the shareholding ministers may require that a climate change risk assessment is included in the annual report of the GOC, both for their consideration and public approval. Some GOCs will obviously be more affected than others, for example those who rely on natural resources or who contract with major resources companies.
Queensland Government agencies are similarly accountable to their minister, and also must prepare annual reports for tabling in the Legislative Assembly due to the requirements of s 63 of the FAA Act. These annual reports are affected by the ‘Annual Report Requirements for Queensland Government Departments’. Under Part 10.3, government agencies are required to disclose both strategic risks and challenges they face, as well as environmental factors impacting the agency at all levels of government. While climate change risks are not specifically mentioned, they are becoming increasingly pertinent to certain agencies, including those responsible for environmental matters. As a result, it is likely that these agencies will be required to address climate change risk and mitigation in their annual reports.
Finally, for Queensland local councils, Division 3 of the Local Government Regulation 2012 (Qld) requires local councils to prepare an annual report; none of the required matters to be included in the annual report (understandably) pertain to climate change or environmental risk.
Community expectations of public-sector agencies and entities to identify climate change risk has thus far been muted in comparison to the attention given to the private sector. That is understandable, as public sector agencies and entities are not large fossil fuel emitters, do not have investor shareholders (outside the Government itself), are not listed on the ASX and have different regulatory oversight model than private companies.
That will certainly change.
Australia is suffering increasingly worse effects from extreme weather events, public sector agencies and entities are exposed to loss from these events and it is taxpayer dollars which supplement their revenue. All of the annual reports for public sector entities and agencies are publicly available. Elected officials who are accountable to the public will, in our view, become increasingly sensitive to the issue from a community-expectations and business profitability perspective. That shift towards greater disclosure will be in alignment with the broader movement in the private sector.
It is also in alignment with recent international legal developments, which we have explored in our briefing here on the recent decision by UK’s Court of Appeal to block plans for a third runway at Heathrow Airport based on climate change policy considerations.
V. Next steps
As the intensity increases on private sector entities to disclose climate change risks, sooner or later that focus will turn to the public sector. The decision makers within public sector agencies and entities should take steps to inform themselves of the climate-related risks which relate to their remit and consider disclosing them in their annual reports. GOCs, who are partially subject to the Act, and the directors’ duties and disclosure obligations reposed therein, have an extra incentive to consider including climate change risk in their annual reports.
Failing to engage with climate change risk disclosure, in the current environment, runs the risk of reputational, regulatory and litigation detriment. To quote Michael Bloomberg, writing on behalf of the Task Force on Climate-related Financial Disclosures ‘What gets measured better gets managed better’.
 Hutley, Noel and Hartford Davis, Sebastian “Climate Change and Directors’ Duties Supplementary Memorandum of Opinion” (26 March 2019), published by The Centre for Policy Development.
 Keynote address by John Price, Commissioner, Australian Securities and Investments Commission, Centre for Policy Development: Financing a Sustainable Economy, Sydney, Australia, 18 June 2018.
 AICD, ‘AGM season: More directors targeted in 2019’ (13 November 2019) available at: <https://aicd.companydirectors.com.au/membership/the-boardroom-report/volume-17-issue-11/agm-season>
 Australian Financial Review, ‘ Judge warns of tide of climate cases’ (5 February 2020) available at: <https://www.afr.com/politics/federal/judge-warns-of-tide-of-climate-cases-20200204-p53xlt>
 IMF Bentham Newsroom, Directors duties and climate change risk (24 October 2017).
  FCA 807
 ASIC, Report 593 Climate risk disclosure by Australia’s listed companies (20 September 2018) available at <https://download.asic.gov.au/media/4871341/rep593-published-20-september-2018.pdf>
 APRA, ‘ Understanding and managing the financial risks of climate change’ (24 February 2020) available at: <https://www.apra.gov.au/understanding-and-managing-financial-risks-of-climate-change>
 APRA, ‘ Climate change: Awareness to action’ (20 March 2019) available at: <https://www.apra.gov.au/sites/default/files/climate_change_awareness_to_action_march_2019.pdf>
 Queensland Treasury, Company Financial Reporting in the Queensland Public Sector, for reporting periods after 1 January 2018
 ‘Annual report requirements for Queensland Government agencies’ (2018-19 reporting period), available at <https://www.forgov.qld.gov.au/sites/default/files/annual-report-requirements.pdf>
  EWCA Civ 214
 Recommendations of the Task Force on Climate-related Financial Disclosures (14 December 2016) available at <https://www.fsb-tcfd.org/wp-content/uploads/2016/12/16_1221_TCFD_Report_Letter.pdf>
Matt Bode, Partner