Director’s duties and climate risk – what are your obligations?

Following on from our article Cyber resilience and directors' duties published on 16 November 2020 (link), the recent article by ASIC Commissioner Cathie Armour, Managing climate risk for directors,¹ is yet another reminder of how important it is for directors to remember their duty under the Corporations Act 2001 (Cth) to exercise their powers and discharge their duties with the requisite standard of ‘care and diligence'²; and to remember that the duty is owed to the company, rather than directly to shareholders.³

Climate related risk has previously been highlighted by ASIC as a systemic risk in the Australian market, in light of the scale of the potential impact it could have on companies, investors, and consumers alike.  Even in the midst of the COVID-19 pandemic, other marketplace risks cannot be ignored.

Ms Armour commented that ASIC aims to ensure listed companies have appropriate governance structures in place to manage this risk, and provide the market with reliable and useful information on their exposure to material risks and opportunities.  

To assist directors and company officers in compliance, ASIC has published the following high-level recommendations:

Consider climate risk

• This applies to directors and officers of listed companies;
• Consideration should be paid to both short term risk, as well as long term risks;
• The assessment should be continual, not a once a year exercise.

Develop and maintain strong and effective corporate governance

• The stronger the governance within a company, the better information flow.  In turn this enables the board to be active and informed in overseeing climate-risk identification and management;
• ASIC recommends that boards should consider if they are comfortable with the level of oversight and the governance structures that are in place.

Comply with the law

Directors of listed companies should carefully consider the requirements relating to operating and financial review (OFR) disclosures in annual reports under s299(1)(a)(c) of the Corporations Act 2001.  ASIC considers that the law requires an OFR to include a discussion of climate risk when it is a material risk that could affect the company’s achievement of its financial performance.  Depending on the circumstances, disclosure of climate risk may also be required by the law in other contexts, such as a prospectus or continuous disclosure announcement.  Boards should ask if material climate-related disclosures have been made and updated where necessary and appropriate.⁴

Disclose useful information to investors

ASIC recommends listed companies with material exposure to climate risk consider reporting under the Financial Stability Board’s Taskforce for Climate-related Financial Disclosures framework.

Ms Armour commented that ASIC acknowledges that there are challenges in preparing and using climate related disclosure (for example scenario analysis). Although ASIC reserves the right to consider enforcement action if serious failures in disclosure occur, in light of the challenges, it intends to adopt a consultative approach going forward.

Lavan comment

In scientific and media circles climate-change is a visible and divisive issue, somewhat conversely, in the legal sphere it is firmly a developing area and is rarely at the forefront of consideration.

Nevertheless, directors and company officers need to remain alive to and seriously consider climate in the exercise of their duties.

If you have any questions in relation to this article, or require advice tailored to your situation, please do not hesitate to contact Cinzia Donald or Lorraine Madden.