Archive for October, 2014

climate change and director responsibilities

When the evidence for anthropogenic climate change is no longer in dispute, it is unthinkable that there are directors of publicly listed companies who admit to be climate change deniers.  There is no longer any scope for deniers to cling to their ideological positions, even if encouraged by sceptics in Government, certain political donors and their sympathisers. See an earlier post on conservative ideology and climate change.

Some recent work by a special counsel at Minter Ellison, Sarah Barker, has highlighted the fact that climate change deniers who are company directors are likely to breach their duty of care.

Sarah has two decades experience on advising governance, disclosure and fiduciary duty issues and was recently acknowledged by the United Nations PRI for her recent work on directors duties and climate change.

As Chairman of Regnan, Australia’s leading governance advisory and engagement body, I am particularly interested in Sarah’s paper and its implications for corporate Australia. The abstract, quoted with permission, reads as follows:

“The science relating to anthropogenic climate change is no longer in credible dispute. With its physical and economic impacts increasingly observed, the attention of legal commentators has begun to broaden from responsibility for emissions mitigation to liability for climate change induced harms.

 At the same time, Courts are demanding higher standards of proactivity and engagement from corporate boards in order to satisfy their statutory directors’ duties.

This paper combines, and extends, those two areas of scholarship by examining whether common corporate governance approaches to climate change may contravene directors’ primary duties under Chapter 2D of the Corporations Act.

 It concludes that, even where directors’ subjective bona fides are not in question, passivity, reactivity or inactivity on climate change governance is increasingly likely to contravene the duty of care and diligence under section 180(1) of the Corporations Act, and increasingly unlikely to satisfy the ‘business judgment rule’ defence under section 180(2). This includes governance strategies that emanate from climate change denial, a failure to consider its impacts due to ignorance or unreflective assumption, paralysis caused by the inherent uncertainty of its magnitude and timing, or a default to a base set by regulators or industry peers. In addition, even considered decisions to prevail with ‘business as usual’ are increasingly unlikely to satisfy the duty (or the business judgment rule defence) – particularly if they are the product of a conventional methodology that fails to recognise the unprecedented challenges presented by an erratically changing climate. In addition, whilst unorthodox, it is reasonably arguable that a failure to actively consider the impacts of climate change may also breach the duty to act in good faith in the best interests of the corporation under section 181.

 Accordingly, directors who do not proactively respond to the commercial risks and opportunities of climate change, now, may be held to account under the Corporations Act if corporate value becomes impaired into the future”

 Maybe activist investors will start to demand  board change and directors who are climate change deniers will eventually be forced to step aside. A better outcome would be for them to acknowledge  that their own views and the overwhelming scientific evidence are at odds, and to further reflect on that Sarah’s paper may have implications for them.