Climate change litigation risk in Australia

What you need to know

• Climate change litigation continues to increase both within Australia and internationally.
• The causes of action relied on to establish liability in climate change litigation are becoming increasingly varied, with companies and directors now at risk of both novel claims, such as arguments over duty of care, as well as more traditional claims relating to disclosure obligations or directors duties.
• We also expect to see action not only from climate activists, but also from shareholders concerned with the financial impacts of climate change.
• There is currently a real risk of regulatory enforcement action against Australian companies concerning the accuracy of information given to markets. For example, it has been reported that ASIC is currently investigating Australian companies for greenwashing.

What you need to do

• In order to mitigate the risks of greenwashing or failing to make adequate disclosures in relation to climate change, company directors should ensure they have a sound understanding of the regulatory and legal compliance requirements in relation to their company's climate change strategy. 
• Once directors are familiar with the appropriate regulatory regimes and their obligations, the next step is to formulate an appropriate response.  
• Once directors and management have decided the appropriate response, with external consultation as required, it is important that these decisions are properly implemented in the day to day business operations, and if appropriate, disclosed to the public. 

Climate change litigation risks on the rise

In this article, we explore the emerging risks that companies increasingly face due to developments in climate change litigation in Australia. These developments are driven by increasing acceptance that climate change poses an urgent risk to humanity, which has prompted a wave of climate change litigation globally.  

As a result, Australian companies, their directors, and governments face increased scrutiny which manifests itself in many ways, including the following:

• There exists a greater risk that projects requiring government approvals will face legal action by third parties alleging that projects with potentially negative ramifications for the climate should be rejected because the government owes a duty of care to the public at large to protect against climate change. 
• Companies may face claims of "greenwashing", where it is alleged that there has been an inadequate disclosure of climate change related risks to the market. Such action could be taken by activists, shareholders and/or regulators, and could extend to financial advisers or asset managers who are alleged to have engaged in greenwashing by making misrepresentations about the greenness of companies.  Relevantly, ASIC has recently released Information Sheet 271, in which it provides advice to disclosing entities on how to avoid greenwashing.
• There is a risk that company directors will be held to account for breaching a duty to their company to act with due care and diligence in relation to climate related governance of Australian companies. 

Third party challenges to projects requiring government approval

There is an increasing risk that companies, and their projects that require government approvals, will face legal challenge by third parties on the basis that the government owes a duty of care to the public at large to disallow projects which will have negative consequences for climate change.  While no such claim has been successful in Australia to date, international developments suggest the risk to companies is real. 

This is clear from a string of recent Australian cases which have sought to establish that the Federal Government owes a duty of care to protect Australians against the impact of climate change. These cases often turn on the novel application of negligence principles, arguing that harm caused by climate change, worsened by a particular action (or inaction) of the government, is reasonably foreseeable, and that the government therefore has a duty to avoid that harm. 

For example, in Sharma v Minister for the Environment [2022] FCAFC 35  (Sharma), the Full Court of the Federal Court unanimously held that the Commonwealth Minister for Environment did not owe a duty to avoid causing personal injury to Australian children when deciding whether to approve plans to extend an open-cut coal mine in New South Wales, thereby overturning the Federal Court's decision at first instance.  However, it is unlikely that the Sharma decision will be the final word on a duty of care in respect of climate change-related decisions.  There is, after all, another novel duty of care case with distinct facts currently in the Federal Court (Pabai & Anor v Commonwealth of Australia, concerning the impacts of climate change on the Torres Strait Islands), which may lead to further claims in negligence.  However, it is likely that the Australian Government will draw on the Sharma decision in defending the proceedings, including an argument that there can be no duty of care in relation to climate change as it is a matter of high public policy. 

Furthermore, regardless of whether a climate change-related duty of care is established against the government, it is not out of the question that we would see similar claims brought against companies.  For example, in 2021 a Dutch court ordered Royal Dutch Shell to reduce its worldwide emissions by 45% by 2030, finding that a failure to do so would be in breach of its duty of care to prevent dangerous climate change through its policies (albeit applying principles that do not currently form part of Australian law).

Claims for greenwashing or failure to disclose climate change risks

Now more than ever, companies and governments must be mindful of the risk of claims based on allegedly inadequate climate-change related disclosures, also known as "greenwashing".  These cases could take the form of civil penalty proceedings by ASIC or shareholder class actions.  Claims in Australia can be expected to rely on established principles in relation to continuous disclosure and the prohibition against misleading or deceptive conduct, for a new purpose: to ensure that disclosures to the market adequately address and account for climate change risks where a reasonable person would expect the information to have a material effect on the price or value of its securities and in a way that does not mislead the market. 

The recent case of Abrahams v Commonwealth Bank of Australia concerned an application by shareholders seeking access to internal documents under the Corporations Act in order, they said, to assess whether the bank had adhered to its environmental and social policies. On 11 November 2021, the Federal Court ordered that the bank allow the shareholders to inspect documents created by the bank in relation to the bank's involvement in seven specific gas and fossil fuel projects. The shareholders may seek to pursue a substantive claim against the bank if they consider the documents suggest that the bank has not complied with its own policies by undertaking ESG assessments of its investments in certain projects. 

Similarly, a class action currently before the Federal Court, O'Donnell v Commonwealth, concerns retail bondholders who allege that the Australian Government has engaged in misleading or deceptive conduct by failing to disclose climate change risks to investors in bond issue documents. 

