By Mark Smyth and Georgia Gee -
The Law Society of NSW has launching new guidance, which provides a detailed overview of the key principles that apply when considering how climate change-related risks may impact client advice, and the solicitor-client relationship.
Climate-related risks will affect most clients and legal practitioners are playing, and will continue to play, a critical role in advising these clients on how to navigate the legal risks associated with climate change. Legal practice is evolving in response to the changing climate change landscape, with many law firms creating practice groups dedicated to advising clients on these issues. As John Kerry, US Special Presidential Envoy for Climate, told the American Bar Association at its 2021 Annual General Meeting “You are all climate lawyers now, whether you want to be or not”.
It is in this context that the Law Society’s Climate Change Working Group is launching its guidance on the “Legal Implications of Climate Change” (Guidance), which is intended to be a useful resource for all practitioners, especially those who are unfamiliar with the legal issues associated with climate change and its impacts.
Why was the Guidance developed?
Given climate-related risks will affect most clients and nearly all areas of legal practice, the Law Society, based on the advice of its Climate Change Working Group, considers there is an evolving duty of care owed by solicitors to their clients to advise on climate-related risks. As such, there is an obvious need for useful resources for solicitors to help them navigate this quickly developing area of legal practice.
Useful guidance has already been published by the Law Council of Australia and the Law Society of England and Wales (LSEW).
- The Law Council of Australia published its Climate Change Policy (Policy) in November 2021. Paragraph 53 to 56 of the Policy states that “lawyers should be alive to the unfolding implications of climate change … [and] be aware that advice regarding a legal problem should be provided in a manner which meaningfully addresses any identified climate change issues and related consequences.”
- The LSEW published its Climate Change Resolution (Resolution) in October 2021. The Climate Change Resolution was published to support solicitors and the companies or firms they work for, to develop a climate-conscious approach to legal practice. The Resolution highlighted its commitment “to provide guidance to solicitors on how, when approaching any matter arising in the course of legal practice, to take into account the likely impact of that matter upon the climate crisis in a way which is compatible with their professional duties and the administration of justice”. The LSEW published its “Guidance on the Impact of Climate Change on Solicitors” in April 2023.
The Law Society’s Guidance follows on from, and draws from, the guidance published by the Law Council and LSEW, applying the principles outlined in that guidance in the context of the legal landscape in New South Wales.
What is the purpose of the Guidance?
The aim of the Guidance is to equip practitioners with the principles and tools necessary to navigate their evolving duty of care to advise clients on climate-related risks.
Climate change is giving rise to, and will likely continue to give rise to, novel and complex questions of law across multiple legal practice areas including regulatory disclosures, corporate governance, occupational health and safety, planning and development, insurance, water rights, and many other areas. It is critical, now more than ever, for practitioners to ensure that they develop a proper grasp of the wide-ranging effects of climate change on their clients.
In particular, the Guidance explores the principles that apply when solicitors are considering:
- how legal risks associated with climate change may be relevant to client advice;
- any issues that may be relevant when considering the interaction of legal advice, climate change and solicitors’ professional duties; and
- any issues that may be relevant when considering the solicitor-client relationship in the context of climate change.
What is required from solicitors?
“[S]tandards of professional conduct change as time passes. What is entirely proper for one generation may be slightly irregular for the succeeding generation and highly improper for the next”: so states the Guide to the Professional Conduct and Etiquette of Solicitors, The Law Society, issued in 1960.
The Guidance provides insights for solicitors to consider when advising clients on the risks and legal implications of climate change in order to comply with their legal professional obligations.
Why is recognising the impact of climate change risks on solicitors’ professional duties important? Solicitors have a general legal duty to exercise reasonable skill and care. While the precise scope of a solicitor’s duty will always be determined on a case-by-case basis, climate change and its consequences are leading to changes in what is to be expected of solicitors.
When it comes to the general legal duty of care, legal practitioners are encouraged to recognise that climate risks can be wide-reaching. They will need to think beyond what a client may be asking them to consider and anticipate how climate change, and its consequences, may impact any given set of instructions. To comply with their professional obligations, legal practitioners should turn their mind to informing their clients of any climate risks that may materialise.
The Guidance also considers the duties to warn, disclose, and uphold service and competency levels. It is important that legal practitioners warn clients about potential climate risks, clearly disclose all climate legal risks which may impact the client’s interests within the scope of the retainer, and ensure they provide a proper standard of service by completing professional training and staying up to date on the developments in the law to better advise clients on risks and mitigation strategies.
How may climate-related legal risks materialise in specific practice areas? The Guidance includes examples of the relevant legal advice and services legal practitioners may provide in corporate, disputes, human rights, and other areas. Depending on the circumstances, legal practitioners may need to consider whether they need to bring any climate issues to their client’s attention, recommend clients seek further specialist advice, or whether to specifically exclude advice on climate risks from their retainer.
