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An ever-brightening spotlight on governance and disclosure

Environmental issues have been on the radar of Australia's corporate regulators for years. As early as 2008, the ACCC brought separate proceedings against each of De Longhi, GM Holden and Goodyear Tyres. The De Longhi case arose from unqualified claims that the company used 'environmentally friendly' refrigerants in its air conditioners. The GM Holden dispute was due to advertisements that the company's Saab vehicles provided 'carbon-neutral motoring'. Finally, Goodyear Tyres attracted the ACCC's attention when it falsely labelled a line of its tyres as 'environmentally friendly'.

Each case led to an enforceable undertaking to modify the company's advertising, plus additional remedial measures in relation to GM Holden and Goodyear Tyres.

The regulatory interest in climate change is now far broader. In September 2018, ASIC issued a set of recommendations in its report, Climate Risk Disclosure by Australia's Listed Companies,[14] highlighting that managing climate risk is an important governance and disclosure issue. These views are now feeding into the corporate regulator's latest guidance. In August 2019, ASIC published two updated Regulatory Guides,[15] including to add new types of climate change risk to the examples of common risks that may need to be disclosed in certain prospectuses, and to flag climate change as a systemic risk which could affect an entity’s financial prospects in the future and which the entity might need to disclose.[16] ASIC also announced a plan to conduct surveillance of climate change-related disclosure practices by selected listed companies, and in mid-December 2019 it was reported that ASIC had started contacting large corporates as part of this surveillance work.[17] APRA has adopted a similar tack, noting most recently in an open letter on 24 February 2020 that 'the financial risks of climate change will continue to be a focus of APRA’s efforts to increase industry resilience, and more supervisory attention is being given to understanding these risks'.[18]

We have not yet seen regulatory actions commenced on climate grounds by ASIC or APRA, but such actions are not far-fetched. The US, in particular, has been the site of significant regulatory action in the financial regulatory space.

For example, on 8 November 2015, Peabody Energy Corporation reached settlement with the New York State Attorney General’s Office (NYAG) whereby Peabody agreed to revise its financial disclosures to reflect the potential impact of climate change regulations on its future business. This followed an investigation by the NYAG into Peabody’s disclosure of financial risks associated with climate change in its SEC filings. The findings of the NYAG included that Peabody had misrepresented findings and projections of the International Energy Agency regarding global coal demand, and that Peabody had committed financial fraud in violation of New York’s Martin Act. As a condition of discontinuance of the investigation, Peabody agreed to add specific language on climate policy risks in its next quarterly report and to acknowledge potential effects of climate regulation on demand for Peabody’s products and securities.[19] More recently, a decision was handed down late last year in the Attorney General of New York's claim against ExxonMobil for alleged misrepresentations to the public and investors about how it accounted for the costs of climate change regulation.[20] In that case, the court found in favour of ExxonMobil.

Developments in Australia, especially as viewed against the backdrop of regulatory activity occurring elsewhere (particularly the US), suggest that consumer laws, statutory disclosure regimes and directors' duties could be an emerging frontier for climate litigation in Australia.

A shareholder claim brought in 2017 against the Commonwealth Bank of Australia (CBA), argued that climate-related risks were material financial risks to the bank and that the bank had breached the Corporations Act 2001 (Cth) because of inadequate disclosure of this risk. The case was withdrawn after CBA included references to climate risk in its next annual report.[21]

In the superannuation space, a claim was commenced in the Federal Court of Australia in 2017 against Retail Employees Superannuation Pty Limited (REST) by one of the trust's members, arguing that the general duties of superannuation trustees require them to obtain information from investment managers, and provide information to their members, about climate change risks and how they are being managed. The claim alleged that REST has failed to comply with its duties. The trial was scheduled to occur in November 2020. The parties reached settlement out of court before the trial went ahead and the proceedings were dismissed with no order as to costs. REST released a statement in November 2020 which acknowledged that the Australian economy is exposed to the financial, physical and transition impacts associated with climate change. Accordingly, REST stated that as a superannuation trustee, it considers that it is important to actively identify and manage these issues, and continue to develop the systems, policies and processes to ensure that the financial risks of climate change are identified and quantified, considered in the context of investment strategy and asset allocation mix, and otherwise appropriately mitigated and managed, having regard to the Paris Agreement and other international efforts to mitigate climate change. [22]

Most recently, 23-year-old law student Kathleen O’Donnell filed a claim in the Federal Court of Australia against the Federal Government and two government officials, for allegedly failing to disclose the risks to the value of government bonds posed by climate change. This is the first case in the world to deal with climate change as a material risk to sovereign bonds.

O'Donnell is alleging that the Government's failure to disclose information about Australia's climate change risks amounts to misleading or deceptive conduct under the Australian Securities and Investments Commission Act 2001 (Cth). O'Donnell is also alleging that, in managing the website that publishes information statements about government bonds, the Secretary to the Department of Treasury and the CEO of the Australian Office of Financial Management failed to discharge their statutory duty to exercise reasonable care and diligence under the Public Governance, Performance and Accountability Act 2013 (Cth).

O’Donnell is seeking a declaration of breach and an injunction to prohibit the Government from promoting exchange-traded government bonds until it updates its information statements to include information about Australia's climate change risks. She is not seeking damages.

The close analogies between the 'misleading and deceptive' and 'duties of reasonable care' causes of action, and more generally applicable consumer protection laws and directors' duties, suggests that similar kinds of claims could potentially be made against private sector boards in the Australian courts.

The close analogies between the 'misleading and deceptive' and 'duties of reasonable care' causes of action, and more generally applicable consumer protection laws and directors' duties, suggest that we might expect more of these kinds of claims (against both business and government), to appear in the Australian courts.

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