2. Developments in Company Law in Response to Climate Change

Since the international Paris Agreement of 2015,^[1] there have been many significant developments in company law in response to climate change, triggered by the recognition that climate change poses financially material risks to company interests (and broader systemic risks to economic systems) and therefore enlivens legal obligations to disclose and manage these risks. Over time, the focus has shifted to how companies should approach climate risk management, with institutional investors and other stakeholders pressuring companies to align their risk management to the goals of the Paris Agreement.^[2]

2.1.  Directors’ Duties

There has been a lively debate in Australia regarding the way in which directors’ duties, particularly the duty of care and diligence, apply to climate change. Although this has not yet been tested by the courts, there is consensus among leading commercial law barristers,^[3] regulators^[4] and industry bodies^[5] on the general point that company directors, as part of their duty of care and diligence, are required to inform themselves of foreseeable risks posed to company interests by climate change and take proportionate measures to manage these risks. A series of legal opinions from prominent commercial law barristers Noel Hutley and Sebastian Hartford-Davis have helped to articulate the evolving standard of care in relation to climate-related risks.

In their first legal opinion, published in 2016,^[6] Hutley and Hartford-Davis recognised the increasing evidence of the extent and foreseeability of climate risks for a range of companies in different sectors and argued that the duty of care and diligence obliged directors to identify and assess these risks where they were material to the company. Directors who failed to perceive, disclose or take steps in relation to foreseeable climate-related risks that could be demonstrated to have caused harm to the company were cautioned about increasing liability risk. The opinion noted that while in some cases directors should take further actions to manage material climate-related risks, the duty did not necessarily require directors to act in a particular way.^[7] In 2019, a supplementary opinion drew attention to emerging policy developments, increasing investor and community expectations, and scientific projections, which evidenced that climate risks may manifest in the short to medium term, and which therefore elevated the standard of care expected of a reasonable director.^[8] The opinion concluded: ‘company directors who consider climate change risks actively, disclose them properly and respond appropriately will reduce exposure to liability. But as time passes, the benchmark is rising’.^[9]

In 2021, a further update noted that the standard of care expected of directors in relation to climate risk continues to rise, and there had been a discernible shift in focus from risk identification and assessment to risk management:

it is no longer safe to assume that directors adequately discharge their duties simply by considering and disclosing climate-related trends and risks; in relevant sectors, directors of listed companies must also take reasonable steps to see that positive action is being taken: to identify and manage risks, to design and implement strategies, to select and use appropriate standards, to make accurate assessments and disclosures, and to deliver on their company’s public commitments and targets.^[10]

In particular, directors should take care to carefully align any public commitments on climate change (including net-zero emissions targets) with the company’s operational strategy, as a failure to do so may expose directors to liability for misleading and deceptive conduct.^[11]

In 2022, following a royal commission into a series of corporate scandals involving financial services,^[12] the Australian Institute of Company Directors commissioned a legal opinion from barristers Bret Walker and Gerald Ng, focusing on the duty of good faith.^[13] Although this did not exclusively focus on climate change, the opinion is relevant to the way in which directors consider climate change, among other ‘stakeholder’ considerations in their decision-making. The opinion confirmed that directors have considerable discretion to identify the best interests of the company and that while shareholder interests are central, directors can and should consider a range of different stakeholder interests. Employees, customers, suppliers, creditors, traditional owners, the environment and broader community were all noted as legitimate concerns for directors, tied back to the long-term interests of the company, including its interest in avoiding reputational harm.^[14] Further, directors were advised to take a long-term view of where the company’s interests lie.^[15]

Litigation seeking to enforce directors’ duties as they apply to climate change is slowly emerging around the world, referencing both the duty of care and diligence and the duty of good faith. A 2023 case brought in the UK against the large energy company Shell (dual-listed in the UK and the Netherlands) has important implications for Australia.

