Environmental, Social & Governance Discussions

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Chapter 10 – Duty of Care, Obligations
& Directors’ Responsibilities

 Introductory articles on emerging exposures, risk mitigation
and insurance risk transfer for clients of Omnisure.

 A compendium of introductory ESG articles on emerging exposures, risk mitigation and
insurance risk
transfer for clients of Omnisure with claims examples.

Martin Birch – March 2022

Chapter 10 – Duty of Care, Obligations & Directors’ Responsibilities

According to Corrs Chambers Westgarth (“CCW”) in an article called ‘Financial investor liability for portfolio company actions: a shifting landscape’, liability is no longer restricted to the typical corporate/parent-subsidiary relationship – it can now extend to financial sponsors and the portfolio companies they invest in (and often control). The legal, political and societal assessment of ‘parent’ responsibility (in corporate structures) for the actions of affiliated organisations is changing in many parts of the world, including Australia. As the landscape continues to shift, financial investors must come to terms with the risks of controlling entity liability. You can read the full article here.

CCW explain that for many years, Australian courts have steadfastly upheld the sanctity of the Salomon principle,1 whereby a corporation is considered to have a separate legal personality, rights and obligations to its shareholders. As a result, ‘piercing the corporate veil’ (or in other words, when a corporation’s shareholders are held personally liable for that corporation’s actions or debts) continues to require something akin to a sham group holding structure. There are, however, two ways in which the consequences of the Salomon principle have been altered without piercing the corporate veil – liability in the tort of negligence pursuant to a duty of care owed by a controlling entity to third parties dealing with affiliated entities, and legislative intervention.

Which Industries are impacted?

A report produced by The Australian Institute of Company of Company Directors explained how the influential Taskforce on Climate-related Financial Disclosures (TCFD) has recognised 16 industrial sectors that are at ‘high risk’ of material climate-related risk (including amongst others):

  • financial services – banks, insurance companies, asset owners including superannuation funds and asset managers; and
  • agriculture, food and forest products (beverages, agriculture, packaged foods and meats, paper and forest products). We hope this Omnisure compendium may of use to our clients operating in one of these industries, to start their climate change journey. Please refer to our Foundation Document 2 for a more fulsome discussion.

Considerations for financial investors

As the impact of ESG matters on financial investments continues to grow, it is becoming increasingly necessary for financial investors to re-examine the nature of controlling entity and affiliate liability. CCW have set out the points that financial investors should carefully consider (our Foundation Document contains a more fulsome discussion):

  1. Promotion of ESG policies and standards.
  2. The ‘control’ question.

Climate change and a range of other issues including modern slavery, have been swept up in a tide of broader ESG momentum. As a result of this groundswell, climate-related risk has shifted from a corporate social responsibility feature to two considerations: identifying climate-related risks and opportunities, and how they are reported.

What are climate-related risks?

Climate-related risks tend to be characterised as ’physical‘ or ’transition’ risks. Physical risks include events like floods, cyclones and fires. Transition risks are those risks that result from the transition to a lower carbon economy and may include asset write-downs and devaluations for carbon intensive assets, litigation related to environmental damage and costs associated with increasing environmental regulation and ESG-related shareholder activism.

Shifting corporate obligations

According to CCW, the ground is shifting and there is now general agreement among regulatory and industry bodies that climate risk demands a considered response from companies and their directors3. Most observable is increased attention from bodies including ASIC (Managing climate risk for directors), APRA (Understanding and managing the financial risks of climate change) and RBA (Climate Change and the Economy); new and amended financial reporting frameworks to cater to climate-related risks from the Task Force on Climate-Related Financial Disclosures (TCFD), the AASB and AUASB and ASX Corporate Governance Council; and support for consideration of climate risk from investor bodies including the Investment Association and the Investor Group on Climate Change. It is now widely recognised that climate risks are linked to systemic financial risk and that the management of climate risks may impact an entity’s ability to create long-term value for security holders. Please see our Foundation Document for a fulsome discussion the challenge for regulated entities and their directors on how to meet their responsibilities.

Directors’ duties 

The 2019 update of the Hutley SC and Hartford-Davis landmark 2016 legal opinion on how Australian law requires company directors to consider, disclose and respond to climate risk settled that directors who do not properly manage climate risk could be held liable for breaching their legal duty of due care and diligence under section 180(1) of the Corporations Act 2001 (Cth) (Corporations Act). Please refer to our Foundation Document to read about what is the nature of the duty and exactly to whom is it owed.

Do directors and officers face real risk in relation to ESG matters?

The Hutley legal opinion explains how directors of regulated companies who do not properly manage climate risk could be held liable for breaching their legal duty of due care and diligence under section 180(1) of the Corporations Act 2001 (Cth) (Corporations Act). That legal opinion also highlights further legal exposures.

In addition, there are proposed reforms on the agenda. Corporate criminal liability has been an area of focus for a number of proposed reforms.  The recommendations of the Australian Law Reform Commission (ALRC) Final Report on Corporate Criminal Responsibility (August 2020) are expected to influence future law reform in this area. Please read our Foundation Document for further information on this topic, as well information about who has principal responsibility for addressing ESG issues.

Do directors in Australia face enforcement action?

Enforcement action – Governance

Please see our Foundation document for information dealing with enforcement action for regulated entities, potential for breaches of directors’ duties, market disclosure laws and corporate accountability requirements applying under the Corporations Act, and the ESG-specific issues on which ASIC has been active to date. There is also information corporate criminal misconduct and the Australian Law Reform Commission’s (ALRC) Review of Corporate Criminal Responsibility.

Reporting requirements

Please see our Foundation Document for information about how ASIC regards climate-related disclosures in a company’s operating and financial review under section 299A(1)(c) of the Corporations Act to be required where climate risk is a material issue that could affect the company’s achievement of its financial performance. Even where a company forms the view that climate risk is of no present material impact, increasing expectations from regulators and investors will necessitate an explanation of these decisions.

Disclosure challenges

Climate risk disclosure entails various challenges. This includes using scenario analysis as a tool to predict possible outcomes upon specific climate-risk scenarios manifesting, and quantification of the impact of physical risks by assessing scientific outputs against financial-sector inputs. Both methods are far from established and present difficulty in achieving industry and cross-sector alignment from a regulatory perspective.

Our Foundation Document has further information about reporting by regulated companies on how they assess and manage climate risk and best practice in preparing financial statements and the company’s operating and financial review. Companies should be careful of ‘greenwashing’ since ASIC has indicated that it will focus its attention on companies that over-emphasise the extent to which they have considered climate risk related issues that could result in consumer harm.

1 Salomon v Salomon 1896 UKHL 1.
2 Our Foundation Document is the original full text version of “ESG Discussions – Introductory articles on emerging exposures, risk mitigation & insurance risk transfer” for clients of Omnisure, compiled by Martin Birch. Register on our website for a full copy.
3 https://www.corrs.com.au/insights/climate-related-risk-a-rising-bar-for-directors-responsibilities

Please contact Martin Birch for a copy of the full-text Foundation Document at martin.birch@omnisure.com.au