Climate-Related Risk Heating Up Down Under

Just days out from the 26th United Nations Climate Change Conference of the Parties ("COP26"), the Australian government has pledged to reduce greenhouse gas ("GHG") emissions to net zero by 2050. While Australia has been relatively slow off the mark in committing to a net zero target, it has not lagged behind other jurisdictions in climate-related litigation and other shareholder actions.

Over the last 12 months, there has been a proliferation in shareholder action on climate-related risks in Australia, with a wave of litigation and shareholder resolutions being brought. Such actions have primarily conformed to two main categories:

• Actions against federal and state governments, including environmental regulators, challenging environmental permits and licenses for projects and businesses with high GHG emissions;
• Actions against publicly listed companies, including, in particular, energy and natural resources companies, as well as banks that provide financing to this sector, challenging the accuracy of disclosures and other representations in relation to climate-related business risks or conformance with pledged emissions reductions.

Essentially, these court actions are founded on allegations of greenwashing. Interestingly, a claim alleging greenwashing based on similar legal arguments has also been brought against the Australian government by a retail investor of sovereign bonds.

Landmark Litigation. While this uptick in climate-related litigation against governments and Australian-headquartered corporates is consistent with global trends, there are several novel and significant claims in the Australian court system that have attracted international attention. Prominent examples of these claims include:

• A class action brought by a Catholic nun on behalf of several children in which the Federal Court of Australia held that the Federal Minister for the Environment owes a duty of care to Australian children when determining whether to approve the expansion of an open-cut coal mine to avoid causing harm to Australian children from carbon emissions: Sharma by her litigation representative Sister Marie Brigid Arthur v Minister for the Environment [2021] FCA 560. The decision (reported on here) is the first of its kind in Australia to recognize that a government decision-maker owes a duty of care to Australian children to avoid the risk of harm from personal injury from the effects of climate change. The Minister has appealed the decision, and the Full Court's judgment is currently reserved. (In the meantime, the Minister has proceeded to approve the coal mine expansion as well as several other coal mine projects).
• Proceedings brought by a climate action group against an Australian environmental protection regulator in which the New South Wales ("NSW") Land and Environment Court held that the regulator had not fulfilled its statutory duty to develop environmental quality objectives, guidelines, and policies to ensure environment protection from climate change. In Bushfire Survivors for Climate Action Incorporated v Environment Protection Authority [2021] NSWLEC 92, the Court ordered the regulator to take action to remedy its breach (see our report here).
• Proceedings instituted in the Federal Court by an activist shareholder, against Australian oil and gas producer Santos Limited: Australasian Centre for Corporate Responsibility v Santos Limited, Federal Court of Australia proceeding NSD 858/2021. The claim alleges "greenwashing" by Santos with respect to statements in the company's annual report as to how it intends to achieve net zero emissions by 2040, and challenges Santos's assumptions as to the viability of carbon capture and storage technology. The company's statements are said to be misleading or deceptive, or likely to mislead or deceive, in contravention of Australia's corporations law and consumer law. As we've reported previously, the claim represents the first court proceedings in the world to challenge the veracity of a net zero emissions target.
• A claim brought by a 24-year-old university student against the Australian government that alleges that the government has misled and deceived investors in sovereign bonds by failing to disclose the climate-related risks. The Federal Court recently determined that the claim can proceed as a class action on behalf of relevant retail bondholders.
• A class action commenced by two indigenous leaders from the Torres Strait Islands against the Australian government, alleging that the government owes a duty of care to all Torres Strait Islanders to take reasonable steps to protect them, their culture, and their environment from harms caused by climate change, including rising sea levels and increasingly erratic weather events. Notably, the case is supported by the Urgenda Foundation—a Dutch nongovernmental organization that successfully brought a similar action in the Netherlands. Ultimately, in 2019, the Supreme Court of the Netherlands held that the Dutch government owes a duty of care to protect its citizens from climate change and that the Dutch State failed to fulfil its duty of care by not pursuing a more ambitious reduction of GHG emissions (see here).

