What are the proposed reforms?
The last month has seen ‘Extinction Rebellion’ climate protests on a major scale, with environment groups calling on consumers and investors to cut ties with energy companies, manufacturers and other entities heavily reliant on fossil fuels. This has extended to demands for boycotts on banks and insurers supporting new resources projects such as Adani’s now-approved Carmichael coal mine.
In a speech to the Queensland Resources Council on 1 November 2019, the Prime Minister labelled these tactics ‘indulgent and selfish’ and indicated the Federal Government would overhaul existing laws so that protest groups can no longer use boycott threats to pressure entities to reduce their reliance on, or support of, mining and resources entities.
The Federal Attorney-General went even further on 4 November, announcing the Government would also seek to crack down on litigation funders and address ‘other areas’ where shareholder activist groups engage in so-called ‘lawfare’ to frustrate and delay mining and other commercial projects and businesses.
While attempts to modify the existing secondary boycott laws in the Competition and Consumer Act would face constitutional challenge, reforms weakening litigation funding and shareholder activism could be seen by directors as a sign they can take their ‘foot off the pedal’ on climate change.
The shareholder class action landscape continues to intensify in Australia, with climate-related actions alleging improper management of climate risks by directors expected to be the ‘next big thing’ in new class actions filings. The growth in shareholder class actions can be linked to Australia’s ‘litigation-funder friendly’ laws, under which there are no licensing requirements for funders, nor any mandatory rules imposing fee caps or security for costs restrictions. This incentivises deep pocket funders to support broad-based shareholder allegations against companies and individual directors, if for nothing else than to generate enough publicity and media attention to force an early settlement.
The Attorney-General’s recent comments (which could possibly be a precursor to a formal Government response to the Australian Law Reform Commission’s December 2018 report on litigation funders) suggest new restrictions may be imposed on litigation funders. This could temper the appetite of funders to pursue new shareholder class actions, including those focused on climate change.
Reforms to quell shareholder activism would no doubt go down well with boards in the resources sector. In the last 12 months, we have seen environment-focused investor advocacy groups Market Forces and the ACCR aggressively sponsor shareholder resolutions against resource companies. The resolutions have tried to pressure boards to commit to specific emissions reductions targets in line with the Paris Agreement.
Given the traditional split between the board and shareholders in corporate governance, shareholders have no power to pass binding resolutions requiring directors to do anything, unless the company’s constitution permits. And in a 2016 decision (Australasian Centre for Corporate Responsibility v Commonwealth Bank of Australia), the Full Federal Court went even further, affirming that shareholders also have no power to issue non-binding ‘advisory’ resolutions expressing an opinion on what directors ought to do.
Yet Market Forces and the ACCR continue to press for advisory resolutions. Even though they are technically invalid, getting advisory resolutions placed on the agenda at a company’s AGM can still be effective. Fuelled by supporting media coverage, this strategy brings climate risks to the forefront of directors’ minds and committing to measures such as emissions reductions targets may be seen to appropriately balance the interests of climate-focused consumers, employees and future investors.
But this tactic may no longer be possible if the Government sponsors laws that not only invalidate advisory resolutions, but also remove the ability of shareholders to even put forward such resolutions for consideration at an AGM.
But this is all a distraction – climate change action is required by all companies now
Even if new litigation funding and shareholder activism restrictions are imposed, directors would be ill-advised to treat climate risks any less seriously.
For one thing, new ASIC, APRA and ASX standards, as well as the annual reporting obligations of public, large proprietary and certain other companies under the Corporations Act, require material physical and transition climate risks affecting a company’s business to be disclosed to the market.
Further, with climate change becoming a clearly foreseeable risk following the attention given to it by regulators and the community, directors may face personal liability under sections 180 and 181 of the Corporations Act (and the corresponding equitable duties) if they fail to actively manage and mitigate any climate risks which materially impact on a specific company.
Even if litigation funders become less active in reaction to any new regulations, ASIC, with its new aggressive enforcement appetite, can be expected to step up to the enforcement plate. Importantly, ASIC’s artillery now includes the ability to seek wide-ranging civil and criminal penalties, as well as compensation and disqualification orders, at the corporate and individual director level if climate risk disclosure and management systems are found to be deficient.
The key takeaway
While it is important to keep a close eye on the design of the Federal Government’s foreshadowed new regulations, directors should not take false comfort.
As we make clear in our accompanying piece, taking action on climate change, not just in the energy, resources and manufacturing sectors traditionally considered to be most at risk, is very much a ‘now’ issue for directors of all companies.
The narrative is clearly moving on ‘awareness’ of climate change. If directors do nothing to consider, disclose and mitigate material climate risks, they will expose the company and themselves to potentially significant civil and criminal penalties and compensation payouts.