Avoiding climate change's perfect disclosure storm
Can and should company directors consider the risks posed by climate change to their business? Yes and yes, to the extent that those risks intersect with the interests of the company, according to the legal opinion provided by Noel Hutley SC and Sebastian Hartford-Davis released by the Centre for Policy Development at the end of October.
Hutley and Hartford-Davis warn that directors who fail to consider the material risks of climate change to their businesses and interests of their companies may be found liable for breaching their duty of care and diligence.
So what should directors do?
Given the spectrum of physical risks, regulatory and other transition risks on the 'below 2°C' and net zero emissions pathway set by the Paris Agreement, climate change has become a clear financial consideration for companies.
To comply with their duties under general law and the Corporations Act 2001 (Cth), company directors may need to consider how risks associated with climate change impact on their business and assets and act in the best interests of the company to mitigate these risks.
Increasingly, investors will be looking to companies and operations with a clear plan for managing climate-related risks.
It will be important for directors to consider both physical and transition risks related to climate change. These considerations may include physical environmental changes, changing resource landscapes, government regulation, technological changes and consumer behaviour.
Risk disclosure is an important part of directors fulfilling their duty of care and diligence, as depending on the circumstances, non-disclosure of material information may constitute misleading and deceptive conduct.
In addition, Australian Stock Exchange continuous disclosure requirements require the immediate disclosure of information that would be reasonably expected to have a material effect on the price of a company's listed securities.
In many ways, climate change has the potential to bring these threads together, creating a near perfect disclosure storm.
Beyond legal compliance requirements, a number of companies have signed on to voluntary initiatives on climate change-related disclosures or reporting. The multiple initiatives and transparency measures relating to climate change underscore the importance of coordination and consistent reporting across compliance and voluntary initiatives.
Growing interest in disclosure
These considerations form part of a growing awareness and interest in climate-related financial disclosures. Initiatives announced in the lead up to, and during the UN climate negotiations in Paris last year (COP21) included key measures relating to disclosure of climate risks.
The Task Force on Climate related Financial Disclosures (TCFD) was established by the Financial Stability Board at the request of G20 and launched in December 2015 at COP21. The TCFD has developed draft recommendations for climate-related risk disclosures and is due to report to the G20 Financial Stability Board at the end of December 2016.
Increasingly, companies are voluntarily adopting an internal carbon price and embedding this within their business operations. A number of companies in Australia also voluntarily release or disclose social and environmental performance data, and some participate in voluntary carbon or climate risk disclosure initiatives.
The issue has also captured the attention of some within our Federal Parliament. Earlier this year, the Federal Senate referred an inquiry into carbon risk disclosure to the Senate Economics References Committee for report by June 2016. The double dissolution of the Senate and House of Representatives in May 2016 caused this inquiry to lapse. However, the terms of reference, discussion paper and submissions highlight the need for companies to be aware of, and ensure compliance with, existing and emerging disclosure requirements.
I'll be in Marrakech next week on behalf of Allens' Climate Change Group for COP22, and will be posting updates on LinkedIn and Twitter. Follow me to keep in touch, or drop me a line if you'd like to discuss what climate change means – or could mean following Marrakech – for your organisation.