Company directors that rush to make net zero pledges without fully examining the firm’s ability to meet the goals could be guilty of “misleading or deceptive conduct” and vulnerable to regulatory or legal penalties.
They also have a legal obligation to act on climate risk, not just to disclose it, or face accusations of “greenwashing” that could carry real legal consequences.
Those are the opinions of lawyers Noel Hutley SC and Sebastian Hartford Davis, published in an official update to their landmark 2016 legal opinion entitled “Climate Change and Directors’ Duties”, commonly known as the Hutley opinion.
The update followed a business and regulatory roundtable on climate risk hosted by the Centre for Policy Development, and attended by major business groups including the Business Council of Australia, the Australian Institute of Company Directors and the Australian Chamber of Commerce and Industry.
Following the meeting, the CPD commissioned Hutley and Hartford Davis to update their opinion.
“It is clear the benchmark for directors on climate change and attendant risks and opportunities continues to rise,” the updated opinion reads.
“Firms and sectors with significant exposures to a decarbonising global economy are facing pressure from their shareholders and stakeholders to consider net zero strategies and commitments of this nature. The COVID-19 pandemic has elevated a focus on how firms and sectors prepare and act in respect of other foreseeable systemic risks like climate change.
“In our opinion, it is no longer safe to assume that directors adequately discharge their duties simply by considering and disclosing climate-related trends and risks; in relevant sectors, directors of listed companies must also take reasonable steps to see that positive action is being taken: to identify and manage risks, to design and implement strategies, to select and use appropriate standards, to make accurate assessments and disclosures, and to deliver on their company’s public commitments and targets.”
In the last year, there has been a rush of companies announcing climate-related pledges, many of which include net zero pledges generally by 2050. Hutley and Harford Davis said there was a risk that many of these are being made without reasonable basis, and could “therefore be taken to have misled or deceived, or to be likely to mislead or deceive, the users of those financial statements”.
That would expose them to penalties from the Australian Securities and Investment Commission (ASIC).
It’s a stark warning to companies that have made their pledges without much thought, in a false sense of ease over the long timeframe and current lack of clear regulatory or legal approach to climate risk. This is a wake-up call for such businesses, reminding them that net zero pledges are serious statements of corporate intent and must not be made unless work has been done to ensure they are deliverable.
“The duty of care for directors on climate risks is now clear,” said Travers McLeod, chief executive of the CPD.
“The conversation has shifted emphatically to the rising standard of care directors are required to discharge with respect to climate change. The focus is now on the gap between what needs to happen, or what is being promised, and what is being done.
“Many Australian firms have been stepping up their climate-related governance, disclosure and capabilities to meet this head on. But it is clear more is needed to keep pace, as surging momentum on net zero reshapes global markets and regulators, shareholders, customers and policy makers step up their scrutiny of corporate responses.”
The opinion comes days after the Australian Prudential Regulation Authority published draft guidance instructing financial service providers that they must respond to the physical, transitional and litigation risks being created by climate change.
James Fernyhough is a reporter at RenewEconomy. He has worked at The Australian Financial Review and the Financial Times, and is interested in all things related to climate change and the transition to a low-carbon economy.