Pattrick Smellie: Should directors who ignore climate change risks keep their jobs?

Not believing in climate change science won't carry much weight should a director end up in court. Photo / 123RF

COMMENT:

When a legal opinion, suggesting company directors are personally liable if they fail to assess climate change risks, was aired at a closed session of a business and climate change conference in Auckland earlier this month, there was some fluttering in the dovecotes.

Written by leading law firm Chapman Tripp, the opinion finds that "directors must address climate change risk to their companies as they would any other financial risk".

It says the same duty extends to managers of KiwiSaver and other investment funds "where to do otherwise could post a material financial risk to the investment portfolio".

That conclusion, says Chapman Tripp, does no more than reflect "commercial common sense".

"Climate change presents a foreseeable risk of financial harm to many companies, particularly with respect to the impacts of transitioning to a lower-carbon economy."

The opinion was released publicly this morning as part of the wider publication of the latest in a string of instances of corporate activism, the interim report of the Sustainable Finance Forum, an initiative of the Aotearoa Circle.

The Circle is a collection of corporate and investor interests led by NZ Super Fund CEO Matt Whineray and Westpac senior executive Karen Silk and its interim report appears heavily influenced by the views of Mindful Money, the ethical investment service being pioneered by former Green MP Barry Coates.

The SFF interim report strays into unexpected territory for a document endorsed by a mainstream group of New Zealand corporate leaders. It endorses UK economist Kate Raworth's lightweight 'donut economics' theory of sustainable economic development and accepts without question the 'limits to growth' doctrine, over which debate has raged since its publication in 1972 by the Club of Rome.

With the Chapman Tripp opinion, however, the rubber meets the road.

Yes, it is a legal opinion prepared for a client with an agenda. Another law firm might reach a different view in response to a brief from a climate change skeptic.

However, the production of a similar opinion in Australia has already been the catalyst for landmark legal action there, which New Zealand company directors ignore at their peril.

As it is, the opinion must land like a cold drink on a hot day for Reserve Bank governor, Adrian Orr, given how much stick the central bank has taken for adding climate change risk as a financial system stability issue. Some of its crustier critics claim the RBNZ is illegitimately extending its mandate with this initiative.

Responses among business leaders on climate change tend to fall into four rough categories. Photo / File

They are perhaps unaware that the Reserve Bank of Australia, the Australian Prudential Regulation Authority and the Bank of England are also on the same path, albeit somewhat further ahead than New Zealand.

And they are reflecting no more than the mid-2017 findings of the Taskforce on Climate Related Financial Disclosures, a project set up by the G20 and led by BoE governor Mark Carney.

Nor, it seems, were all the professional directors at this month's Auckland conference up with the play, being either unconvinced about climate change or, more commonly, unconvinced that climate change needs to be singled out so explicitly.

Responses among business leaders on climate change tend to fall into four rough categories.

First, there are those who accept the problem is real, urgent and are actively developing strategies in response. Many of the 122 companies who've signed up to the Climate Leaders Coalition fall into this camp, although some are clearly there in the hope of brand-burnishing and others – think Z Energy or Fonterra – will always struggle for public acceptance that their motives are pure.

The second group are those who know they can't ignore climate change, but for whom the reality of business-as-usual prevents deep-rooted change to the way they've always approached commercial issues. This may be most directors of most companies.

A third group doesn't like being told what to do. Climate change is just another risk among many. Leave it to us to decide if it matters, thanks very much.

And then there's the fourth group – surprisingly large when the surface is scratched – who think that climate change is either a hoax or a natural process that it's pointless to try and influence.

For this last group, the Chapman Tripp opinion says: "our assessment is that a director would not be able to avoid liability for a breach (of the Companies Act 'standard of care' obligation) by arguing that climate change does not exist."

"The only debate will be on whether the director's actions or inactions were justified against the specific climate related risks faced by the company."

In other words, not only do investors not care whether directors believe the science of climate change and not, it's highly unlikely that the courts will either, if and when they're asked.

With that in mind, the mainstreaming of professional directors' legal duty to manage climate-related risks proactively may yet prove to be the most impactful element of today's Aotearoa Circle publication.