In ClientEarth v Shell’s Board of Directors, public interest environmental law group ClientEarth (which purchased shares in the company) filed a derivative action against Shell’s board, alleging that the directors were in breach of their duties under UK company law, due to a failure to adopt and implement a robust and credible climate transition strategy in line with the Paris Agreement.^[16] Similar to Australia, UK law requires directors to promote the success of the company and to act with due care and diligence.^[17] Shareholder plaintiffs require the permission of the court to continue a derivative claim, and an application for permission cannot proceed if the court finds that there is no prima facie case arising.^[18]

This case focused on Shell’s climate targets and associated strategy, which, at the time, included a net-zero emissions plan with a 2050 target. On the basis of independent assessments,^[19] ClientEarth argued that the strategy excluded short- to medium-term targets to reduce the companies’ scope 3 emissions that equate for 90% of its overall emissions^[20] and that the net emissions of the Shell group were calculated to only fall by 5% by 2030.^[21] Further, the case alleged that Shell’s ongoing allocation of capital to new oil and gas projects, as well as high reliance (and lack of transparency) on carbon capture and storage and use of carbon offsets to meet climate targets, did not establish a reasonable basis for achieving the net-zero target. ClientEarth also noted that Shell’s targets and transition strategy were inconsistent with an order issued by the Hague District Court in the Netherlands against Royal Dutch Shell in 2021, which required the company to reduce their GHG emissions by a net 45% by 2030 across its own operations and scope 3 emissions. In this Dutch case (since appealed), the court found Shell’s failure to take adequate and proportionate action to curb GHG emissions was in breach of the duty of care owed under the Dutch Civil Code and European human rights obligations.^[22]

In May 2023, the UK High Court dismissed ClientEarth’s claim, finding that there was an insufficient prima facie case to allow the derivative action to proceed;^[23] this decision was confirmed following an oral hearing.^[24] The court noted that Shell did have a plan to manage climate-related risks, and it is for the directors (not the courts) to consider how best to promote the success of a company.^[25] The court also highlighted that ClientEarth was a minority shareholder, holding only 27 shares in Shell, that its claim was supported by a small fraction of the Shell membership and that the majority of the members supported the directors’ strategic approach to climate change risk (88.4% of the votes cast by members at the 2021 AGM and 80% at the 2022 AGM).^[26] These factors suggested to the court that ClientEarth’s ‘real interest is not in how best to promote the success of Shell for the benefit of its members as a whole.’^[27] … [I]t is that (membership) constituency, as a whole, whose views should carry very considerable weight when determining how Shell can best manage … climate change risk.’^[28]

The outcome in the Shell case raises interesting questions about the potential and the limits of directors’ duties and the use of derivative actions to influence company approaches to climate change:

• A focus on material risks at the entity scale: The judgment underscores that the duty of care and diligence is focused on material financial risks to the company (not the risks and impacts of the company’s activities on the climate). Directors are provided considerable discretion to respond to such risks. Even though financial materiality of climate change is well established, there are still gaps between what is material to a company (and how a company might manage those risks) and what is needed to meet international climate goals and to address the more systemic risks posed by climate change. The Shell case suggests that, at least in the UK High Court’s view, it is reasonably open for directors to decide to continue to pursue climate-damaging activities such as new oil and gas developments in the short to medium term as part of their business model if they are profitable and the financial risks associated with these activities can be appropriately managed (eg through sufficient diversification of business activities and investment of resources and capital in developing alternatives over time), even though this is completely at odds with the timely phase out of fossil fuels required to achieve the Paris Agreement goals.^[29]
• Short-term shareholder interests dominate: The case also reflects a tendency to prioritise shareholder interests (or more specifically, the short-term, profit-focused interests of current shareholders above the interests of longer-term or even future shareholders) in interpreting the best interests of the company. While directors may have permission to make decisions to reduce harmful climate impacts if this is beneficial for the company and the shareholders in the longer term, this may not be enough to incentivise improved climate performance at the extent and pace necessary to achieve global climate goals.

2.2.  Member Rights and Meetings

Despite the legal hurdles (see part 1.2), member resolutions have been used by activist members and institutional investors to pressure Australian companies (especially fossil fuel, energy and finance companies) on their approach to climate change.^[30] These resolutions are typically brought in two parts: as a special resolution requesting constitutional change to allow non-binding advisory resolutions, and with an accompanying advisory resolution addressing the substantive matter in question. This approach means that the board is legally required to at least put the constitutional change resolution to the GM. Typically, companies have not challenged the legality of the accompanying advisory climate resolutions,^[31] and have published GM voting on these, even though the advisory part is not legally effective without a successful constitutional change resolution (requiring 75% of the vote).

