Better cooperation still needed to get full value out of pensions implementation statements
Out-Law Analysis | 08 Oct 2020 | 8:46 am | 6 min. read
While youth-led protests have been front and centre of the debate in Australia, climate change is an issue that has moved beyond environmentalists and into boardrooms. The threat posed to industry and investment, new regulatory requirements and increasing consumer demand mean working to mitigate the risks of climate change is crucial for economic survival.
Co-written by Abigail Gedge and Lydia Holt of Pinsent Masons, the law firm behind Out-Law.
Swedish teenager Greta Thunberg inspired an international movement to fight the climate crisis when she began skipping school to protest outside the Swedish parliament to call for stronger action on climate change. In Australia, this generation has now taken the climate change protests from the streets to the courtrooms.
On 8 September, a class action was brought in the Federal Court seeking an injunction to prevent the planned extension of the Vickery coal mine in New South Wales. The class action alleges that the environment minister owes a duty of care to young people to prevent the negative impacts of climate change. The case is one of three significant recent environmental cases, but is the first to focus entirely on plaintiffs under the age of 18.
The previous cases tie climate change to actual financial risk and, if successful, could mandate the disclosure of climate-related risks across various financial investments. They include 24-year-old council worker Mark McVeigh's case against Retail Employees Superannuation Trust, a A$57 billion (US$41bn) pension fund, in which he argued that the fund's trustee breached its fiduciary duties by not acting in his best interests and exercising care, skill and diligence to protect his retirement savings from the financial risks posed by climate change. Similarly, 23-year-old law student Katta O'Donnell was the lead applicant in a class action against the federal government for failing to disclose how climate change would impact the value of government bonds.
The focus of these cases shows that the youth-led climate change movement is no longer a matter of politics which holds no place in the business world.
While these are the first significant cases to be litigated formally in the Australian courts, economic arguments supporting environmentally-friendly policy were already receiving high-profile institutional support in Australia.
Businesses face equal parts opportunity and risk in acting ahead of mandated requirements for climate change.
The Australian Prudential Regulation Authority (APRA) has addressed climate risk and prudential oversight frequently since 2017 when Geoff Summerhayes, executive board member for APRA, told the Centre for Policy Development that climate-related financial risks are no longer future concerns but "foreseeable, material and actionable now". He later acknowledged that businesses face equal parts opportunity and risk in acting ahead of mandated requirements for climate change.
This approach has since been supported by the Australian Securities and Investment Commission (ASIC) which, in August 2019, updated its regulatory guide to effective disclosure for retail investors to include explicit references to the risks of climate change and its direct correlation with non-financial impairment. The guide advises directors to adopt the disclosure standards set out by the Financial Stability Board's Taskforce on Climate Related Financial Disclosures (TCFD). As well as providing disclosure advice, ASIC began a review of Australia's large listed companies in 2019, investigating how they were dealing with the risks of climate change.
International regulatory best practice dictates that financial institutions should consider climate change in strategic planning and risk management. In the UK, in 2019, the Financial Reporting Council undertook a major review of disclosure of climate risks by UK businesses in their reports and accounts. Following this review, the UK Prudential Regulation Authority introduced a requirement for UK companies to appoint a senior manager responsible for identifying climate-related risks to their businesses.
Regulators have increasingly supported voluntary climate risk measures being made mandatory; including requiring UK companies and their auditors to list climate-based risks and uncertainties to investors, reflecting on the way climate change may affect the value of company assets, and promoting best practice by reporting in line with the TCFD. Additionally, in December 2019, the EU introduced its own disclosure regulation, broadening EU climate-related disclosures.
