This article is based on the discussion between Brendan Bateman, Partner at Clayton Utz and leader of the firm's Climate Change and Sustainability Group and Dr Peter Holt, General Manager of Strategy and Policy at Energetics. We hear from Brendan on the developments in climate change risk management as seen through the legal lens. His main message? More and more businesses are ‘waking’ to the reality of climate change and the need to identify and address the risks, find the opportunities, and ensure that the assessment and disclosure of climate related risks by business is robust.

Litigation and climate related risks

Australia is the second highest ranking country in the world when it comes to climate related litigation and developments in this space need to be watched. Brendan commented, “Certainly the Rocky Hill[1] judgement was a significant case last year, but there have been other cases. The McVeigh case[2] involves a member of a superannuation fund bring proceedings against the trustees, alleging that they failed to pay sufficient regard to climate change risks when assessing the investments made on behalf of their members. So effectively, what is alleged is a breach of the trustee's duty.”

He added, “We've also seen litigation involving shareholders. In 2017, shareholders brought action against the Commonwealth Bank of Australia, where it was alleged that the disclosures made by the CBA in its 2016 annual report did not provide a fair and reasonable view of the bank's financial position because of alleged deficiencies in its reporting of climate related risks. So we're seeing very different types of litigation. This is in addition to the usual types of project approval challenges we might see, for example, in relation to the Adani coal mine.”

The business response

Corporates are increasing their focus on climate change. Brendan says, “They understand that regulatory environments are changing and that a critical mass of businesses are moving to align with the goals of the Paris Agreement and set net zero emissions targets. We see businesses assuming obligations now – at a time when they are not legally obliged to do so here in Australia.”

The financial services sector (including the insurance sector) is leading the assessments of climate risks. Brendan says, “That's attributable to a number of factors. Firstly, that sector understands risk. They are equipped to understand how climate risks translate into financial risks. They have the tools and they respond to the science - the objective facts - and seek to understand how that might impact a business strategy.”

Peter Holt asked if businesses more broadly have the right financial metrics for assessing climate related risks. In response, Brendan said, “It is challenging because while there are tools that are being developed, it's a case of learning by doing - which is not to say that is a wrong approach! Indeed, it is very important. There needs to be a building of internal capability within organisations to understand climate related risk and translate that into a financial assessment of those risks.”

The drive to disclose climate risks is growing. Brendan said, “There's a need not just to be seen, but to take action. There is a growing expectation that businesses not only assess the risks, but also disclose them. Whilst it is not mandatory, there seems to be an inevitability about disclosure. We will get to a point where not only will climate related risks be a native feature in annual reports, they will be a mandatory disclosure requirement.”

He added, “Certainly disclosure needs to be robust in the way disclosure is for the purposes of distilling the truth of the financial and operational affairs of a company. It is not an extension of a sustainability report.”

The need to engage with climate science

There has been broad discussion about the rise of science in 2020, driven by the bush fires and the global pandemic. Brendan commented, “In litigation we're seeing the emergence of probabilistic risk assessments and the application of a science-based approach. This is not dissimilar to what we saw in relation to tobacco in the 1970s and 1980s.”

He added, “We talk about climate projections for different scenarios – for a one and a half degree up to a six degree world. Around 1.1^oC of warming is locked into our system - regardless of any immediate actions taken. So the climate projections apply in quite foreseeable ways that can translate into potential future liabilities for businesses and therefore impact directors and their responsibilities. They need to be appraised of the issue and seek the right information to make the decisions for their future investment strategies.”

“Different businesses within different sectors are doing it better than others. As I mentioned, the financial services sector and the insurance sector are leading the charge. The energy resources sector is moving faster than previously. Whereas I think it's a much more of a struggle particularly in the manufacturing sector where it is very difficult to find the resources to look at the science, let alone commence the necessary R&D.”

Human impacts

The bushfires brought attention to issues of human wellbeing under a changing climate. Aside from the dangers for employees responding to severe weather events, bushfires or floods, there are risks with hotter, drier days. As Brendan said, “Questions are being asked. There will need to be reviews of the relevant work health and safety policies that apply to particular industries and sectors.”

Opportunities in a world impacted by climate change

Brendan said, “Someone's risk is another’s potential opportunity. This goes to the fundamental sustainability of businesses. They need to look not only at the environment in which they are currently operating, but also to the long term and where the science is telling us to reduce our emissions as quickly as possible to reach net zero emissions. There needs to be a full review of the options available, to be a sustainable business. I don’t just mean ‘being green’ but actually being a business that will have a future and able to operate successfully in a changed economic environment.”

Advice to boards and directors

Brendan’s concluding comments, “Even if you don't believe that there is a material risk with climate change, you need to document your rationale. It is not sufficient to say, “we've looked at climate change and we think, for various reasons, that we're not exposed to risks.” That needs to be properly documented, articulated and tested. That process will drive an understanding of the risks and the need to manage them.”

References

[1] Environmental Defenders Office NSW | Climate litigation news

[2] ABC Law Report | Climate change litigation targets super fund