Over time, climate resolutions have developed to address a wide range of matters. Early resolutions focused on climate risk disclosure, seeking to drive the uptake of best practice disclosure standards by Australian companies or to pressure companies to address public lobbying activities that were inconsistent with their climate change goals.^[32] More recent resolutions are pressuring companies to set Paris-aligned emissions reduction targets accompanied by decarbonisation plans that demonstrate alignment of company strategy and capital allocation to these targets,^[33] to disclose liabilities associated with decommissioning oil and gas infrastructure in line with Paris-aligned net zero scenarios,^[34] to disclose how their capital allocation to fossil fuel assets aligns with Paris goals^[35] and to bring forward closure dates for coal assets in alignment with Paris goals.^[36] These more recent resolutions explicitly address the systemic nature of climate risk and focus on aligning corporate risk management and mitigation of corporate climate impacts with the goals of the Paris Agreement.

Voting on the constitutional change resolutions themselves has remained reasonably low over time. However, voting on the accompanying substantive climate change resolutions has been significantly higher (albeit variable) as larger institutional investors become more active in their engagement on climate change.^[37]

Certain members have also voted against board-proposed, ordinary resolutions to express dissatisfaction with directors’ governance on climate change.^[38] For example, a member with a 11.28% interest in AGL (a large Australian energy company) nominated four directors with climate risk and energy transition expertise to the AGL board at its 2022 AGM. Despite AGL’s board recommending that members vote against three of the proposed directors, all four directors were elected through ordinary resolution.^[39] At the 2023 AGM of Woodside Energy (a large Australian oil and gas company), 35% of members voted against the re-election of one board member, with some members justifying their decision to do so due to Woodside’s lack of commitment to emission reduction targets. Despite most members favouring re-election, this action amplified pressure on Woodside’s board to oversee and implement a Paris-aligned climate strategy.^[40]

Beyond member resolutions and voting, shareholders have also exercised their rights to inspect internal company documents^[41] as a strategy to hold companies accountable for representations made in relation to climate change. For example, in 2021, shareholders of the Commonwealth Bank of Australia successfully requested access to documents concerning the bank’s involvement in financing fossil fuel companies, which, the plaintiffs argued, were inconsistent with the bank’s environmental and social policy.^[42]

2.3.  Reporting and Disclosure

As noted in part 1.2, public and large proprietary companies are required to prepare an annual report, which includes discussion of future business prospects and any material risks that could affect the achievement of those prospects.^[43] Where climate change poses material risks to a company, these general financial risk disclosure obligations apply. Until recently, there has been considerable scope for companies to take different approaches to determining the materiality of climate risks and reporting on these. Expectations for climate reporting have however hardened over several years through the establishment of voluntary industry standards, strategic litigation, increased regulatory oversight of disclosure practices, and most recently, law reform to standardise climate reporting in line with international standards.

Voluntary industry standards have played an important role in developing best practice expectations for climate risk disclosure and management in relation to the general financial risk disclosure obligations found in company law (see part 1.2).

The international, industry-led Taskforce on Climate-related Financial Disclosures (‘TCFD’), formed in the wake of the 2015 Paris Agreement, was instrumental in articulating different categories of climate-related financial risks (physical risks arising from the physical impacts of climate change and transition risks arising from the policy, regulatory, market and technology shifts occurring as society transitions to clean energy systems) and highlighting financial implications for operating companies and associated finance sector entities.^[44] In 2017, the TCFD set out a four-part framework for climate risk disclosure and management covering risk governance, strategy, risk management, and metrics and targets (used to assess and manage climate-related risks and opportunities).^[45] Over time, the TCFD has provided increasingly detailed guidance, including encouraging entities to report on the direction and ranges of potential financial implications of climate change to their business under different climate-related scenarios (including scenarios aligned to Paris Agreement goals), to set quantified targets to manage climate risks (eg GHG emissions reduction targets), to set out comprehensive business transition strategies to meet targets and to report regularly on progress using common indicators and metrics to allow for progress tracking and comparison.^[46]

