Analysis of the further supplementary opinion on Climate Change and Directors’ Duties
- The Centre for Policy Development has published a third opinion from Noel Hutley SC and Sebastian Hartford Davis of counsel in their seminal series on directors' duties with regard to climate change. MinterEllison Partner and Head of Climate Risk Governance, Sarah Barker, instructed on the brief. The Opinion concludes that evolving market expectations on climate change have considerably elevated the standard of care required to discharge a directors' duty of due care and diligence. It also highlights the risk of liability for misleading disclosure, in the form of 'greenwashing', should there be inconsistency between a company's stated position and ambition on climate risk management, and its internal strategy, plans and actions.
- MinterEllison's Climate Risk Governance team has summarised the key conclusions of the Opinion below, followed by practical insights on what this means for company directors and their advisors.
What does the Opinion say?
In brief, Messrs Hutley and Hartford David opined:
- The profound and accelerating shift in the way Australian and international regulators, both debt and equity investors, firms and the public perceive climate change has further emphasised the foreseeability and materiality of its economic impacts. This has, in turn, considerably elevated the standard of care required to discharge a directors' duty of due care and diligence in relation to climate-related governance under the Corporations Act.
- In relevant sectors consideration of net zero emissions targets are considered an 'appropriate and necessary step' in the discharge of duties.
- When setting a net zero target, a company does not need to have all the answers, at that time, about how the target will be achieved. However, such an announcement carries with it a representation that a company does, at that time, have a genuine intention, formed on reasonable grounds, to pursue strategies to achieve the target in good faith (including by way of progress against credible short- and medium-term targets, adequate investment etc). A misalignment between that intention and operational strategy places the company, and its directors' and officers' at risk of 'greenwash' – and potential liability for misleading disclosure in relation to a future matter under the Corporations Act, ASIC Act and Australian Consumer Law. That may, in turn, lead to 'stepping stone' exposure to liability for a breach of the directors' duty of care.
The opinion concludes:
The pendulum has swung on directors’ duties and climate change. In 2016, our focus was the existence of the duty; that is, what directors could and should be doing on climate change to discharge their duty of due care and diligence. That is now uncontroversial. In 2019, we observed that the risk of liability for directors on this front was rising exponentially. In 2021, it appears to us that the focus is increasingly on how the duty is discharged. One aspect of this is that a company (and its directors) could be found to have engaged in misleading or deceptive conduct or other breaches of the law by not having had reasonable grounds to support the express and implied representations contained within climate change commitments . There is a reason to think that 'greenwashing' claims of the kind outlined in this memorandum will become an acute source of risk. Cases of this kind have been emerging overseas. Greenwashing could prove to be the focus of what has been called the 'third wave' of climate litigation 
Analysis - what should company directors do now?
As reflected in the Opinion, the rapid elevation in regulatory, investor and stakeholder demands on climate change risk governance has continued through the Covid era. The scale - and pace - of this shift may leave many boards and their advisors unprepared for the step-change in market expectations as we head into the FY21 reporting season. It is important to note that the duty of due care and diligence does not dictate that directors to pursue a particular outcome, or reach a particular decision, on climate change - nor on any other foreseeable financial risk issue. In each case, the key to compliance will be a robust consideration of the relevant issues, in the pursuit of the best interests of the company. In light of the developments highlighted in the Opinion, we recommend that directors ask the following key questions in considering corporate strategy, in their oversight of material risk management, and in assuring their company's financial reports:
- contemporary capacity building – how do we, and our executive team, remain abreast of material developments in this dynamic area of financial risk (and opportunity)? What has changed in the regulatory, investor and stakeholder landscape in the past year that may present a foreseeable risk (or opportunity) for our business strategy, planning, risk management, and financial position, performance and prospects? Has expert advice been sought where this is not available internally?
- strategy and risk management in the shift to net zero – what does the rapid increase in government, investor and corporate 'net zero emissions' commitments mean for our business? Have we robustly interrogated the impact on our corporate strategy, financial position, performance and prospects? Are we able to clearly articulate our own strategic position to investors, and the reasoning behind it?
- oversight and assurance – what assurance do we require to satisfy ourselves, in a duly careful and diligent way, that material climate-related financial issues have been integrated into our annual disclosures – both narrative and financial reports? What are the key areas of uncertainty and judgment? What process has been applied by management to consider, assess and assure those matters? In what areas would it be prudent to obtain external assurance