Time for companies to look at climate change financial risks

Minter Ellison Group

Tuesday, 01 May, 2018

Time for companies to look at climate change financial risks

New legal analysis released to coincide with the Commonwealth Heads of Government Meeting (CHOGM) in London last month shows that Australian business needs to work on better understanding climate change through a financial risk lens — particularly if they don’t want to be left behind by their global peers.

A series of papers released by the Commonwealth Climate & Law Initiative (CCLI) explains how directors could be held personally liable for failing to assess, manage and report climate risk, where it poses a foreseeable and material financial risk to their company. The reports demonstrate a high level of uniformity across the corporate governance laws of four Commonwealth jurisdictions: Australia, the UK, South Africa and Canada.

Sarah Barker, special counsel for climate change risk for legal services company MinterEllison, worked with the University of Oxford in drafting the CCLI’s Australian country paper. She explained why the laws of these four jurisdictions are particularly significant as companies and their directors wrestle with the implications of climate change for their business performance and prospects.

“Between them, Australia, Canada, South Africa and the UK account for a quarter of global pension assets. Their stock exchanges account for a third of the world’s listed fossil fuel assets and they are home to more than 10% of the world’s oil and coal reserves,” Barker said.

According to Barker, the new legal analysis is “timely” given the federal government’s recent response to the recommendations of the Senate Economic References Committee Inquiry into Carbon Risk Disclosure — a response which indicates that the Corporations Act currently “accommodates corporate governance and disclosure of climate-related financial risks, and indicated support for the development of further guidance on point by ASIC and the ASX”.

“In addition, the government suggested that companies have regard to the Recommendations of the G20 Financial Stability Board’s Taskforce on Climate-Related Financial Disclosures,” Barker added.

At the same time, investors and corporate regulators are demanding a step up in climate risk fluency from directors and more meaningful disclosures in annual reports (including in relation to stress-testing and scenario analysis, a central plank of the G20 Taskforce Recommendations).

“The Australian Government’s response to the Senate Committee Inquiry may be perceived as a significant shift in domestic regulatory practice in some quarters — certainly for those corporations accustomed to viewing climate change as a singularly ‘environmental’, or only a long-term, issue,” said Barker. “But far from being a groundbreaking development, in reality it merely served to more closely align Australia’s regulatory position with that of other corporate or prudential regulators, treasuries and stock exchanges around the world.”

She noted that Europe continues to show leadership on this front, with France having introduced mandatory climate risk analysis and reporting requirements for pension funds, insurers and asset managers back in 2016. A number of other European countries are actively considering mirror legislation. In the UK, legislators are meanwhile considering whether to incorporate the G20 Taskforce Recommendations into their mandatory reporting laws.

In addition, in March 2018 the European Commission released its strategy for a financial system that supports the EU’s climate and sustainable development agenda, including a focus on incorporating sustainability into prudential requirements and enhancing transparency in corporate reporting.

“Australian company directors need to ensure that they view climate change through a corporations and securities law lens, rather than an ‘environmental’ lens,” Barker said. “The key takeaways from the federal government’s response to the Senate Inquiry are that our law already accommodates action in this area, and that further regulatory guidance can be expected. This is only reinforced by the Commonwealth Climate and Law Initiative’s conclusion that Australian corporate governance laws demand a proactive approach to the governance and disclosure of climate-related financial risks. If this is news to any business or board, they would be well advised to accelerate their understanding of the issue before enforcement proceedings begin to flow.”

Pictured: Sarah Barker.

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