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Ignore sustainability at your peril – the growing risk of liability

Organisations are increasingly acting on the recognition that sustainability considerations, including climate-related risks, must be integrated into every-day operations, although there remains a wide gap in practices, goals and targets set by different organisations. Organisations that continue to pay mere lip service to sustainability, or even the leading organisations in this space tempted to shift focus away from sustainability in a world affected by COVID, do so at their own peril.

Leaving aside the reputational risks associated with weak sustainability practices and the competitive advantages to be gained from a strong corporate sustainability strategy, corporate inaction or even action that is out of step with those of peers, exposes an organisation and its directors to the risk of corporate and personal liability. Similarly, inaccurate statements as to commitments made by an organisation to sustainability, may attract liability. This is a rapidly developing area of law, particularly in the space of climate-related risks, but also in relation to more emerging areas of corporate sustainability practice, such as supply chain sustainability, including human rights aspects.

In its most traditional form, liability can arise from regulatory non-compliance. Levels of commitment, disclosures and governance frameworks must, therefore, be designed to ensure compliance with the carbon and energy regulatory framework, as well as to meet newly emerging compliance-duties, for example in relation to human rights in supply chains under the Modern Slavey Act 2018 (Cth).

In addition to this traditional scope of corporate and director liability, there are now further, more indirect, liability risks associated with the failure to meet statutory duties imposed on directors, particularly in relation to climate change. It is widely acknowledged in Australia that directors’ duties under the Corporations Act 2001 (Cth) extend to the consideration of climate-related risks (we have previously written on this topic here). Although Australian courts have not yet confirmed this fact, or the manner in which directors and corporations are to meet their obligations, the currently pending case of McVeigh v Retail Employment Superannuation Pty Ltd could cement the notion that climate change is a financial risk to be assessed and disclosed, and thus broaden the net of corporations expected to plan, act and make climate change disclosures. Further, the case could also cement that this disclosure ought to be made with reference to the TCFD recommendations.

Even if McVeigh does not succeed in his claims, liability could potentially arise out of a failure to disclose in line with TCFD recommendations given the growing acceptance of the TCFD framework amongst domestic and international regulators, as well as growing reporting by market participants. In this way, as a widely accepted practice or norm, the TCFD framework may establish a ‘reasonable standard’ for claims based in negligence. These developments establish fertile ground for activist NGOs, shareholders and investor-initiated litigation based on the failure to disclose or inadequate disclosure.

A further issue to be considered by organisations is that liability may arise out of inaccurate sustainability or climate-related disclosures, or the adoption of voluntary standards and guidelines. Such liability may arise either under Consumer Law provisions or as part of a growing willingness on the part of courts to hold private organisations to international policies and instruments (traditionally preserved for holding governments accountable), particularly where an organisation has pledged commitment to a particular policy or framework.

The bottom line for organisations is that in light of the heightened risk of exposure to corporate and director liability: governance frameworks designed to address sustainability issues must be robust and effective; commitments must be real, actionable and actually acted upon by the company, pitched at the right level; and disclosure must be accurate. There is no one-size-fits-all response to tackling climate change and embedding sustainability in the fabric of an organisation. Instead, each organisation is on a unique journey, informed by a myriad of factors, such as the exposure of the organisation to climate risks, the type of operations, the complexity of its supply chain, existing commitments, and governance structures and procedures.

How we can help

Ndevr Environmental is a specialist carbon, energy, and sustainability consultancy that partners with clients to achieve positive business and environmental outcomes. Our specialist team of consultants, with varied backgrounds including law, sustainability and risk, and climate change strategy can help your organisation develop a fit-for-purpose climate risk and sustainability management practice and prepare disclosures that navigate the complex issues that arise in this space. Contact us today for an obligation free and confidential discussion.

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