Current trends in ESG risk for boards & company directors

The impact of the pandemic, coupled with numerous natural catastrophes has brought the material risk factors of ESG to the forefront of board oversight. No longer are Directors answerable only to company shareholders but now the wider community, and pressure is mounting for board members to develop skills around resilience strategies and critical ESG issues.

Recent studies have shown that 64 per cent of existing corporate board members state that company strategies are tied to ESG concerns – this is a 15 per cent increase from 2020 to 2021. Coupled with this, only one in four directors believe their board understands ESG risks well. Government and regulator responses to ESG risk are developing at a faster rate than what is generally seen within the private sector leaving many organisations exposed to ESG related claims due to both a lack of awareness and lack of sufficient risk management strategies.

ESG plays a major role in the governance framework of today’s organisations. It is no longer a recommendation or “should have” type strategy but rather a necessity if organisations are going to expect shareholder confidence to be maintained into the medium and long term. In a global society where the Western world is taking active steps to tackle ESG issues, private enterprise must embrace the mentality.

It is therefore critical that companies and directors are cognisant of obligations pertaining to the ESG issues facing them. This responsibility is reflected in law introduced by Australian regulators over recent years, including in legislation such as the Corporations Act 2001. These laws are important in respect of director duties, where ESG issues may be addressed by way of risk management by the board. These issues have also featured recently in ASIC market feedback and are therefore highly topical.

Trends in ESG litigation

Climate change litigation is increasing and diversifying in nature. Across the world, climate change related cases have more than doubled since 2015 with over 1000 new cases being brought in the last 6 years globally. Australian figures show even more aggressive growth with 2021 seeing more climate change litigation per capita than any other nation globally. Governments remain frequent defendants however cases focused on private litigation against companies are growing also. The scope of recent cases in Australia is broad with some notable examples:

  • The liability of non-disclosure to investors regarding climate change risks was seen in O’Donnell v Commonwealth of Australia where the applicant alleged non-disclosure of material climate change information which would inform investors of significant risks associated with holding the exchange-traded Australian Government Bonds that persons would reasonably require to make an investment decision. The application by the Government to have the Applicant’s statement of claim struck out was unsuccessful and the claim in misleading or deceptive conduct was allowed to proceed.

  • The importance of climate risk disclosure for companies and the inherent potential exposure of directors was highlighted in Abrahams v Commonwealth Bank of Australia (CBA) where the Federal Court recently ordered CBA to release documents regarding its decision to finance seven oil and gas projects following a shareholder’s application for access to the documents on the basis that CBA’s involvement in the projects may infringe its own ESG policies and whether the projects are consistent with the goals of the Paris Agreement.

  • The fossil fuel sector has been challenged over environmental claims with Australia’s first “Greenwashing” case brought by the Australasian Centre for Corporate Responsibility against Santos Limited. This is the first case globally to challenge the accuracy of a company’s net zero targets.

Response from regulators

In November 2021, APRA released CPG 229 Prudential Practice Guide on Climate Change Financial Risks. While the document does not impose new requirements in relation to climate risks, it makes clear that existing risk management governance requirements must encompass climate risks.

APRA is also undertaking a Climate Vulnerability Assessment (CVA) of Australia’s 5 largest banking institutions. Results have not yet been released but APRA Chair Wayne Byres said: “APRA began the CVA program in the banking sector due to its centrality to the Australian financial system, as well as the potential impacts associated with climate risk across the portfolios, from household mortgages to business exposures. The results should help the boards and management of participating institutions to understand and proactively address any identified risks, as well as capitalise on new opportunities. They will also help regulators with a better picture of the nature of the risks, and how financial institutions plan to respond.”

ASIC has shown interest in ‘net zero’ statements in prospectus documents, intervening in an energy company’s initial public offering in September 2021. The intervention resulted in the removal of some of the ‘net zero’ statements in question. Last year ASIC announced a review of ESG-focused financial products to examine how they are offered to investors and has noted it will monitor approaches by international regulators.

The credibility of climate targets touted by private companies is seeing increased scrutiny by special interest groups and NFPs. Terminology such as ‘net zero’, ‘carbon neutral’ or ‘carbon positive’ can have different definitions yet are in some cases used interchangeably while specific details of climate change targets are sometimes absent or hidden in the fine print. In response to this issue the Science-based Targets Initiative (SBTi) has established a service to validate a company’s climate target and has developed the SBTI’s Net Zero Standard to provide guidance and tools to assist companies in setting measurable and science based net zero targets.

Bellrock’s approach to ESG risk

Bellrock’s proactive approach to risk management requires that we advocate to insurers that our clients have a demonstrated approach to ESG. This includes ensuring our clients have an established understanding of ESG risks and can demonstrate a risk management strategy and ongoing oversight in respect of same.

As is our advice to boards generally, it is prudent to obtain expert analysis and opinion insofar as risk generally, but particularly with emerging risk. In doing so the independent expert will be able to measure the maturity and appropriateness of said strategy, and more importantly its adequacy. The expert will also be able to observe recommendations on improvement.

As regards insurance, external expert opinion provides probity in Bellrock’s advocacy of our client’s risk profile. That ordinarily leads to a more attractive risk to present to insurers, and ordinarily returns coverage benefits and more competitive premiums.

Bellrock has partnered with Colin Biggers & Paisley (CBP) to provide clients with an independent review of ESG risk, details of which can be found in our ESG Risk Assessment Guide. For further information or to obtain an ESG risk review, please contact us via the form below.

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