“One area of particular relevance to practitioners, which has become a major focus of litigation commenced by activists and enforcement action by regulators is ‘greenwashing’”
An overview of climate change risks
Climate change, and responses to climate change, give rise to long-term material, physical and transition risks. These risks result in shifting legal demands, which in turn create both risks and opportunities for the legal profession.
Categorisation of climate risks
The Guidance separates climate risks into three categories:
- Physical risks are risks associated with climate change-related weather events;
- Transition risks arise from the behaviour of regulators, commercial institutions (such as insurers and banks), and the community at large; and
- Liability risks including being held to account for contributing to, or failing to adapt to, climate change.
Physical risks
Physical risks may result in more severe and frequent extreme weather events, including storms, floods, droughts, and heatwaves. This will likely impact on commercial and residential buildings, transport infrastructure and business operations, agricultural output and may result in loss of life and migration.
In light of these physical risks, solicitors are advised to consider a range of impacts when advising their clients, including:
- the impact on asset values and potential commercial impacts, for example insurance, directors’ duties, and share price;
- the impact of physical events on conveyancing transactions, whether any climate-related risks are disclosed in the transaction documents, and whether, for example, these risks may affect the cost and availability of insurance; and
- the impact of physical events on clients’ businesses (e.g., when advising on acquisitions and asset purchases). Advice regarding acquisition or asset purchases should consider what adaptation of the asset may be needed to improve climate resilience.
Transition risks
Policy, legislative, regulatory, market and community changes have supported the transition to a net zero economy.
Transition risks are risks associated with the behaviour of government, regulators, commercial institutions, and the community at large. Such risks may include new or amended climate-related legislation or regulation, target setting, and shifting customer and supplier expectations.
In 2022, in response to greater climate demands, the Australian Government legislated greenhouse gas emission reduction targets. The legislation included a new commitment to reduce greenhouse gas emissions to 43 percent below 2005 levels by 2030, and reaffirmed its target to reach Net Zero by 2050. Australia’s Nationally Determined Contribution is recorded in the Nationally Determined Contributions Registry and is available on the United Nations Climate Change website.
There are numerous legislative regimes which exist at the Commonwealth and State level in NSW which support and regulate the climate transition, including the Climate Change Act 2022 (Cth) and the National Greenhouse and Energy Reporting Act 2007 (Cth). The Guidance provides a comprehensive summary of these and other statutory regimes.
As the Guidance outlines in more detail, this legal framework is supported by numerous Government agencies, including the Climate Change Authority, the Clean Energy Regulator, and the Australian Renewable Energy Agency (ARENA). Further, as discussed below, Australia’s key regulators, the Australian Prudential Regulation Authority (APRA), the Australian Competition and Consumer Commission (ACCC), and the Australian Securities and Investments Commission (ASIC) are each focusing on climate-related issues in their guidance and enforcement priorities.
Solicitors play an important role in ensuring clients are equipped to adapt to the legislative and regulatory requirements, as well as community expectations.
In light of these transition risks, solicitors are encouraged to:
- be aware of the current regulatory and legislative regimes concerning climate change, including the relevant stated positions of regulators and government agencies;
- factor emerging climate regulation (on climate reporting, for example) into their advice; and
- be aware of how changes in client demand or stakeholder sentiment could affect asset values and operating costs.
Liability risks
Legal liabilities may arise for law firms, governments and organisations from claimants seeking compensation for losses resulting from physical or transition risks. Activists are commencing claims on novel grounds and clients could be the subject of proceedings brought by those impacted by climate change for contributing to climate damage, or for making representations about their approach to climate change.
The United Nations Global Climate Litigation Report: 2023, available on the United Nations environment programme website, has revealed that Australia is the most prolific country in the world per capita for climate change litigation.
As the risk of climate-related litigation has crystalised for many clients, legal practitioners should be proficient in assisting clients develop a proactive risk-based approach to anticipate and reduce climate-related litigation risk. This can include identifying climate-related legal issues and business practices where risks may materialise, assessing the likelihood and severity of risks, managing the response to those risks, and ensuring robust governance processes are in place. In doing so, legal practitioners play a pivotal role in helping clients develop solutions to address the ever-changing landscape of
climate-related litigation risks.
One area of particular relevance to practitioners, which has become a major focus of litigation commenced by activists and enforcement action by regulators, is “greenwashing”. Allegations of greenwashing are generally pursued under legislation relating to false, misleading, deceptive or dishonest conduct, and also in relation to corporate disclosure obligations. Some of those provisions may be relied upon by private litigants and many are enforced by regulators. In November 2021, APRA published its “Prudential Practice Guide CPG 229 Climate Change Financial Risks”, in December 2023, the ACCC released a guide for business titled “Making environmental claims: A guide for business”, and ASIC has identified greenwashing as one of its 2024 enforcement priorities.
