Climate change risk heats up for directors

Benjamin Hine

Today marks the formal adoption of the Paris Agreement on climate change in many countries across the globe. When ratified in Australia, the Agreement will give legal effect to the development of an economy dedicated to low carbon emissions. The Agreement ushers in a new age for corporate Australia, in which company directors will be required to give careful and detailed consideration to environmental risks to effectively discharge their legal duties.

Earlier this year, we reported on amendments to the ASX Corporate Governance Principles that require ‘a listed entity [to] disclose whether it has any material exposure to economic, environmental and social sustainability risks and, if it does, how it manages or intends to manage those risks.’ See: Disclosure Requirements for Environmental Risks in DLA Piper’s Insurance Review.

Since then, leading Sydney barristers Noel Hutley SC and Sebastian Hartford-Davis have weighed into the debate and released a formal legal opinion on the liability of directors once the Paris Agreement is implemented (commissioned by the Centre for Policy Development and the Future Business Council). They comment that ‘it is likely to be only a matter of time before we see litigation against a director who has failed to perceive, disclose or take steps in relation to foreseeable climate-related risk …’.

The opinion confirms our view that dealing with environment risks is not simply a matter for waste heavy industries or large energy companies, but something that needs the attention of all directors. Of particular importance to insurers, Hutley and Hartford-Davis note, ‘in our opinion, a director of an insurance company would have a duty to consider the impact of increased incidents of extreme weather events upon the business of the company, and to ensure that this was being addressed at a granular level by updating models and adjusting coverage prudently.’ In our view, the obligation to consider the impact of weather events extends more broadly than to directors of insurers, and it will be up to the industry at large to respond to the increased risks presented by environmental risks and regulation including the Paris Agreement.