Although voluntary in Australia, many Australian companies committed to align to the TCFD standard.^[47] This was driven by the engagement and advocacy activities of investor groups and civil society (including through member resolutions; see part 2.2), many of which have focused on improving climate risk disclosure. Corporate regulators also endorsed the TCFD, referencing the framework in various updates to regulatory guidance on financial reporting.^[48] Yet despite a surge in the quantity of climate risk disclosure provided by Australian companies, several empirical studies have highlighted that early reporting practices were highly variable and often poor quality, with only partial implementation of the TCFD framework. While companies were providing more qualitative discussion of climate risk in the directors’ report, these risks remained under-reported and unquantified in financial statements.^[49] Further, few companies disclosed robust transition plans using relevant targets and metrics to allow for progress reporting and comparison across entities.^[50] Accordingly, investors and civil society stakeholders raised concerns about the quality and decision-usefulness of climate reporting.^[51]

Strategic Litigation

Many Australian companies have made voluntary commitments to achieve net-zero emissions (in line with the Paris Agreement) and set out related interim climate targets and actions. Strategic shareholder litigants are engaging company law to hold companies accountable to these commitments. For example, in 2021, the Australasian Centre for Corporate Responsibility (‘ACCR’) commenced litigation against the large Australian oil and gas company Santos Ltd. The case concerns a series of statements that Santos made in its 2020 annual report, including that it had a clear and credible pathway to achieve its 2030 emissions reduction targets and 2040 net-zero target, and that natural gas and hydrogen produced from natural gas with carbon capture and storage were ‘clean’ and ‘zero emissions’. ACCR alleges that these statements are misleading and deceptive and lack a reasonable basis, and therefore are in breach of Australian company law (and related provisions in the Australian Consumer Law).^[52] ACCR argues that Santos has failed to disclose that it intends to pursue growth of its oil and gas business beyond 2025, which will increase its overall emissions, and that its net-zero plans depend on a range of undisclosed and unreasonable assumptions, including in relation to the viability of carbon capture and storage technology.

Regulatory Scrutiny and Enforcement

In recent years, corporate and prudential regulators and the Australian Competition and Consumer Commission (‘ACCC’) have increased their scrutiny of climate risk disclosures, with an increased focus on greenwashing practices more generally. Greenwashing refers to representations, acts or omissions made in relation to environmental issues by companies which are false, misleading or lack a reasonable basis.

For example, ASIC developed guidance on how to avoid greenwashing when offering or promoting sustainability-related products.^[53] ASIC has also increased its surveillance of company disclosures, including capital raising documents, intervening in situations of potential misleading marketing or greenwashing, including by issuing infringement notices and commencing civil penalty proceedings.^[54] One of ASIC’s focus areas has been net-zero statements, targets and claims of decarbonisation that lack a reasonable basis or are factually incorrect.^[55] Companies involved in ASIC investigations have subsequently corrected misleading statements, and in some cases, have been issued infringement notices and financial penalties.^[56]

Law Reform

In 2024, the Australian Government amended the Corporations Act 2001 (Cth) to explicitly require large public and private companies,^[57] as well as high-emitting companies,^[58] to provide climate risk disclosures in their annual reports, in line with a reporting standard developed by the AASB.^[59] The Australian reporting standard is based on international standards developed by the International Sustainability Standards Board (‘ISSB’),^[60] which in turn builds on the four part TCFD framework.^[61]

Under the new regime, reporting entities are required to disclose the climate-related risks and opportunities that could reasonably be expected to affect the entity’s financial position and prospects;^[62] the current and anticipated effects of those risks and opportunities on the business model and value chain, as well as on company strategy and decision-making;^[63] and the climate resilience of the entity’s strategy and business model (using emissions reduction scenarios aligned with the Paris Agreement’s more ambitious 1.5 °C temperature goal).^[64] Disclosure of any climate-related targets and associated transition plans developed by the company,^[65] as well as GHG emissions, including scope 1, scope 2 and scope 3 emissions, is also required.^[66]