06 October 2021
Given the recent rise in shareholder activism and significant judicial decisions relating to climate change, the message is clear – if corporations do not actively take steps to meet rapidly evolving climate change benchmarks through proper due diligence, risk management, target setting and transparent reporting, it is likely that those corporations will be compelled to do so.
In Australia, regulator activity in this area has been sporadic, but numerous international developments indicate it is soon likely to come into sharp focus. While the regulators play ‘catch-up’, it is anticipated that shareholder activism and climate change litigation will emerge as one of the greatest threats for corporations over the next 2-3 years.
The legal, financial and reputational risks associated with failing to robustly engage with climate change are significant. Apart from the imposition of penalties, the resulting reputational damage could be debilitating, and impact the ability to secure financing or result in the withdrawal of capital. For company directors, individual liability under the Corporations Act 2001 for breach of fiduciary duty is also a very real risk.
However, the shifting public sentiment also presents opportunity. The Edelman Trust Barometer 2021 indicates that public trust in companies is currently higher than trust in the government – 66% of respondents voted that CEOs should take the lead on change rather than waiting for the government to impose change, while 68% endorsed the notion that CEOs should step in when the government does not fix societal problems.
The community is looking to company directors and industry to create change where government regulation may be lagging, with significant market rewards to follow for those who adapt early.
“…each reduction of greenhouse gas emissions has a positive effect on countering dangerous climate change… RDS cannot solve this global problem on its own. However, this does not absolve RDS of its individual partial responsibility to do its part regarding the emissions [which] it can control and influence.”
Hague District Court in Milieudefensie et al v Royal Dutch Shell Plc (2021)
A number of significant international and domestic court proceedings in 2021 illustrate the increasing willingness of the courts to adopt the science based evidence of climate change, link human rights to climate change and hold both corporations and governments to account against greenhouse gas emission (GHG) targets.
Two high profile examples include:
Following the Sharma judgment and having regard to the principles in the Shell decision, it is not inconceivable that Australian courts could soon find that corporations owe a duty of care to Australian children to adopt appropriate frameworks and align their conduct to adopted international climate change goals, such as the Paris Agreement.
Climate change activism is also likely to manifest itself in a number of ways in the future, including:
The significance of these developments is heightened by the release of the Intergovernmental Panel on Climate Change 6th Assessment Report in August 2021 (2021 IPCC Report), which provides a comprehensive global assessment of the current status and projections as to the future trajectory of climate change on the basis of the best available physical science. Significantly, the 2021 IPCC Report found that even if Net Zero is achieved globally by 2050, with negative emissions thereafter, the chance of limiting global warming to 1.5 degrees is less than 50%.
The 2021 IPCC Report is likely to be used in evidence given by experts in any litigation where climate change grounds form part of the legal challenge. It is also likely unavoidable that consent authorities, regulators and government agencies will need to consider this report when exercising their executive powers where they are linked to climate change issues.
There are various actions that can be taken to minimise the risks of legal challenge. For example, challenges to project approvals and government funding are likely to be minimised if the corporation involved has:
Further, corporate climate change risk and disclosure frameworks, where relevant, should include climate change considerations in alignment with UN recommendations. For example, any such frameworks should align with the Task Force on Climate-related Financial Disclosures (TCFD) global framework for the identification, assessment and financial disclosure of material climate change risks.
Collectively, the above law and policy developments underscore the need for companies to proactively and robustly engage with climate change related risks and dependencies, both within their primary operations and across their supply chain. This will involve elements of horizon scanning and adapting to climate change benchmarks as they develop. The more a corporation can be seen to be taking action, the less likely it is to be the target of any potential legal challenges.
“Shareholders have the right and obligation to set the parameters of corporate behaviour within which management pursues profit.”
Eliot Spitzer
Shareholder activism and impact investing are on the rise in Australia. Recent trends on climate-related risks in the US and activist investing in Europe, coupled with an increased focus on climate change issues, suggest that this is a growing area of risk for boards, and targeted strategies are required to respond adequately.
Shareholder activism typically takes the form of:
Impact investing, on the other hand, is a hybrid of both forms of shareholder activism – it can be characterised as investing with the purpose or intention to generate positive, measurable social and environmental impact alongside a financial return.
Shareholder activism and impact investing are effectively two sides of the same coin, each presenting risks and opportunities for boards across Australia.
While climate change is only one plank of ESG considerations for boards, sustainability issues from a climate perspective necessarily form a key part of scenario planning, given:
The consequences of failing to take into account the demands of investor stakeholders in this area can range from reputational damage to a failure to secure finance or the withdrawal of capital.
In Australia, managed investment schemes and superannuation funds are frequently able to take into account sustainability factors alongside financial returns in determining how best to allocate their capital. Additionally, a high proportion of activists are increasingly prepared to exercise their voting rights to drive change, for example, by removing directors from the board and proposing advisory resolutions or constitutional changes. This is compounded by a growing body of commentary that suggests asset owners and investment managers could be held legally liable for breaching their duty to act with care and skill, or their duty to act in the best interest of a company, if they fail to consider financially material ESG factors.
Shareholders are undoubtedly becoming more proactive and demanding, questioning whether they can do more than manage their assets than for financial performance alone.
The idea of engaging with activist investors remains a daunting one for many directors, especially those in industries where sustainability issues are likely to put them in conflict with their stakeholders.
Set out below are six practical suggestions or ‘rules of engagement’ for boards on how to de-risk their organisations and engage effectively with activists and impact investors.
Shareholder activism and impact investing undoubtedly pose significant legal, financial and reputational risks for organisations. Careful planning and the implementation of appropriate response strategies will enable directors to engage effectively, minimise risk and deliver better outcomes for all stakeholders.
This article is part of our publication Continuity Beyond Crises: Staying ahead of risk in an evolving legal landscape. Read more here.
[1] See Notre Affaire a Tous and Others v France, No. 1904967, 1904972, 1904976/4-1, Paris Administrative Court (3 February 2021), available here.
[2] See Lawyers for Climate Action NZ v The Climate Change Commission (1 July 2021), available here.
Authors
Head of Environment and Planning
Head of Corporate
Senior Associate
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Head of Environment and Planning