News & Views

Bar for directors rising on sustainability

The Centre for Policy Development has released a new legal opinion which demonstrates that the bar for company directors is rising as the links between social and environmental factors and financial risks and performance, and the implications of this for directors’ duties, come into sharp focus.

There has long been discussion in Australia around the extent to which a director’s fiduciary duty permits or requires consideration of sustainability issues. This new legal opinion, commissioned by the Centre for Policy Development in partnership with the Future Business Council, includes key findings that:

 

  • Climate change risks would be regarded as foreseeable by courts, and relevant to a director’s duty of care and diligence to the extent that those risks intersect with the interests of the company (e.g. by presenting corporate opportunity or risks to the company or its business model).
  • Company directors are not legally restricted from taking into account climate change and related economic, environmental and social sustainability risks, where those risks are, or may be, material to the interests of the company.
  • Company directors certainly can, and in some cases should be considering the impact on their business of climate change risks – and that directors who fail to do so now could be found liable for breaching their duty of care and diligence in the future.

 

Highlighting – from a legal perspective – the imperative for companies to understand and respond to the implications of climate change for their businesses, the opinion concludes:

“There is certainly no legal obstacle to Australian directors taking into account climate changes and other sustainability risks, where those risks are, or may be, material to the interests of the company. The ASX Listing Rules arguably mandate this. Further, the duty of care and diligence is capable of requiring company directors to consider and disclose their exposure to physical, transition and liability risks associated with climate change. 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).”

Access the full opinion on the Centre for Policy Development’s website here: https://cpd.org.au/2016/10/directorsduties/