In relation to private actions, in August 2023 Australian Parents for Climate Action filed proceedings against Energy Australia, challenging claims made on its website that its “Go Neutral” electricity and gas products are “carbon neutral”; emissions created by “Go Neutral” products are “cancelled out” or “negated”; and that by opting into its “Go Neutral” products, consumers “have a positive impact on the environment”.
In relation to regulator actions, in February 2023 ASIC commenced its first greenwashing proceedings against Mercer Superannuation (Australia) Ltd. ASIC alleged Mercer engaged in greenwashing in relation to certain investment options because those options included investments in companies involved in the extraction or sale of fossil fuels, despite marketing statements made by Mercer to the contrary. Mercer admitted liability and in December 2023 agreed to pay $11.3 million during a penalty hearing.
Clearly, the role of solicitors is critical in both advising organisations on the mitigation of such liability risks and, ultimately, in acting for clients in any associated proceedings. It is therefore important that solicitors have a working knowledge of these risks in their interactions with clients.
Climate change risks in practice
Whether clients need advice on obtaining climate-related credentials, or implementing emissions reduction targets or net zero strategies, or require representation in climate-change related proceedings, the Guidance provides important information on the relevant legal frameworks, policies and institutions. The Guidance also provides information on relevant state and federal climate legislation, as well as an overview of regulatory activity. The Guidance takes it a step further by detailing how climate legal risks materialise in specific practice areas.
Corporate law
Clients need to consider the impact of climate change in a variety of ways in relation to corporate law. Even though the Corporations Act 2001 (Cth) does not contain any directors’ duties specific to climate risk, the scope of existing directors’ duties will continue to evolve, and climate risks are likely to be increasingly captured by those duties. This may create a legal impetus for boards to scenario plan, make disclosures in accordance with guidance, and respond to the reputational and financial implications of physical and transitional climate risks.
In relation to directors’ duty of care and diligence under section 180 of the Corporations Act, that duty will require careful consideration of potential climate change-related risks for their business and, to the extent those risks are material, proactive steps to mitigate or otherwise address those risks. The Centre for Policy Development published three opinions by barristers Noel Hutley SC and Sebastian Hartford Davis in 2016, 2019 and 2021 on directors’ duties and climate change. Hutley and Davis stated the duty of care and diligence extends to climate risks, requiring directors to obtain knowledge about the effect of climate change on their business, consider and disclose climate-related risks, and take reasonable steps to ensure positive action is taken to address climate-related risks. As the Guidance outlines, it is likely that directors’ duties will increasingly capture climate-related risks due to further guidance from ASIC, the ACCC and APRA, and from voluntary disclosure frameworks that provide an indicative standard of conduct (such as the Taskforce on Climate-related Financial Disclosures and the Taskforce on Nature-related Financial Disclosures). In addition, there is growing pressure from shareholders, activists and other stakeholders for companies to act on climate change.
This has been an area of focus for activist groups. For example, in early 2023, environmental charity ClientEarth commenced proceedings in the UK, in the form of a derivative action against Shell’s directors.
Mergers and acquisitions
In the field of mergers and acquisitions (M&A), climate risks have increasingly impacted how clients do deals, as acquisition and divestment transactions may have a material impact on a company’s transition strategy.
There are a range of strategic considerations which need to be factored into due diligence and M&A evaluation processes when considering the implications of climate risk. This also extends to financing associated with such acquisitions and whether sustainable finance options may be available.
The Guidance provides an overview of the range of strategic considerations which need to be factored into due diligence and M&A evaluation processes when considering the implications of climate risk.
Construction and infrastructure
In projects, construction and infrastructure, clients may seek advice on managing climate risks over the course of projects of all sizes. The Guidance details several factors that legal practitioners should consider when assisting clients with designing construction materials to reduce emissions, navigating the optimal approval pathways with consent authorities, and engaging with regulators and other stakeholders.
The impact of climate change on the solicitor-client relationship in practice
To ensure that legal practitioners and clients develop effective relationships, legal practitioners need to be equipped to identify and clearly articulate the climate risks clients currently face, and may face in the future, and assist their clients to evolve to capitalise on new opportunities created by the energy transition.
The Guidance provides legal practitioners with insights on key factors to consider, and effective tools and strategies to leverage when building and maintaining strong relationships with clients. This includes careful consideration of how legal practitioners should present themselves to clients and the wider public, how to approach new instructions, whether to accept instructions, and the important factors to bear in mind when considering the scope of a retainer.
Launch of the Guidance
The Guidance was launched at a sold out event at the Law Society on 27 February 2024, with a panel session hosted by Law Society President, Brett McGrath alongside guest speakers Mark Smyth, Partner at Herbert Smith Freehills and inaugural Chair of the Law Society’s Climate Change Working Group, and Elizabeth Wild, Partner at Norton Rose Fulbright. It is now available on the Law Society’s website.
