By Noel Hutley SC and Sebastian Hartford Davis -
Snapshot
- Directors duties are evolving with respect to climate change.
- Companies making ‘net zero’ commitments are required to have ‘reasonable grounds’ to support their representations, otherwise, a company (and its directors) could be found to have engaged in misleading and deceptive conduct.
- Regulators are cracking down on companies who engage in ‘greenwashing’ or embellishing their environmental credentials to gain favour with investors or customers.
- This article offers some practical steps directors can take to reduce the liability risks associated with net zero commitments.
The bar for directors continues to rise amidst surging global action on climate. As companies race to keep up, or at least be seen to be keeping up, the legal risks associated with ‘greenwashing’ cannot be ignored.
This is just one of many themes that emerged from a special climate change round table convened by the Centre for Policy Development (‘CPD‘) in December 2020, at which the authors met with company directors, business leaders and union and public sector representatives, to consider key climate-related challenges for boards and businesses, and priorities for delivering more proactive responses to climate change. The authors went on to produce a supplementary legal opinion for the CPD, which built upon their earlier opinions of 2018 & 2019. This article is a summary of their 2021 opinion.
Directors duties – expectations continue to rise
It is now well understood that climate change presents a range of risks, which it may be the duty of company directors to identify, consider and manage. There have been a number of recent developments:
First, Australia’s financial regulators have continued to strengthen their focus and develop their guidance on climate risks:
- APRA has released new draft guidance for banks, insurers and superannuation trustees on climate-related financial risk management , and is currently conducting a supervisory review of climate risk governance, as well as vulnerability assessments to stress test the resilience of Australia’s banks, financial system, and economy against climate risks.
- ASIC has recently indicated that it may consider enforcement action ‘should there be serious disclosure failures’. On 5 June 2021, ASIC was reported to have announced ‘a crackdown on the practice of “greenwashing”, where companies embellish their environmental credentials to gain favour with investors focused on the transition to net-zero carbon emissions’ (R Gluyas, ‘ASIC “greenwashing” crackdown on dubious ESG claims’, The Australian, 4 June 2021).
Second, there is an emerging consensus on climate risk disclosure. e.g. in April 2019, the Australian Accounting Standards Board and Auditing and Assurance Standards Board issued an updated joint guidance on disclosure and materiality of climate change risks. This guidance, echoed by the International Accounting Standards Board, explains that climate risks may be material to financial statements, including insofar as they impact asset impairment, the useful lives of assets and fair valuation. The recommendations of the Task Force on Climate-related Financial Disclosures appear to have transitioned from ‘best practice’ to industry standard. They are endorsed by APRA, ASIC and the ASX Corporate Governance Council.
Third, a number of Australian industry-based initiatives are establishing frameworks for disclosure, scenario analysis and risk management. Notable amongst these are the Climate Measurements Standards Initiative, the Australian Sustainable Finance Initiative, Climate League 2030, and the Australian Industry Energy Transitions Initiative.
Emerging judicial attitudes about climate risk
Although not impacting the standard of care of a company director, it is also relevant to observe emerging judicial attitudes about climate risk and its interaction with legal norms.
In a widely publicised decision, the Federal Court of Australia recently found the Minister for the Environment owes Australian children a duty of care when exercising approval functions under Environment Protection and Biodiversity Conservation Act 1999 (Cth), ss 130 and 133 (Sharma by her litigation representative Sister Marie Brigid Arthur v Minister for the Environment [2021] FCA 560). Anthropomorphic climate change was described as ‘the greatest inter-generational injustice ever inflicted by one generation of humans upon the next’ (at [293]).
The Hague District Court recently ordered Royal Dutch Shell to reduce the CO2 emissions of the Shell group by 45 per cent of 2019 levels by 2030; the first ever case in which a Court has ordered a corporation to pursue a more ambitious emissions target.
These developments reinforce that directors of listed companies should be taking steps to: (i) identify and manage climate risks, including where appropriate by implementing decarbonisation strategies; (ii) make accurate and appropriate disclosures in public announcements, including mandatory reporting frameworks; and (iii) ensure, if they see fit to make public commitments relating to climate risk (for example ‘net zero’ commitments), that there is a proper basis for making such commitments.
There are some obvious practical steps available to directors to reduce the likelihood of liability arising from a net zero commitment, and to reduce the difficulty of demonstrating the existence of ‘reasonable grounds’ for a past decision in the event of litigation.
