Last week I had the privilege of attending the Future Business Council and Centre for Policy Development – Director’s duties & Climate Change forum. This meeting of business and climate change leaders was significant because these two worlds are about to collide head on. The head of NSW Bar, arguably Australia’s most high profile barrister, Noel Hutley SC and Australia’s major regulator APRA, both threw the climate risk spanner in the works, being explicit in stating that climate change is a material financial risk and one directors will be liable for.
The message was loud and clear from the panel consisting of briefing solicitor, Sarah Barker, Special Counsel at MinterEllison; Brian Horrigan, Dean of the Monash Law School and Angela Emslie, Chair of HESTA, hosted by Alan Kohler, if Directors do not address climate risk and associated risks, they could be held liable. Newly appointed CEO of Future Business Council, James Wright, summarised it perfectly in that “the challenge for directors is to reframe their prism or lens of their fiduciary duties”. While they have been mitigating risk by applying financial ratios, they are now required to think laterally from climate risk, to assess social, reputational, shareholder and environmental risk. This is a paradigm-shift in mindset.
Key areas of governance: (I have summarised the most important areas of governance for companies to pay attention to)
One of the chief legal professionals in the nation Noel Hutley SC has formed his opinion on the climate change implications for Australian company fiduciary duties and the associated risks: Mr Hutley’s view,
“it is likely to be only a matter of time before we see litigation against a director who has failed to perceive, disclose or take steps in relation to a foreseeable climate-related risk that can be demonstrated to have caused harm to a company.”
The Regulatory Framework:
APRA Executive Board Member, Geoff Summerhayes (statement):
“The key point I want to make today, and that APRA wants to be explicit about, is that this is no longer the case. Some climate risks are distinctly ‘financial’ in nature. Many of these risks are foreseeable, material and actionable now. Climate risks also have potential system-wide implications that APRA and other regulators here and abroad are paying much closer attention to.”
Having spoken to previous Australian of the Year and world climate leader this morning, who was on the World Sustainability Board for a global multinational, we agreed the challenges for directors in Australia are immense. We discussed the Stanford University corporate governance research that states 92% of Directors in the US are not equipped to deal with cybersecurity risk, he felt ASX directors would need expert opinion to help them steer through this climate risk economic transition.
Australia is already experiencing the threat of “Stranded Assets” with Engie having to close Hazelwood Coal Power Station next month. While it is costing jobs, climate change in China is costing lives. The health problem in Shanghai from climate change has become an economic problem in catastrophic health and related issues. Just like Australia needs to realise the Great Barrier Reef is a $7-Billion-per-annum-asset in tourism revenue on the Government balance sheet, we also need to invest in renewable energy and clean technology to steer the innovation agenda.
So, what’s the risk?
As Angela Emslie, Chair of Hesta, put it as history repeated, “It will play out like in the 80s when OHS and safety became a liable risk, climate will be front and centre to become mainstream director fiduciary duties”. The challenge is, we have got a lot to learn in the interim, we need a shift of mindset to lateral thinking and global risk challenges beyond our borders of 25 million people in the world’s hottest climate continent.
What can company directors do to mitigate climate risk?
First of all, read the Future Business Council / Centre for Policy Development report. MBB, strategy and Big4 firms or independent consulting firms or Governance and specialist ESG research firms are options for advice. Boards and CEOs could consider appointing a Climate Advisory Board to act as a conduit with company directors and boardrooms. Alternatively, send your board to the Antarctic or Shanghai with your startup thinkers and innovation team and have an off-site Climate Hackathon?!
Is your company equipped to address the risks of climate disruption and invest in the clean technology for tomorrow? Invest for tomorrow today.