Zeroing In on the Financial Services Sector. One striking aspect of climate-related litigation in Australia is that, together with corporates in the energy and natural resources sector, Australian banks increasingly are being targeted by activist shareholders. Such shareholders typically are looking to challenge the funding of coal, oil, and gas projects in light of the relevant lender's climate and sustainability policies and public statements. This trend appears to be largely unique to Australia.

In particular, in 2017 and 2021, shareholders of the Commonwealth Bank of Australia ("CBA") brought claims against the bank seeking, respectively:

• Orders requiring CBA to disclose climate-related risks faced by the bank (and CBA's management of those risks) in its annual reports; and
• The disclosure of internal documents detailing the CBA's decisions to finance oil and gas projects in order to consider whether such decisions are compliant with the CBA's environmental and social policies.

The shareholders discontinued the 2017 claim after CBA voluntarily included climate-related business risk information in its 2017 annual report, including an acknowledgement that climate change posed a significant risk to the bank's operations.

In McVeigh v Retail Employees Superannuation Pty Ltd [2019] FCA 14, a fund member and beneficiary, Mark McVeigh, brought proceedings against his pension fund, Retail Employees Superannuation Pty Ltd ("REST"). Mr. McVeigh contended that, in failing to provide information about how the fund was managing climate risks, REST had breached fiduciary and statutory duties to exercise care, skill, and diligence on behalf of beneficiaries, and to act in the best interests of beneficiaries. As reported previously, the matter settled, with REST agreeing to nine initiatives, including a net zero target for 2050 and to enhance its consideration of climate change risks when setting its investment strategy and asset allocation positions.

Shareholder Resolutions. In addition to litigation, activist shareholders are bringing pressure to bear on Australian corporates via shareholder resolutions, which, under Australia's corporations laws, are relatively easy to bring. For example, shareholders who hold (individually or collectively) at least 5% of the votes that may be cast at a general meeting can requisition, or themselves convene, a meeting of shareholders. Corporations Act 2001 (Cth), ss 249D and 249F. Further, shareholders with 5% of a company's votes or 100 shareholders may provide a company with notice of a resolution that they will seek to move at the next scheduled general meeting. Corporations Act 2001 (Cth), s 249N. Following receipt of such notice, listed companies are required to announce the development to the market within two business days. These features of Australia's corporations law constitute powerful tools in the artillery of an activist shareholder. Such resolutions are generally nonbinding on the company's board or management; however, they have the potential to be impactful in terms of corporate strategy in relation to climate-related legal risk.

As a consequence, the number of resolutions and the corporations that are subject to them has increased markedly. In 2014, only three ESG-related resolutions were brought by the shareholders of major Australian corporates, as compared with more than 25 ESG-related resolutions in both 2020 and 2021. Moreover, earlier this year, a coalition of climate activist shareholders lodged shareholder resolutions with Australia's four biggest banks, calling for an immediate end to the funding of new oil and gas projects and the phasing out of any exposure to the sector by 2030, consistent with the goals of the Paris Agreement on climate change.

Unlike in the United States, institutional investors are not playing a primary role in driving ESG initiatives in the Australian market. Rather, this has generally been the province of public interest groups that have small shareholdings in major corporates in order to engage with them in respect of these matters. That said, one unique and distinguishing feature of the Australian economy is the presence of the Australian superannuation funds, which hold approximately A$2.7 trillion on behalf of Australians as a consequence of compulsory superannuation arrangements. The Australian superannuation funds are not ubiquitous in their support for ESG-related shareholder resolutions, but their support of such actions from time to time is impactful in this space. For example, between 2017–2020, nine of Australia's largest super funds supported a majority of ESG-related resolutions. Lastly, most of the Australian super funds have themselves made ESG commitments, including net zero targets and a commitment to building a responsible investment portfolio.

We will continue to monitor and report on the progress of developments in Australia, which may be the proverbial canary in the coal mine and a harbinger of what's to come in other jurisdictions around the world.