‘Net zero’ commitments & associated liability risks
Each Australian State and Territory has now committed to achieving ‘net zero’ emissions by 2050, as have 14 of Australia’s top 20 trading partners.
Many firms have made such commitments, or may make such commitments in the future. Indeed, as seen at the recent 2021 AGMs of ExxonMobil and Chevron, companies considered to be too slow in responding to climate risks may be confronted with shareholder activism. Boards may be facing increasing pressure to commit to achieving net zero within an acceptable timeframe.
Such commitments give rise to liability risks. In particular, net zero commitments can create liability for misleading or deceptive conduct under e.g. Australian Consumer Law, s 18; Corporations Act 2001 (Cth), s 1041H; and ASIC Act 2001 (Cth), s 12DA.
Conduct is misleading or deceptive, or likely to mislead or deceive, if it has a tendency to lead a consumer into error (Australian Competition and Consumer Commission v TPG Internet Pty Ltd (2013) 250 CLR 640, 655; [2013] HCA 54 at [49]). Determining whether conduct is misleading or deceptive is an objective enquiry, and it is unnecessary to prove any person was actually misled or deceived or that the defendant intended to mislead or deceive. Silence will constitute misleading or deceptive conduct if the circumstances are such as to give rise to a reasonable expectation that, if some relevant fact did exist, it would be disclosed (Addenbrooke v Duncan (No 2) (2017) 348 ALR 1, 119; [2017] FCAFC 76 at [482]).
Of particular importance is the fact that a ‘net zero’ commitment, being in some cases a promise to achieve a certain carbon emissions profile by a certain date, will constitute a representation about a future matter. If a person makes a representation about a future matter, the representation is taken to be misleading unless the person had reasonable grounds for making that representation (Competition and Consumer Act 2010 (Cth) sch 2 s 4(1); Corporations Act 2001 (Cth) s 769C(1); ASIC Act 2001 (Cth) s 12BB(1)). Whilst this does not shift the ultimate onus of proof, it places an evidential burden on the representor to adduce evidence that there were reasonable grounds for making the representation (Australian Competition and Consumer Commission v Woolworths Ltd [2019] FCA 1039 at [113]).
Net zero commitments are inherently ‘in the nature of a promise, forecast, prediction or other like statement about something that will only transpire in the future’ (Australian Competition and Consumer Commission v Woolworths Group Limited [2020] FCAFC 162 at [132]). Directors must therefore ensure that net zero commitments are founded upon ‘reasonable grounds’. For there to have been reasonable grounds, there must have existed ‘facts sufficient to induce that state of mind in a reasonable person’ (Australian Competition and Consumer Commission v Dateline Imports Pty Ltd [2015] FCAFC 114 at [100]).
Practical steps to reduce liability risk
There are some obvious practical steps available to directors to reduce the likelihood of liability arising from a net zero commitment, and to reduce the difficulty of demonstrating the existence of ‘reasonable grounds’ for a past decision in the event of litigation.
First, directors should ensure net zero strategies are properly integrated with operational strategies and policies. Public disclosure about these strategies should identify and justify the key assumptions underpinning the company’s transition to net zero emissions and document the drivers of the company’s decarbonisation. Where appropriate, qualified external advisors should be engaged to assist in the formulation or review of a net zero strategy, though this will not absolve directors of the responsibility of supervising the strategy and the grounds upon which it is based.
Second, net zero strategies and commitments should be framed with care. The net zero commitment should explain the types of emissions it encompasses (Scopes 1, 2 and 3 or some combination thereof) and the relevant time frame(s). The language used to express the net zero commitment is also consequential. Aspirational phrasing and use of an appropriate disclaimer may reduce litigation and liability risk.
Third, if a company’s net zero strategy is amended, not suitably fulfilled, affected by supervening circumstances, or otherwise untenable, that information should be disclosed promptly. Public concern about climate change amongst governments, regulators, and investors may generate an expectation that, should some relevant facts change, it would be disclosed.
Concluding remarks
Accelerating impacts of climate change, and responses to climate change overseas and domestically, are profoundly influencing, positively and negatively, the interests of many Australian businesses. Movement towards the identification and management of climate risk is to be welcomed. But directors must be cautious about ‘greenwashing’. Directors and firms that misrepresent their commitment to managing climate risk are exposed.
