The Commonwealth Bank of Australia has successfully bypassed Federal Court litigation by mitigating shareholders’ concerns over climate change risk.
In its most recent directors’ report, the bank acknowledged that climate change poses a significant risk to its business. It also promised to undertake climate change scenario analysis on its operations to assess the risk.
This unprecedented move came less than a week after Environmental Justice Australia had brought an action in the Federal Court on behalf of longstanding CBA shareholders Guy and Kim Abrahams. They claimed that the bank had failed its due diligence obligations by not adequately disclosing environmental risks related to CBA shares in its 2016 annual directors’ report.
The CBA report ultimately satisfied the CBA shareholders’ concerns, leading them to drop their Federal Court action against the bank last month. The report accompanied the bank’s first climate policy position statement, which promised to decrease the average emissions intensity of its business lending portfolio. This statement is consistent with the bank’s commitment to achieving a net zero emissions economy by 2050.
Mr Abrahams acknowledged the positive progress, stating that, “after years opposing resolutions to improve climate change reporting and refusing to rule out participating in Adani’s Carmichael coalmine, the Commonwealth Bank’s directors have finally acknowledged the seriousness of climate change in the 2017 annual report”.
This world first action is part of a broader movement towards greater reporting on the risks of climate change to investments. It followed warnings from the Australian Prudential Regulation Authority (APRA) that climate change poses a risk to the entire financial system, and that company directors could be liable for failure to disclose these risks.
Geoff Summerhayes, Executive Board Member of APRA, said these risks include physical and transitional risks. He claims transitional risks stem from “the now-agreed transition to a low-carbon economy”, which will involve changes in policy, law, markets, technology and prices.
The claimants’ case
While the bank’s 2016 annual report discussed climate change as an environmental, social and governance priority, Environmental Justice Australia lawyer David Barnden argued this was not enough. Mr Barnden asserted that climate change impacts should have been disclosed as a major or material risk.
The claimants argued 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. They further argued it did not adequately inform investors of climate change risks, per s299A of the Act. On this basis, shareholders sought an injunction to prevent the bank from making similar omissions in future annual reports.
The future of climate change due diligence
Although the bank’s promising response has mitigated these specific concerns, the extent to which companies are required to disclose climate-change risks in their annual reports remains unclear. As the claimants discontinued the proceedings, the Federal Court missed the opportunity to clarify its position.
However, with climate change risks on investments gaining increasing recognition, other businesses will need to ensure their reporting satisfies climate change due diligence obligations.