The Ethical Investor: Cautionary tales for directors and officers failing to prepare against climate risk
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The Ethical Investor is Stockhead’s weekly look at ESG moves. This week’s special guest is Hicksons Lawyers partner Persia Navidi.
The consumer watchdog is delivering on its promise last year to crack down on businesses making concerning claims about environmental credentials with ASIC filing – for the first time in history – court action against Mercer Superannuation for alleged greenwashing conduct.
News about Mercer, combined with news from the UK last month on an action being brought against Shell’s board for failing to properly prepare for the energy transition, serve as cautionary tales for directors and officers.
In Shell’s case, experts say directors should be warned that shareholders of corporations can now proactively hold them personally liable for failing to manage future climate risk while the Mercer case highlights ASIC’s position on ensuring sustainability-related claims made by financial institutions are accurate.
Both actions reinforce findings by a recent report from The Securities and Exchange Commission (SEC) from October last year which revealed that only 8% of respondents believe their organisations have robust procedures in place to manage climate risks.
The cases bring to light how companies across the global face challenges in understanding their ESG obligations and demonstrates the need for discussion on how directors can best understand and mitigate climate litigation risk.
Persia Navidi of Hicksons Lawyers is an expert in climate risk.
Stockhead sat down with her to discuss what needs to change for directors to better understand their environmental and climate change obligations.
“The case reflects the focus of regulators on greenwashing.
“Regulators have made it abundantly clear that they are targeting companies for greenwashing, a primary reason being to maintain confidence in the market.
“I think this case is only the beginning and is a sign of what is to come, particularly in circumstances where companies serve to make a profit on making statements relevant to sustainability in circumstances where such statements could be misleading.
“The prohibition of misleading and deceptive statements and conduct is a well-established part of Australian law, but there is certainly a growing trend towards companies making statements about their ‘green’ credentials where those statements are not substantiated.
“Investors should therefore feel somewhat at ease knowing that regulators are monitoring the market to ensure that their money is being invested as they are told it will be, and as they understand it to be.”
“The Mercer case is certainly one to watch.
“It is the first time that ASIC has commenced legal proceedings against a company in Australia for alleged greenwashing and it is indicative of regulators following through on the statements they have made over the past 12-18 months about targeting greenwashing and the veracity of sustainability claims.
“In my view, we will continue to see more of these sorts of cases and not only in the fund industry but more broadly.
“Organisations need to ensure that their words match their actions, or else they are at risk of falling foul of their obligations under the Corporations Act 2001 (Cth) and Australian Consumer Law.
“Company directors and their insurers and brokers also need to consider the potential coverage implications of such claims.
“Are these sorts of regulatory investigations, fines and penalties covered? This is something that will no doubt garner more attention as we see more of these cases emerge, particularly with mandatory disclosure of climate-related financial risks also on the horizon in Australia.”
“There needs to be an understanding of the risk as relevant to the specific organisation. Different organisations will have different risks that could impact their business.
“Directors need to assess the risk as relevant and specific to their organisation and determine what steps need to be taken to manage and mitigate that risk accordingly.
“Depending on the level of risk, some companies may also want to obtain legal advice in order to ascertain what their climate litigation risk is, (particularly their risk of greenwashing given the current wave of greenwashing-type claims against organisations) and how they can minimise that risk. Hicksons Lawyers can assist with this.
“On the issue of how to disclose their risks to investors, the ISSB is currently working on a global framework for climate-related financial disclosures which is set to be released in June 2023, and effective from 1 January 2024.
“Australia has also released a consultation paper on 12 December 2022 seeking initial views and key considerations for the introduction of mandatory, internationally aligned disclosures of climate-related financial risk in Australia.
“Once a framework for mandatory disclosure is determined in Australia, I anticipate this will provide company directors with increased direction on how to disclose risks to ensure they are properly informing the market and investors of their potential exposure.”
QEM is keeping its sustainability goals on track with the release of its fifth consecutive quarterly ESG report which grants investors and other external stakeholders with full visibility on how its commitment to ESG has grown over more than a year.
The company highlighted its agreement with Sun Metals in the current March 2023 quarter to turn a waste stream into a highly prized product as a concrete example of how it supported initiatives aimed at reducing the resources sector’s environmental footprint.