Article | Related with duty of director and climate risk

ANSWER (A)
List of articles related with duty of director and climate risk are as follows –
1. Utz., C. ( 05 October 2019).It's not just the climate that's warming up: New heat on
directors. < https://www.lexology.com/library/detail.aspx?g=5d9c8712-afa6-46cc-9341-
777b5a82c96f>
2. Nilsson., B. ( 05 October 2019). Directors' duty to consider and respond to climate
change risks - a perfect storm brewing?< https://www.lexology.com/library/detail.aspx?
g=cc2850c2-32bc-4d94-a10a-c0ad22b3dcf4>
3. Crosling., D ( 05 October 2019). Company directors can be held legally liable for
ignoring the risks from climate change. <https://theconversation.com/company-directors-
can-be-held-legally-liable-for-ignoring-the-risks-from-climate-change-68068>
4. Hennessy., L, Casey., R, Aki., T, ( 05 October 2019). Climate change and directors’
duties. <https://www.kwm.com/en/au/knowledge/insights/climate-change-and-directors-
duties-20190702>
5. Lacey., A. (05 October 2019). Should climate change risks be on a director’s radar?.
<https://mccabecurwood.com.au/climate-change-risks-directors-radar/>

ANSWER (B)
Issue
In the present case the issue is related with whether director of company could be held liable for
breach of duty of care and diligence in failing to take actions, consisting of failure to provide
explanation of the financial risk in the financial reports, and in connection with predicable
climate change risk that may assist in harm to the organization, including loss of reputation
Applicable Law
The directors of company have major responsibility towards the company and shareholders. It is
the duty of director to carry their activities in such a manner which is the best interest of
shareholders1. With this aspect, according to section 180(1) of the Corporation Act 2001, director
of company should apply due care and diligence while carrying activities of business in the
manner that a rational individual would exercise if they hold position of director in the similar
situation and possess same obligations as the director or officer. According to Common Law as
well as Corporation Act, it is considered as primary duty of directors of company2. Climate
Change risk are proficient of demonstrating vulnerabilities of damage to the interest of
companies of Australia, which would be considered by court as being probable at the current
1 Amar Ben, Walid, and McIlkenny Philip. ‘Board effectiveness and the voluntary disclosure of
climate change information.’ 24.8 (2015) Business Strategy and the Environment 704-719.
2 Binh Bui, and De Villiers Charl. ‘Business strategies and management accounting in response
to climate change risk exposure and regulatory uncertainty.’ 49.1 (2017) The British Accounting
Review 4-24.

time. In the present scenario, there are significant risk connected with climate change, and such
type of risk requires involvement of directors of company3. It is required by director to consider
the climate related risk and their impact on business activities, to the extent they interconnect
with the interest of organization. In other words, it can be said that by considering the duty of
director such as duty of care and diligence, climate change risk should be considered by director,
to the extent they interconnect with the interest of organization, in so far as existing opportunity
for company or predicable risk to the organization4. In legal aspect, there is no restriction is
imposed on director for considering climate change and connected financial, environmental and
social sustainability risk, where those risk are significant for interest of company. On the other
hand, directors of company should consider the impact of climate change risk to their business
activities. It is recognized that directors who fail to take into account the climate change risk on
business, is considered as breach of duty of care and diligence. Director who considers the
impact of climate change risk on business would require creating their own assessment and
taking decision regarding implementation of any action5. In addition to this, director of company
3 Gordon Jr, J, Wright Morton Lois, and Hobbs Jon. ‘Understanding farmer perspectives on
climate change adaptation and mitigation: The roles of trust in sources of climate information,
climate change beliefs, and perceived risk.’ 47.2 (2015) Environment and behavior 205-234.
4 Simon Caney. ‘Human rights, responsibilities, and climate change.’ Environmental Rights.
(Routledge, 2017) 117-137.
5 Christopher Wright, and Nyberg Daniel. ‘An inconvenient truth: How organizations translate
climate change into business as usual.’ 60.5 (2017) Academy of Management Journal 1633-
1661.

also required to provide proper disclosure of those risks in the financial reports of company.
There are three types of climate related risk, such as litigation risk, physical risk, and transition
risk. Physical risk is connected with increasing total global temperature, and transition risk is
connected with advancement that may or may not occur in the procedure of adjusting in the
direction of lower-carbon economy. These criteria of risk each provide risk to tertiary risk,
restricting from litigation consisting obligation for breach of duty by director.
According to section 180(1) of the Corporation Act 2001, conduct of director should be analyzed
by considering the objective standard like position of individual director, knowledge and
responsibilities, nature of company, size of organization, and the entire situation dealing the
director at the time. In addition to this, duty of acre and diligence is owed by director towards the
company; therefore it is very important for director to consider the climate change risk at the
time of evaluation of risk of company. In some cases, the interest of organization will
interconnect with the interest of workers, creditors, or shareholders, and therefore it will be
suitable for director to consider those aspects into account. Similarly, the interest of organization
is consisting of the physical surroundings in which it running their activities and the regulatory
matters in which it changes. It leads that climate change risk must be considered by director of
company to the amount it is interconnected with the interest of organization. This could take
place in several manners6.
6 Arjya B Majumdar. ‘The fiduciary responsibility of directors to preserve intergenerational
equity.’ (2019) Journal of Business Ethics 1-12.