ASIC issues updated guidance for directors seeking to avoid climate lawsuits

Australia’s corporate regulator has released updated guidance reminding directors that they need to assess and disclose the risks of climate change to their businesses, or they could be found to be legally liable for a failure to act.

The Australian Securities and Investment Commission’s move follows a Senate inquiry on carbon risk disclosure, and it explains to companies  the type of information that should be included in company prospectus’ and regular reporting of company operations.

There are growing calls from various investor groups for companies to undertake comprehensive assessments of the risks posed by climate change to their operations, and for the development of plans for how those risks will be mitigated.

In particular, company directors have been spurred into action as a result of a growing body of legal advice that suggests directors face the risk of being sued by investors and the wider community if they fail to address the risks of climate change to their companies.

A survey of large banks, insurers and superannuation managers completed by the Australian Prudential Regulation Authority (APRA) found that just one third of respondents believed climate change was a material risk to the operations.

This includes notable advice from the former president of the NSW and Australian Bar Associations, Noel Hutley SC, who suggested that the risk of climate change related litigation is accelerating unless directors start proactively considering climate change risks.

Globally, recommendations to companies are being driven by the Taskforce on Climate-Related Financial Disclosures (TCFD), established by the G20’s Financial Security Board, and chaired by Bloomberg founder and former New York mayor Michael Bloomberg.

Companies have scrambled to understand the recommendations of the TCFD, and those of financial regulators, to mitigate the legal risks of ignoring climate change.

Financial regulators, including ASIC, have pointed to the different kinds of risks that may impact companies, including the physical risks to assets and property, as well as the transitional risks that are created through a shift away from activities that contribute to climate change, such as fossil fuel extraction.

While ASIC updated its guidance on the types of risks that companies should assess and disclose, it believes there are minimal risks that directors will face litigation, provided they follow the advice.

For example, ASIC has now provided updated guidance to companies about the kinds of climate change related financial risks that should be disclosed.

ASIC, along with other regulators, has pointed to two key kinds of risks that may impact companies, including the physical risks to assets and property through flooding and severe weather events, as well as the transitional risks that are created through a shift away from activities that contribute to climate change, such as policies seeking to reduce fossil fuel use.

“Transitioning to a lower-carbon economy may entail extensive policy, legal, technology and market changes to address mitigation and adaption requirements related to climate change,”  the ASIC guidance on prospectus disclosure now says.

“Depending on the nature, speed and focus of these changes, transition risks may pose varying levels of financial and reputational risk to companies (transitional risks of climate change).

“Physical risks resulting from climate change can be event driven (acute) or longer term shifts (chronic) in climate patterns. Physical risks may have financial implications for companies, such as direct damage to assets and indirect impacts from supply chain disruption.”

ASIC has also updated its guidance on ongoing risk disclosures for company directors, recommendation that companies continue to undertake assessments of climate change related risks, and such assessments should feature within regular operational reports for companies.

ASIC believes that provided directors are making such disclosure and that these disclosures are in line with the best available evidence at the time, directors can mitigate the risk of legal liability for making ‘misleading or deceptive’ forward-looking statements.

“While disclosure is critical, it is but one aspect of prudent corporate governance practices in connection with the mitigation of legal risks,” it says.

“Directors should be able to demonstrate that they have met their legal obligations in considering, managing and disclosing all material risks that may affect their companies. This includes any risks arising from climate change, be they physical or transitional risks.”

ASIC will undertake active assessment of the climate change risk disclosures by companies, to ensure they are complying with the disclosure expectations.

The announcement was welcomed by the Australian Greens, who were the original instigators of the Carbon Risk Disclosure enquiry that recommended ASIC update its guidance, but said the government needed to do more to ensure the reporting obligations were enforced.

“We’re pleased to see additional work from ASIC providing guidance to companies on carbon risk, following on from the Greens work in establishing a senate inquiry,” Greens spokesperson Adam Bandt told RenewEconomy.

“We’re also calling on ASIC and the government to go further to ensure Australian companies are adequately protected against carbon risk.  The Greens are calling for mandatory carbon risk disclosure requirements for large companies, climate-exposed companies and the financial sector. We also want to see explicit responsibilities introduced for company directors to manage climate risk.”

Alongside regulators, there are growing calls from various investor groups for companies to undertake comprehensive assessments of the risks posed by climate change to their operations, and for the development of plans for how those risks will be mitigated.

Major Australian companies have faced multiple calls from groups representing investors to better assess their contributions to climate change, and the risk it poses to the future of the company.

This has included shareholder resolutions put forward on behalf of shareholders by groups like Market Forces and the Australian Centre for Corporate Responsibility, targeting companies like BHP, AGL, Rio Tinto, Woodside and Santos which all have direct exposures to the fossil fuel industry.