It is becoming increasingly important for companies to disclose information about long-term climate risks as more and more investors are using this information to inform financial decisions. While a general shift towards transparency is taking shape, many businesses still lag behind in sharing information about their environmental performance and impacts — as well as the consequences of a changing climate on their operations. However, the launch of the world’s first-ever climate disclosure lawsuit could help accelerate the uptake of the practice.
After failing to properly disclose the risks posed to its business by climate change in its 2016 annual report, Australia’s Commonwealth Bank (CommBank) is being sued by shareholders. The bank’s failure to disclose the information deprives shareholders of a “true and fair view” of the company’s financial position and performance and puts it at odds with sections 297 and 299A of the Corporation Act. Section 299A states that annual reports must provide enough information to allow shareholders to make informed assessments of the company’s financial position, business strategies and future prospects.
The claim was brought by lawyers from Environmental Justice Australia (EJA) on Tuesday on behalf of CommBank shareholders Guy and Kim Abrahams and seeks an injunction to prevent the bank from making the same omissions in the future.
“We bought Commonwealth Bank shares more than 20 years ago as an investment in our children’s future. We are deeply concerned about the serious risks climate change poses to the environment and society. The bank should tell investors about the risks climate change will have on its business,” Guy Abrahams said in a statement.
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The suit follows a recommendation made by the G20’s Task Force on Climate-Related Financial Disclosures (TCFD) earlier this summer for firms to disclose climate information as part of their financial statements — advice already being heeded by some of the world’s largest banks, including Barclays and Santander — as well as warnings from the Australian Prudential Regulation Authority that climate change poses a material risk to the entire financial system.
EJA lawyer David Barnden says CommBank’s climate-related risks are extensive, ranging from the threat of sea level rise to the housing market to the reputational risk posed by the bank’s financing of fossil fuel extraction and infrastructure. Explicitly ignoring and neglecting these risks is what has landed the company in hot water.
According to Barnden and nonprofit environmental law organization ClientEarth, the lawsuit could set a new precedent for climate risk disclosure.
“With this case, the risk of litigation over poor climate disclosure has become a clear reality for companies,” said Daniel Wiseman, a lawyer with ClientEarth. “It’s unsurprising that investors are demanding companies properly disclose climate change risks — particularly where these companies have clear exposure to the fossil fuel sector. Shareholders will not be content to stand by silently without reassurance that climate risk is being adequately managed.”
“Many other countries already have similar disclosure requirements to Australia. In the UK, the Bank of England and other financial regulators have now made clear that financial institutions like banks and insurers should be considering climate risk. To limit exposure to this sort of litigation, business leaders need to get acquainted, and quickly, with their legal duties and with emerging industry standards, like the TCFD recommendations.”
Approximately 60 percent of the world’s 500 biggest asset owners, worth $27 trillion, now recognize the financial risks of climate change. BNP Paribas has announced a new palm oil policy that sets responsible palm oil production as a pre-condition for financing, while Royal Philips and ING agreed upon a new €1 billion Revolving Credit Facility earlier this year with an interest rate that will be dependent on the company’s sustainability performance improvement. Goldman Sachs has also taken steps to protect its portfolios, pledging to funnel $150 billion in financing and investments into clean energy by 2025.