The inaugural joint Australian Bar Association and Victorian Bar Conference in late October brought together prominent legal minds from across the nation to discuss “The National Profession in the Global Legal Market”. In a panel session convened by Victorian barrister David O’Callaghan QC, the interaction between corporate responsibility, risk management and directors’ duties was discussed.
Taking a risk
Panelist Michael Wyles QC FAICD considered the impact of climate change risk on Section 180 of the Corporations Act 2011 (Cth). The section imposes a duty on directors to act with the due care and diligence that would be expected of a reasonable director in the particular circumstances.
In relation to corporations, climate change risks may be “physical risks”, for instance increasing occurrences of severe weather events may disrupt supply lines; or “transitional risks”, indirect financial risks such as changes in government policy or consumer preference that may emerge in a transition to a low carbon economy.
Wyles suggested that, subject to the circumstances of the corporation, active engagement with climate change risks may be essential to the proper discharge of a director’s duty of care. He suggested that when it comes to ensuring the sustainability of a corporation, “it is not in the shareholders’ interest for the board to allow a shortsighted interest on profitability in one year, which would cripple the business in the next.”
In this vein, Wyles proposed that a director who must take into account the circumstances of their corporation in order to satisfy their duties “cannot ignore events such as the coal divestment movement, which as of December 2015 had achieved a commitment by 500 or more institutions, holding $3.4 trillion in assets.”
The failure of a board to engage with climate change risks may result in the continuation of strategies that could leave a company “holding stranded assets, or worse still becoming a stranded asset. That is, one in which no one would invest because the business cannot be reconciled with a sensible approach to climate change,” said Wyles.
Wyles’ comments are echoed by the position put forward in Climate Change and Directors’ Duties, an advice released on 31 October 2016. Co-authored by Sydney barristers Noel Hutley SC and Sebastian Hartford-Davis, the advice was released by the Centre for Policy Development and the Future Business Council. It discusses the ramifications of climate change risks insofar as they are risks that intersect with the interests of a company. In that sense, it is possible that directors should approach climate change risk management as they would traditional risks.
The advice notes that directors are not prohibited from “taking into account climate change and related economic, environmental and social sustainability risks” where those risks may have a material impact on the company or its interests. Rather, a director “certainly can, and in some cases should be considering” the impact of climate change risks.
A judgment call
The business judgment rule (Section 180(2) of the Act) operates as a safe harbour for directors; it is a defence to an action brought under Section 180(1). At the Conference, Justice John Middleton, Federal Court of Australia, emphasised that to establish the defence, a director “must have made a decision,” that was properly informed and in good faith.
In this sense, it is possible that the defence will not be available to a director who does not turn his mind to the implications of climate change risk.
This idea is reiterated by Hutley and Hartford-Davis who note that directors who do not actively seek to manage foreseeable climate change risks, or who do not consider the possible risk because they do not “believe in the reality of climate change” may find that they have not satisfied the business judgment rule.
While the law surrounding the possible impact of climate change on directors' duties is yet to be confirmed via case law or legislation, the growing commentary on the subject is something that should not be blindly ignored.