In an interesting development that could prefigure further climate change-related disclosure litigation, an Australian investor has filed a lawsuit against the Australian Federal Government and two government officials, on her own behalf and on behalf of over investors in Australian Government Bonds, for allegedly failing to disclose to investors the climate change risks attached to the sovereign bonds. According to an August 12, 2020 memo from the Allens law firm (here), the suit is “a first-of-its-kind action worldwide,” one that could serve as a “stepping stone” toward both more activist litigation and more commercially focused climate change disclosure litigation.
On July 22, 2020, Kathleen O’Donnell, a 23 year-old student, filed a lawsuit in the Victorian Registry of the Federal Court on her own behalf and as representative for retail investors and holders of Australian Government Bonds. The suit names as respondents two government officials – the Secretary of the Department of Treasury and the CEO of the Australian Office of Financial Management. The suit asserts multiple claims that the respondents violated several statutory disclosure obligations and other legal duties, based on the factual allegation that the bonds face material climate-change related risks that the claimant asserts should have been disclosed in the bond offering documents.
The climate-change risks that the claimant asserts should have been disclosed include (i) physical impacts, such increased temperatures, droughts, and bushfires; (ii) transition impacts, such as increased exposure to stranded assets and legal actions; (iii) risks of sovereign response to climate change, including, for example, treaty requirements for emission reduction and reductions in emissions per capita under government energy policy.
These various omissions, the claimant asserts, were material to investors’ decisions to purchase or trade in the bonds. By failing to disclose this information, the claimant asserts, the Government breached its disclosure obligations and engaged in misleading or deceptive conduct, in violation of various statutory provisions of the Australian securities laws. The individual respondents are alleged to have breached their duties to perform their functions and discharge their duties “with reasonable care and diligence” under applicable statutory provisions.
The claimant seeks judicial declarations that the respondents violated their duties as alleged, as well as an injunction to prevent further promotion of the bonds until the Government complies with its disclosure obligations. The claimant does not seek damages.
Law Firm Analysis
The law firm memo to which I linked above notes that the claimant faces some substantial hurdles. She will, for instance, need to establish that there was a “reasonable expectation” under the circumstances that the climate change risks would have been disclosed to investors. She will also have to establish what particular information ought to have been disclosed. However, by omitting any claim for damages, the claimant has at least avoided the need to “grapple with the challenges of extrapolating a climate-related loss and damage” attributable to the non-disclosure.
While the claims may face significant hurdles, the action (and others like it) should not, according to the law firm memo’s authors, “be dismissed as insignificant.” The action is, as the authors note at the outset of their memo, the “first-of-its kind worldwide,” in that it represents a climate change disclosure action against a sovereign government. The action is also significant in that it “targets individual public office holders in relation to duties that are closely analogous to directors’ duties,” and in that regards, it “might serve as a caution for members of publicly listed boards.”
Moreover, the authors note, the action and others like it “demonstrate increasing creativity in the approach of environmental activist litigants.” Perhaps even more significantly, these kinds of activist driven lawsuits “workshop” legal theories, principles, and approaches, and could create precedents “that can be leveraged in more commercially driven climate change class claims.”
In short, the case could be a “stepping stone towards more commercially focused climate change disclosure actions,” a possibility, the authors note, that could be of particular concern in Australia, given that the country is “becoming front and center as a forum for activist climate change litigation.”
The law firm memo concludes with a set of recommendations for corporate boards to consider in light of the recent legal action filing, including several steps board might take to understand, assess and oversee their companies’ climate change-related disclosure risks.
I continue to believe that climate change risks, including but not limited to climate change-related disclosure risks, are and will remain a serious and important item for corporate boards to consider, monitor, assess, and oversee. I say this not only because climate change related developments are and will continue to be an increasingly important factor in company operations and finances (as climate impacts affect supply chains, transportation, and capital markets), but also because I believe these considerations will translate into D&O claims, for a number of reasons.
