Progressive corporations are now focused on Environment and Social Risk Governance (ESG) criteria as an important indicator of business performance.  Evaluation of which environmental risks might affect a company’s income and expenses, and how to manage those risks, are important issues for socially aware investors in driving investment decisions.  In the coming decade – as millennials build their own wealth – ESG will likely determine whether or not they invest.

During the recent Senate committee hearings into Climate risk disclosure, ASIC affirmed that Australian directors have a duty to consider and disclose climate risks.  ASIC joint senior executive, Kate O’Rourke, raised the spectre of s 180 of the Corporations Act and the obligations on directors to act with care and diligence, when making decisions in the best interests of the corporation.

Ms O’Rourke noted that guidance is required to be provided to boards on the implications of climate considerations for business decisions.  Despite this warning, Emma Herd, CEO of the Investor Group on Climate Change, told the Senate inquiry hearing that most of the top 200 ASX listed companies have significant gaps in their carbon disclosure, with most companies failing to report on their strategies to address climate related risks.  A key focus of the Senate inquiry committee’s final report will be on the consensus that directors have a duty to consider climate risks on the one hand, and the current lack of disclosure on the other.

Like ASIC, APRA is also focused on the need for carbon risk disclosure, with Executive Board Member Geoff Summerhayes recently announcing that APRA will increasingly examine how banks, super funds and insurers respond to climate risks.  Mr Summerhayes pulled no punches, stating “if entities’ internal risk management processes are not starting to include climate risk as something that has to be considered – even if risks are ultimately judged to be minimal or manageable – that seems a pretty reasonable indicator there might be something wrong with the process. Similarly, if you’re an investor and you’re not already asking questions about how the companies you invest in approach these issues – perhaps you should be.”

It will probably be some years before we see shareholder action arising from failures to disclose climate risks.  But as Noel Hutley SC stated in a recent Opinion commissioned by the Centre for Policy Development and the Future Business Council “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 (including, perhaps, reputational harm).”[1]

As Mr Hutley noted “climate change risks are capable of representing risks of harm to the interests of Australian companies, and would be considered by a court to be foreseeable risks at the present time. In other words, they would not be considered ‘far-fetched or fanciful’.  Importantly, a director’s lack of belief in climate change, or whether it was human-induced, would not provide sufficient protection. “The Court will ask whether the director should have known of the danger”.[2]

Comment

Climate Change poses risk and opportunity for the insurance market.  While the recent effects of Cyclone Debbie have caused significant property and business losses in northern Australia, the environmental risks for business are not confined to property loss from extreme weather events.

Insurers have a key role to play in lobbying governments for policy development on climate action.  Their unique risk management expertise can help policymakers to implement strategies to reduce overall risk to the community.  At the same time, climate change provides a unique opportunity for insurers to refine traditional products, including property, casualty and directors and officers cover, to ensure that corporations and their directors are covered when the consequences of climate change result in first party losses or third party claims.

[1] Noel Hutley Opinion p22

[2] Noel Hutley Opinion p15