Directors have a duty to respond to climate change: Hayne

Responding to climate-related risk needs a system-wide reaction which includes Australian businesses taking responsibility, according to Kenneth Hayne QC.

Learned helplessness and short-termism should not distract from the duty of directors to respond to climate-related risks, Hayne told the Centre for Policy Development's Business Roundtable on Climate and Sustainability last month.

In response to the 2019 TCFD Status Report which shows the speed at which changes are needed to limit the rise in the global average temperature obliges more companies to consider the potential impact of climate change and disclose their material findings than are now doing so.

The entities, and their boards, must ask at least two questions:

• What is the potential financial impact of climate-related issues?
• What is now, and what will be, our strategic response?

Hayne firmly attributes blame to short-termism and a sense of helplessness.

According to Hayne, while directors must act in the best interests of the company, "best interests" is not one dimensional.

"It is not determined only by share price movement or total shareholder return over a period.  Best interests does not present a binary choice between the interests of shareholders and the interests of others (whether customers, employees or society more generally)," he says.

"The longer the period of reference, the more the interests of all affected by a company's actions will converge in pursuit of the long-term financial advantage of the enterprise."

Hayne also suggests that putting climate risk into a bucket marked "non-financial risks" if they do not see the risk being realised in the next financial period, is not the answer.

"The distinction between financial and non-financial risk to the entity is anything but clear. Conduct and regulatory risk were seen by some financial services entities as non-financial risks less important than other risks to the financial performance of the entity.

"But the realisation of conduct and regulatory risks has had large and continuing effects on, not only the reputation of the entities, but also their profitability."

Hayne also sees that helplessness is often seen in the context of "the issue is large; Australia is comparatively small; nothing we do will affect the outcome if the big emitters do not act."

"Both learned helplessness and short-termism yield a result that fits comfortably with those who still see climate-change as a matter of belief or ideology. Framing the most recent debates provoked by the bushfire emergencies as part of the 'culture wars' reinforces the notion that climate science is a matter of belief, not scientific observation and extrapolation.

"No less importantly, because the debate remains framed as a debate about belief, learned helplessness and short-termism can be translated into the nativist-populist terms that now have such currency in many political systems."

Hayne's suggests all boards need to:

• recognise both the nature and extent of climate-related risks and the speed with which change will have to be made;
• develop strategic plans in response;
• report to shareholders and the wider market about what they have done, are doing and will do in response.

"Boards simply cannot confine their attention to the short-term. As I have said, entities which did not look beyond short-term profit have recently suffered very large financial and non-financial losses," Hayne says.

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