Conversations around climate change are becoming increasingly prevalent and important. As a result, a growing number of regulators and shareholders are calling for companies to assess the potential risks climate change poses to their businesses and develop plans to mitigate these risks. Corporate regulator, the Australian Securities and Investment Commission (ASIC), has demonstrated an awareness of the effects that climate change has on businesses and issued guidance to company directors especially those of public listed companies to remember their director’s duties. 

This article will explain:

  • what your duties are as a company director;
  • the risks that climate change poses to your business; and
  • what you should be doing as a director in response to these risks. 

What Are My Directors’ Duties?

As a company director, you are responsible for the management of your business’ affairs, and you owe duties to your company. One of your key duties is to exercise due care and diligence when carrying out your role.

As a director, you must perform your role with the degree of care and diligence of a reasonable person, assuming they:

  • were a director of the company in the same circumstances; 
  • occupied the same office as you; and
  • had the same responsibilities as you.

Each company is different, and no single standard of care and diligence applies to all directors. Therefore, as a company director, you must consider what an appropriate standard is based on the potential risks that relate to your particular company. 

For example, you could consider risks associated with:

  • cybersecurity;
  • economic crisis;
  • technological disruption;
  • market instability; and 
  • climate change.

If you are accused of breaching your duty of due care and diligence, you may be able to use the business judgement rule as a defence in situations where you:

  • legitimately believed you were making the right decision; and
  • made the decision in good faith.

A key aspect of the business judgement rule is properly informing yourself about the matter. In this context, this may mean:

  • looking into the potential impact climate change could have on your business; and
  • developing a plan to mitigate the risks.

What Risk Does Climate Change Pose to Your Business?

The risks and possible impact of climate change to your business can be split into:

  • physical risks; and
  • transitional risks. 

Understandably, some industries will be more susceptible to the risks of climate change purely by their nature.

Physical Risks

Physical risks are classified as risks that are associated with physical damage caused by short- or long-term climate patterns. These climate patterns can include:

  • drought;
  • floods; 
  • coastal erosion; and
  • fires. 

Physical risks often have a direct impact on company assets.

For example, long-term drought may affect crop growth.

However, these risks can also have an indirect impact.

For example, the disruption of your supply chain as a result of low crop growth may pose a financial risk to your company. 

Transitional Risks 

Transitional risks are risks that arise because of a shift away from activities and operations that contribute to climate change. As industries adapt to climate change, there could be: 

  • changes to government policy or the law;
  • technological changes; and
  • market shifts.

For example, a government policy which aims to reduce fossil fuel use would be a risk to an oil or coal company. 

These risks can be financial but also reputational. Reputational risks could arise as community and stakeholder awareness of climate change grows, resulting in: 

  • less tolerance or investment interest in companies which contribute to climate change; and 
  • more interest in companies which prioritise environmental sustainability.

Disclosure Obligations for Companies

ASIC guidance indicates that publicly listed companies should be reporting the potential financial implications that both physical and transitional risks may have on your company to potential investors and stakeholders. Companies should be making disclosures relating to potential climate change risks in: 

  • company prospectuses; and
  • annual directors’ reports. 

Public companies will use a prospectus when offering shares to the public. The purpose of a prospectus is to provide investors with the necessary information to assess the risks and potential return on their investment and allow them to make an informed decision. If you are preparing a prospectus, you must ensure that the disclosures you are making are supported by evidence and are not misleading or deceptive.

Annual directors’ reports are generally issued at the end of each financial information to the shareholders alongside an annual financial report. The annual director’s report will provide context to the company’s financial performance for that year and include business strategies for future financial years.

What Should You Be Doing as a Director?

ASIC indicated in their guidance that company directors should be assessing these effects and mitigating them as part of their overarching duty to act: 

  • in the best interests of the company; and
  • with due care and diligence. 

To discharge your duty effectively as a director, you should:

  • understand and inform yourself of any direct or indirect impacts that climate change may have;
  • monitor policies in this area closely, particularly those relating to your reporting and disclosure obligations;
  • carefully consider regulatory advice that is available from ASIC and other regulatory bodies;
  • take reasonable and active steps to mitigate the impact that climate change may have your business; and
  • assess your disclosure requirements and report on the risks of climate change to your business.

Currently, most of the focus is on the disclosure obligations that public listed companies face. However, there is increasing community, shareholder and investor support for private companies to voluntarily disclose and report any climate change risks as part of their corporate risk management strategies. 

Consequences for Breaching Directors’ Duties

There are a range of potential consequences you could face if you breach your director’s duties, including by failing to act with due care and diligence. These consequences include:

  • civil penalties; 
  • disqualification as a company director; 
  • financial liability; or 
  • criminal charges leading to jail time in serious cases. 

ASIC has confirmed that these consequences still apply to directors who fail to properly inform themselves of the risks that climate change poses to their businesses. Courts are also increasingly likely to view climate change risks as foreseeable business risks and, therefore, relevant to the director’s duty of care and diligence. It is, therefore, crucial to understand the link between climate change and your business when carrying out your duties as a director. 

Key Takeaways

As social awareness of climate change continues to grow, so too does the overall push for corporates to take responsibility for monitoring their roles in this space. It is increasingly clear that the impacts of climate change extend beyond the environment and into the economy and the business that make it up.

As a company director, you are responsible for understanding potential and foreseeable risks to your business. Climate change is one such risk. Depending on the nature of your business, you may need to:

  • consider the potential climate change impacts on your business; and
  • respond accordingly with a plan to mitigate those risks. 

Much like any other foreseeable risk to your business, you have a legal duty to mitigate these impacts. Failing to do so may be a breach of your director’s duties. If you have any questions about directors’ duties, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

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