Elsewhere, the mandate for governments to act on climate change is bolstered by human rights obligations. A 2013 case, State of the Netherlands v Urgenda Foundation, pointed to domestic law and the European Convention on Human Rights (ECHR) as creating a positive duty for the government to protect its citizens against the dangers posed by climate change. The Supreme Court of the Netherlands, deciding the final appeal in 2019, held that the Dutch government was obliged to act, and the Dutch government has since announced plans to reduce greenhouse gas (GHG) emission levels by 25% against 1990 levels by the end of 2020. In 2020, Climate Case Ireland also successfully relied on the ECHR to compel the Irish government to act on climate change.
Unlike many of its western counterparts, Australia does not have federal human rights legislation and has not incorporated any international law obligations into federal law. Human rights in Australia are sourced from the constitution, which was written in 1901 and does little to address the issues climate change poses today. While Victoria and the Australian Capital Territory have enacted human rights legislation similar to that of the Netherlands, this cannot be used to compel the federal government to act on climate change.
The case against the Australian environment minister aims to create accountability through a general duty of care, rather than relying on human rights obligations. Leveraging the success of a 2018 case which found that the immigration minister owed a duty of care to offshore detainees, the case aims to impose a duty on the minister to act on climate change. Notably, this duty is argued to be owed to the youth of Australia, as the group most likely to suffer as a result of climate change.
The Australian government may instead find itself forced to bolster climate change policy out of necessity to attract investment. Repeat occurrences of fire and drought, and Australia's continued reliance on coal and other forms of mining, mean many investors have concerns.
The 2019-20 bushfire season was a harsh reminder of the economic impact of climate change in Australia. The estimated cost of the bushfires is A$4.2bn, of which only A$700 million is expected to be recoverable through insurance. This highlights not only the immediate economic impact of the bushfires, but the long term risks posed by climate change: what happens to the building industry, mortgage market and insurance entities if bushfire risk becomes so great it is uninsurable?
Previous NAB chief economist Rob Henderson has said that Australian government bonds are "significantly more exposed than some other countries" to climate change. These concerns have not been ignored, as investors avoid or divest from bonds which carry a climate change risk. In late 2019 Riksbank, the Swedish central bank, divested from Queensland and Western Australian government bonds in an attempt to reduce the risk associated with governments so heavily invested in mining and raw materials.
Companies and institutions are beginning to recognise the benefits of addressing climate change even where they are not required to by regulation, with the market showing a natural evolution towards active disclosure and management of climate risks. For example, in 2019, Lendlease committed to a carbon offset programme to ensure its construction practices were carbon neutral. Notably, the company sought input from employees about which cause should receive their offset resources, demonstrating the power of public sentiment in driving climate change action.
In January 2020 Larry Fink, the chief executive of BlackRock, stressed the importance of climate change. Fink warned against investing in companies which do not disclose how they are managing climate risks, while BlackRock itself announced that it would no longer invest in any entity which generated more than 25% of its revenue from fossil fuels. Explaining that he made these changes not because he is an environmentalist but because he is a capitalist, Fink captured the growing sentiment that the economic importance of climate change is undeniable.
Beyond the investment market consumer pressure, particularly from young people, is forcing companies to respond to climate change. Recently, some of Australia's largest companies have formed the Australian Industry Energy Transition Initiative (AIETI), with the sole target of becoming carbon neutral by 2050. The AIETI extends beyond professional services such as banking and pension funds to include mining and raw material companies looking to move away from traditional emissions-intensive practices.
Australian pension funds have also begun to divest away from fossil fuel investments in response to consumer sentiment. In 2016 Australia's largest pension fund, AustralianSuper, announced that it would offer its members an option that will restrict investment in companies with fossil fuel reserves. In July 2020, HESTA announced that it was divesting from thermal coal and investing in renewable energy, and First State Super announced that it would dump its shares in companies that derive more than 10% of their revenue from thermal coal mining.
These moves align with the arguments put forward in Mark McVeigh's case against Retail Employees Superannuation Trust that investments by pension funds need to contemplate the financial risks posed by climate change.
26 Jun 2020
23 Aug 2019
Better cooperation still needed to get full value out of pensions implementation statements