Climate Risk and Directors Liability

Company directors are liable for foreseeable risks if they fail to take reasonable steps to identify and mitigate them. 

This is because directors have a duty of care to the company and its shareholders to act in the best interests of the company. This duty of care includes taking reasonable steps to protect the business from foreseeable risks. Duty of care applies to all types of risks, including financial risks, operational risks, environmental and climate risk.

For example, if a director knows that the company is facing a risk of financial loss, they have a duty to take steps to mitigate that risk. This could include taking measures to reduce costs, increase sales, or obtain insurance. If the director fails to take these steps and the company suffers financial loss, the director could be held liable for that loss.

The extent of a director's liability for foreseeable risks will depend on the specific facts of the case. However, in general, directors will be liable for foreseeable risks if they fail to take actions to mitigate them.

An opinion, provided by Mr Hutley and junior counsel Sebastian Hartford-Davis stated that, as a matter of Australian law, directors and boards must actively engage with the impacts of climate change-related risks on their operations and strategy in order to satisfy their duty of due care and diligence under section 180 of the Corporations Act. It is conceivable that directors who fail to consider the impacts of climate change risk for their business, could be liable for breaching their statutory duty of due care and diligence going forwards.

This means directors should ensure they are adequately informed in relation to the best data and science available and, inquire of experts where appropriate and evaluate the impact of climate risks and the company's strategic response.

Climate risks must be given the same critical consideration as any other issue that may have a material impact on financials, business operations, risk management and strategy. The Australian Government has committed to applying standardised climate-related financial disclosure requirements to large businesses. In comparable jurisdictions, such as New Zealand, the UK and the European Union, such disclosures are or will be mandatory for large, listed businesses and financial institutions. In jurisdictions developing mandatory disclosure, including Hong Kong, Switzerland and Japan, disclosure is anticipated to apply to large, listed businesses and financial institutions.

As a starting point in Australia, it is proposed that standardised climate-related financial disclosure requirements would initially apply to certain listed entities covered by the Corporations Act 2001 (Corporations Act), with views sought on thresholds that could be applied to determine the mandatory application of new requirements (for instance, market capitalisation, turnover, and/or number of employees). As outlined above, disclosure requirements could gradually be applied to smaller listed entities over time, as climate reporting capability is institutionalised in Australia.
In the context of climate risk, the first exercise is hazard identification. This is the process of identifying potential threats that could cause harm to the company. Organisations can use a risk assessment tool such as Climatics. This solution provides acute risk assessment of individual perils and exposures to help evaluate the likelihood and severity contrasted against vulnerability. The immediate follow through as previously mentioned, is taking action to reduce or avoid any impact.
Note, if directors are using bad data or data that is not transparent, they may make decisions that are not in the best interests of the company. This could lead to financial loss, damage to reputation, and other negative consequences.

In Australia, directors can be held liable for decisions they made while in office for a period of time after they resign or retire. The length of time is typically two years, but it can be extended to three years in certain circumstances.
Directors can be held liable for decisions they made while in office if they:
•    Breached their duties as a director;
•    Failed to exercise reasonable care and skill; or
•    Were involved in fraud or other criminal activity.

If a director is held liable for a decision they made while in office, they may be personally liable for any damages that are caused. This means that they may have to pay the damages out of their own pocket, even if they were acting in good faith.

It is important for directors to remain informed; ignorance isn’t an excuse. This means some self-education on not just the impact of climate risk on a business, but also the various solutions in risk identification, quantification and mitigation… Lots of ‘ations’ there. It would also pay to document the decision-making process. Directors of public companies are subject to the same laws and regulations as directors of private companies. However, there are some additional considerations that public company directors need to be aware of.
 
An essential exercise for public company directors is the duty of continuous disclosure. This means that directors must keep shareholders informed of any material information that could affect the company's share price. This covers information about the company's financial performance, its operations, and its plans for the future. Within the last year we have witnessed multiple events that have heavily impacted supply chains, communications and business operations. This often has a ripple affect radiating out from critical logistics and suppliers to buyers and service delivery. 
In Australia, a director can be sued by shareholders for decisions they made while in office for a period of two years after they resign or retire. This is known as the "retrospective limitation period".
The retrospective limitation period is a statutory limitation period, which means that it is set by law. The retrospective limitation period is designed to protect directors from being sued for decisions they made long after they left office.

There are a few exceptions to the retrospective limitation period. For example, a director can still be sued if they:
•    Breached their duties as a director;
•    Failed to exercise reasonable care and skill; or
•    Were involved in fraud or other criminal activity.

If a director is sued for a decision they made while in office, the court will consider the following factors when deciding whether to allow the claim to proceed:
•    The nature of the claim;
•    The extent of the damage suffered by the shareholders;
•    The conduct of the director; and
•    The public interest.

The court will also consider the retrospective limitation period when deciding whether to allow the claim to proceed. If the claim is brought outside of the retrospective limitation period, the court may still allow the claim to proceed if it is in the interests of justice to do so.

There is currently a lot of scrutiny being applied by investors and activist shareholders regarding ESG obligations. Barely a day going by without climate risk and the environment being mentioned in the media. This requires increased sensitivity to the concerns of the business, the investment market and shareholders through delivery of an effective and operationalised response.

Author: Kerry Plowright
CEO/Executive Director Aeeris Limited (ASX:AER)