Company directors can be legally liable for failing to manage climate change risks - report

Directors who consciously disregard climate change risks may be acting in bad faith

Company directors can be legally liable for failing to manage climate change risks - report

Under Australian corporate governance laws, company directors can be held liable for failing to manage risks associated with climate change, according to a legal analysis paper by the Commonwealth Climate and Law Initiative (CCLI).

The paper warned that the effects of climate change – including extreme weather, an increase in bushfires, and changes in crop yields – can cause harm not only to ecosystems, but to economies as well.

These impacts can give rise to commercial issues, including reduced workforce productivity, business interruption, insurance restrictions, and increased risk of customer default.

While boards in practice delegate operational matters to executive management, the paper said that directors remain responsible for the oversight of corporate performance, for the monitoring and supervision of compliance, the approval of significant transactions, and external reporting.

“In the corporate context, ‘risk’ is simply ‘the effect of uncertainty on objectives’. It is clear that risk management and strategy are interrelated, and that board governance and oversight of both is critical to the creation of corporate value,” the paper said.

The Corporations Act mandates directors to act in the best interests of their firm. Hence they may fail to act in good faith if they consciously disregard, or are wilfully blind to, climate change risks, the paper said.

According to Sarah Barker, MinterEllison special counsel for climate change risk, the Coporations Act accommodates corporate governance and disclosure of climate-related financial risks, as mentioned in the federal government’s response to the recommendations of the Senate Economic References Committee Inquiry into Carbon Risk Disclosure.

Barker worked with the University of Oxford in drafting the CCLI report.

“Australian company directors need to ensure that they view climate change through a corporations and securities law lens, rather than an 'environmental' lens,” Barker said. “If this is news to any business or board, they would be well advised to accelerate their understanding of the issue before enforcement proceedings begin to flow,” she added.

 

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