Australia’s Altered Climate Risk Framework - Key Pressure Points from Regulators, Courts and Increased Shareholder and Community Activism

This article was originally posted on the Oxford Business Law Blog on 19 July 2021.

By Scott Atkins, Kai Luck

Over the last 12 months, there have been important developments in Australia in relation to climate change risks. Australian regulators have set a clear expectation that entities and their officers must not only disclose material climate risks but also take proactive measures to mitigate those risks to avoid liability. There has also been a marked increase in shareholder and broader community activism on climate change, and this has been a major ‘pressure point’ for entities to commit to emissions reductions targets and other mitigating action. 

Regulatory expectations

As recently as 12 months ago, there was still uncertainty as to whether climate risks impacting on an entity were ‘material’ risks.

Yet, half way through 2021, the status of climate risks as ‘still developing’ has been replaced by ‘ignore at your peril’. On 22 April 2021, the Australian Prudential Regulation Authority (APRA) issued a draft prudential practice guide, CPG 229 (Climate Change Financial Risks), expected to be finalised later in 2021.

Importantly, CPG 229 clearly identifies APRA’s expectation that entities must identify and disclose material climate risks as well as manage and mitigate those risks. APRA expressly endorses the framework for considering and managing climate risks developed by the G20 Financial Stability Board’s Taskforce on Climate-Related Financial Disclosures (TCFD).

Notably, APRA states in CPG 229 that all of its regulated entities must manage climate risks within their overarching risk management framework and also develop and implement appropriate climate risk policies that enable climate risks to be specifically quantified and assessed, including through the conduct of scenario analysis and stress testing. 

This is the first time these kinds of expectations have ever been so clearly articulated by an Australian regulator. 

While the Australian Securities and Investments Commission (ASIC) is yet to release guidance of the kind set out in CPG 229, it has endorsed the TCFD climate standards and has also been clear that it expects entities to include material climate risks within the scope of their ordinary annual reporting, and also in fundraising documents for entities that are undertaking a new share issue or other capital transactions.

Additionally, because the expectation has been set by APRA and ASIC that climate risks are plainly foreseeable, there is a high likelihood that directors and other officers will breach their duty of care, skill and diligence and their duty to act in good faith in the best interests of the company if they fail to address and mitigate climate risks on behalf of the company. 

Shareholder and community activism

In parallel with the regulatory developments outlined above, climate-related shareholder activism has increased significantly in Australia in recent times. The tactic employed by shareholders has been to put pressure on company directors to commit to specific emissions reductions targets, the divestment of assets and the termination of relationships with customers and suppliers that are responsible for a high level of emissions, to avoid being replaced by alternative candidates.

Further, both investors and broader community interest groups have pursued novel legal claims in Australian courts seeking to compel entities to take action on climate change. 

A particularly novel claim, pursued by eight children on behalf of all Australian children, successfully resulted in the recognition by the Federal Court of Australia in May 2021 in Sharma by her litigation representative Sister Marie Brigid Arthur v Minister for the Environment (Sharma) [2021] FCA 560 that, in assessing new projects for approval, the Australian Minister for the Environment has an obligation to avoid causing personal injury to Australian children that may arise from the impact a project will have on climate change. In Sharma itself, the project was an extension of a major Australian coal mine, and the Court accepted evidence that the extension would, over the 25 year life of the coal mine, lead to an additional 100 million tonnes of carbon dioxide being emitted. It was also accepted that climate change would cause around one million of today’s Australian children to suffer at least one heat stress episode requiring acute hospital care, with many thousands expected to suffer premature death from heat stress or bushfire smoke. 

While the nature of the duty will continue to be explored in future decisions, further test cases are expected to be run, which will argue for the duty to be extended to other government decisions, as well as business decisions made by private enterprises that have the potential to result in substantial emissions. This would fundamentally alter the way business is conducted and would elevate climate risks to a primary risk and operational consideration for all entities.

Takeaway

Regulatory and court developments in the last 12 months have fundamentally changed the climate risk and liability position in Australia for all entities and their officers.  There is now a clear expectation from APRA and ASIC that entities must not only assess and disclose the material climate risks which impact on their operations but also take proactive steps to mitigate and manage those risks. Continued shareholder and community-based climate activism also places pressure on entities to commit to emissions reductions targets. The recent recognition of a duty owed by the Australian Government to avoid the risk of personal injury to Australian children from climate change in determining whether to approve new development proposals also breaks new legal ground and may lead to the recognition of a similar duty owed by both public and private sector entities in the conduct of business operations in future years.

The liability risks from these regulatory and court-based developments are significant and they have placed climate risks as one of the primary non-financial risks that must now be proactively addressed by all Australian entities.

Scott Atkins is the President of INSOL International and Partner, Australian Chair and Head of Risk Advisory at Norton Rose Fulbright.

Dr Kai Luck is Executive Counsel at Norton Rose Fulbright.

This post is based on contributions to and the discussion at the 5th Annual Oxford Business Law Blog conference on ‘Business Law and the Transition to a Net Zero Carbon Economy’ which took place online on 25 to 27 May 2021. This post is forthcoming in Andreas Engert, Luca Enriques, Georg Ringe, Umakanth Varottil and Thom Wetzer (eds), Business Law and the Transition to a Net Zero Carbon Economy (CH Beck - Hart Publishing 2021) (forthcoming).

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Event: Business Law and the Transition to a Net Zero Carbon Economy (25 - 27 May 2021)

Videos of the presentations are available on the ECGI website and YouTube channel.