23 August, 2017
On 8 August 2017, shareholder proceedings were filed in Australia against the Commonwealth Bank alleging that the company failed to disclose its exposure to climate change risk in its 2016 Annual Report. The proceedings are the latest in a series of efforts by shareholders to hold the company to account for the climate change risks it assumes. If successful, this may raise the standard for adequate disclosure for climate-related financial risk.
Shareholders demand to know more about climate change risks
The boards of publicly-listed Australian companies are facing increasing pressure to take climate change risks into account, and to disclose their risk assessment in financial reporting.
The shareholder proceedings filed against the Commonwealth Bank are the latest move by shareholder groups to pressure companies to release information about the greenhouse gas emissions which a company is producing directly or, in the case of services firms, to release information as to whether the company has exposure to climate change risk.
Not the first challenge by shareholders
The Commonwealth Bank has previously been subject to repeated actions by shareholders to have proposed resolutions relating to climate change risk disclosure passed by members at Annual General Meetings (AGMs).
In 2014, three resolutions relating to climate change risk disclosure were proposed by a group comprising of more than 100 Commonwealth Bank shareholders at the AGM, led by the Australasian Centre for Corporate Responsibility (ACCR), a not-for-profit association.
The board declined to put two of the resolutions to a vote at the AGM. The shareholders filed proceedings in the Federal Court of Australia seeking a declaration that the resolutions were of a nature which could be validly moved by shareholders at an AGM. In Australasian Centre for Corporate Responsibility v Commonwealth Bank of Australia [2016] FCAFC 80, the Full Federal Court of Australia found on appeal that the Commonwealth Bank was not required to put the resolutions received from ACCR in advance of its 2014 AGM to its shareholders, as the resolutions related to matters which were not within the powers of shareholders.
While the Commonwealth Bank shareholders were unsuccessful in their 2014 challenge to the Board, the alternative route which the shareholders are now pursuing, under a different section of the Corporations Act, may yet achieve the disclosure objectives they were seeking.
Is climate change a "material or major risk"?
The shareholder claim is being run by lawyers at Environmental Justice Australia and the plaintiffs are not seeking any monetary compensation.
The shareholders allege that the bank failed to give a true and fair view of its financial position and performance (as required by section 297 of the Corporations Act 2001(Cth) (Corporations Act)) by not adequately disclosing the risks that climate change poses to its business in the bank's 2016 Annual Report. The shareholders are also seeking an injunction to stop the Commonwealth Bank from making the same omissions in its future annual reports.
In Australia, Division 1 of Pt 2M.3 of the Corporations Act sets out the requirements for annual financial reports and directors’ reports. A listed entity’s annual directors’ report must contain information that shareholders would reasonably require to make an informed assessment of the entity’s operations, financial position and business strategies, and prospects for future financial years. Specifically, the directors' report must disclose the material business risks that could adversely affect the achievement of the financial performance or financial outcomes of the company.
In the proceedings, it is alleged that climate change poses a "material or major risk" to the Commonwealth Bank given the diverse range of climate change risks in its portfolio, ranging from loans to extractive industries, to the potential effects of rising sea levels on the Australian housing market and the impact this would have on its residential mortgage portfolio.
Consequences for Australian companies
The shareholder proceedings are being run as a test case. If successful, a new standard may be set as to the risks that Australian companies are expected to consider and disclose in order to meet their reporting obligations to shareholders.
The fact that this type of legal action has been brought by shareholders of a financial services company operating in an industry which is not directly linked to climate change, signals that a wide range of companies may potentially be targeted by shareholders looking to pursue an environmental agenda.
Regulators' views on climate change risk
The regulators in Australia have also highlighted that companies should be cognisant of climate change risks in making decisions.
In February 2017, Australian Prudential Regulation Authority (APRA) Executive Board Member Geoff Summerhayes said APRA's view is that "climate change risks are no longer a future or non-financial problem and that many of these risks are foreseeable, material and actionable now".
Momentum is also gathering on a global level for disclosure obligations relating to climate change risks to be more
consistent across jurisdictions. The Financial Stability Board Task Force on Climate-Related Financial Disclosures released its final best practice recommendations in June 2017, aimed at aligning climate change risk disclosures by companies, structured around 4 key areas: governance, strategy, risk management and metrics.
Key takeaways
It is clear that climate change risk is heightened for companies which operate in industries such as energy, commodities and insurance, where the company's business model is more likely to be directly impacted by the increase in the frequency and severity of extreme weather events linked to the physical risks of climate change.
However, in light of the growing pressure from shareholders and regulators, boards of Australian companies should carefully consider whether they are accounting for any foreseeable climate change risks to their companies or business models (including any indirect risks) and should monitor the Commonwealth Bank shareholder proceedings carefully to ensure that they are meeting their financial reporting requirements.
For further information, please contact:
Avryl Lattin, Partner, Clyde & Co
avryl.lattin@clydeco.com