A third Federal Court case involves the Australasian Centre for Corporate Responsibility and a large Australian energy company, regarding alleged contraventions of Australia's consumer protection and corporations laws due to statements about clean energy natural gas and plans to achieve net zero emissions by 2040.  This case raises a key issue for companies, being the extent to which those companies that make statements in the market about their emissions reduction commitments can demonstrate a credible pathway to achieve those commitments.

Each of these proceedings has been commenced by climate activists.  Looking forward, however, there is also the risk of claims by shareholders concerned about the long term performance of a company, as well as regulators enforcing relevant disclosure rules.  For example, ASIC has recently released Information Sheet 271, in which it provides advice to disclosing entities on how to avoid greenwashing.  The ASX has similarly stated that it intends to assess the 'green' credentials of listed funds, and report any breaches of its listing rules to ASIC for investigation and possible enforcement.  Accordingly, the risk to disclosing entities arises from activists, shareholders and regulators.  

Risks to advisers and asset managers for greenwashing

As a subset of disclosure related risks, we anticipate claims against financial advisers or asset managers who are alleged to have engaged in greenwashing by making misrepresentations about the greenness of companies.  For example, action has previously been taken against a superannuation fund, REST, where the plaintiff argued that REST had, amongst other things, failed to exercise its powers in the best interests of their beneficiaries by failing to provide adequate disclosure about the risks of climate change to its investments.  This proceeding settled shortly before trial, with REST agreeing to make more detailed disclosures regarding climate change risks.  ASIC has similarly issued guidance to assist superannuation and managed funds avoid "greenwashing". 

Risk to directors for breaching duty of care

In addition to claims against companies and governments, the general trend towards using litigation as a tool to address climate change suggests that directors also face the risk of allegations that they have breached their duty to act with due care and diligence in relation to climate change risks. 

While we have not yet seen such a case in Australia, the three highly publicised opinions from barristers Noel Hutley SC and Sebastian Hartford-Davis, published by the Centre for Policy and Development, outline how the amplified market scrutiny in relation to climate change has meant climate change risks should be taken into account by directors as part of compliance with their care and diligence duty under section 180 of the Corporations Act.  Similarly, in July 2022, the Australian Institute of Company Directors published a legal opinion by barristers Bret Walker SC and Gerald Ng which sought to provide clarity around the duty on directors to act in the best interests of the company under section 181 of the Corporations Act.  The opinion emphasised that in complying with the best interests duty,  shareholders' interests  include the interests of a broad range of stakeholders who might be affected by the company's conduct.  Depending on the circumstances, this might mean a director is obliged to consider the environmental ramifications of their company's conduct.

Accordingly, it is important for directors to consider the regulatory framework in which they operate, remain properly informed, and ensure a proper approach to climate change is implemented within their organisation.  You can read more about this risk, and the need for directors to consider stakeholder interests more broadly, in our previous publication. 

Tips to avoid or mitigate these risks

1. Ensure a clear understanding of the regulatory frameworks at play

In order to mitigate the risks of greenwashing or failing to make adequate disclosures in relation to climate change, company directors should ensure they have a sound understanding of the regulatory and legal compliance requirements in relation to their company's climate change strategy.  While the exact requirements will depend on the jurisdiction and industry in which a company operates, there will likely be some link to the TCFD recommendations (and in the future, the impending Taskforce on Nature-related Financial Disclosures framework).  It is also important to bear in mind that the content of specific legal requirements may evolve incrementally to reflect changes in practice, with the effect that the bar for compliance rises over time.  Our previous publication on APRA's prudential guidance on the management of climate change financial risks provides an example. 

In a similar vein, businesses ought to be mindful of the proliferation of various ESG reporting standards.  For example, the International Sustainability Standards Board (ISSB), which has been newly established by the International Financial Reporting Standards Foundation, is set to develop a global set of sustainability-related disclosure standards.  It is prudent for companies to monitor developing standards such as the ISSB standards in order to understand what is expected of companies globally in relation to ESG matters.

It is similarly important that directors take steps to understand their obligation to consider, and potentially address, the risks posed by climate change.  Our previous publication provides further details of this topic. 

2. Decide on an appropriate response 

Once directors have familiarised themselves with the appropriate regulatory regimes and their obligations, the next step is to consider and formulate an appropriate response.  The steps that directors must take will depend on a number of factors, including the obligations, disclosure and otherwise, that the company is subject to, the industry in which it operates, and the risk posed to the company's long term viability by the effects of climate change. 

Our previous publication provides further details on how to identify and prioritise climate change risks to your business. 

3. Act on the decision

Once directors and management have decided on the appropriate response, with external consultation as required, it is important that these decisions are properly implemented in the day to day business operations.  There remains a significant risk of climate change related enforcement action or litigation where a company pays 'lip-service' to the risks posed by climate change by designing an appropriate response, then failing to actually implement it. 

Depending on where your company operates, it may also be important to consider the risks posed by bribery and corruption, which has a higher risk of manifesting in CO2 reduction efforts in the developing world.  Our previous publication provides further details on this topic.

4. Report or disclose the risks appropriately 

Where required, it is also essential that the response chosen, and the risks it seeks to address, are appropriately disclosed to the public.  In doing so, it is important to avoid any vague or aspirational disclosures, and take steps to ensure that the disclosures are accurate.  A failure to properly disclose these risks could lead to disputes or enforcement action.

Authors: James Clarke, Partner; Michael Deighton-Smith, Lawyer; and Stephanie Douvos, Lawyer.