First, as the recently filed Australian action demonstrates, activists clearly intend to use litigation as a vehicle to draw attention to climate change issues, including climate change disclosure. There have been a number of other examples from outside the U.S. where advocacy groups have filed litigation aiming to encourage reporting companies to beef up their climate change disclosure. For example, On August 2, 2018, the non-profit legal group Client Earth filed complaints with the U.K. Financial Conduct Authority (FCA) against three different U.K. insurers. The legal group contends that the insurers’ annual reports failed to meet the requirements of the Disclosure Guidance and Transparency Rules due to the absence in the reports of any climate change-related disclosures. A similar action seeking increased climate change-related disclosure previously was filed in Australia against one of the leading banks. These advocacy groups likely will continue to file these types of actions in a variety of jurisdictions.
Second, climate change-related disclosure issues have already been the source of securities class action litigation activity in the U.S. There is of course the long-running securities suit pending against ExxonMobil related to the company’s disclosure concerning its ability to realize the full economic value of its hydrocarbon assets. It is important to note that that lawsuit recently survived the defendants’ motion to dismiss; however, as discussed here, on December 10, 2019, New York (New York County) Supreme Court Justice Barry Ostrager ruled in a lengthy and detailed post-trial opinion that the New York Attorney General (NYAG) had failed to establish in a separate action against ExxonMobil that the company had made material misrepresentations in its public disclosures concerning how the company accounted for climate change risk.
There has been other climate change-related litigation filed in the U.S. against companies whose operations were affected by the impacts of climate change. The most significant examples of this are the various lawsuits filed in recent years against PG&E (refer for example here) and Edison International (here); both of these companies were sued in securities class actions after their electrical utility facilities were tied to wildfires that were the result of climate change-caused drought conditions. The likelihood is that there will be further climate change related litigation involving companies whose operations, supply chains, or finances are disrupted by the physical impacts of climate change.
I am not alone in thinking that climate change-related issues represent a serious and growing area of D&O risk; frequent guest blogger Francis Kean published a guest post on this site earlier this year (here) in which he discussed his view of the D&O risk associated with climate change, as well as potential D&O insurance issues. Indeed, the law firm memo I cited above quotes a February 2020 statement by a former Australian High Court Chief Justice as saying that governments, business and regulators face a “growing tide” of climate change-related legal challenges.
All of that said, I do have to acknowledge one criticism that might fairly be raised regarding my analysis of these issues. It might fairly be pointed out that I have been predicting on this site that climate change-related issues represents a serious area of D&O concern for many years – I think I published my first post on climate change in 2007. Over the course of those many years, there have only been a very small handful of claims. It might fairly be asked that given the passage of time and paucity of litigation that perhaps I am guilty of overstating things, more than just a little bit.
While this criticism might well be fair, I counter with two observations. One problem with climate change is that because it is a slow motion problem with its worst effects only occasionally apparent to all but the most skilled scientific observers, it is a problem that has up until now been easy to push in the background. (The current pandemic represents yet another example of how more immediate concerns can complete subordinate longer term concerns like climate change). But merely because it has been up until largely possible to disregard the long-term consequences of climate change, that does not mean that it is not real or that its potential consequences will not be serious.
Over time, as climate change-related events – droughts, temperature extremes, floods, wildfires, tropical storms, coastal flooding, and so on – become more common and more frequently disrupt business operations and activities, the consequences will be harder to ignore. I continue to believe that the corporate directors and officers that have not anticipated the changes and adapted, or that have not warned investors of the risks, could be subject both to criticisms and liability claims for failing to take these climate change concerns into account. These things may not come to pass immediately; the time frame is too hard to predict. But these are things that are going to happen.
One final note. It is kind of interesting but this is the second securities lawsuit filed in recent days against sovereign national governments. As discussed here, in late July, bondholders filed a securities suit in the U.S. against the government of the Republic of Ecuador. Further details about the Ecuador lawsuit can be found here. However, the parties recently notified the court that they had settled the case, and the court therefore entered a dismissal order (here).