A hint of the climate that lies ahead

It’s one of the basic tenets of best practice corporate governance – and in what could become a global test case, a number of shareholders of the Commonwealth Bank of Australia don’t believe their board is particularly first-rate in this regard.

I’m referring, of course, to the board’s duty to act with care and diligence and to take into account all known facts that might impact the longer term outcome of a strategic decision they make.

And the case in question deals with a group of shareholders who have – in what is a world-first – commenced proceedings against the bank on the grounds that it failed to adequately disclose the risks climate change poses to the business in its 2016 annual report.

As I said, it’s a pioneering case and while the smart money suggests it won’t get up, chances are this landmark legal challenge will be remembered as a harbinger of what’s to come.

I say this because as issues raise their heads in a society – and those who are reasonably well-informed come to accept that these current or imminent issues could impact the longer term success of the company – they expect reason to prevail.

They know, too, that the test the law always applies in these scenarios centres on what the reasonable person in a certain position would do.

And the reasonable person, where there is enough coverage of an issue, will ultimately be expected to take that issue into account in the strategic decisions or the risk assessment that the board undertakes before it does certain things.

So as the scientists accept more and more that climate change is upon us – and all the pundits point to a possible two degrees Celsius rise in temperature in Australia and its significant impacts – companies are going to need to take this into account with the investments they make.

Their environmental policy and its central principle of ‘don’t degrade the environment’ is also going to need to be revisited and revamped to reflect the new reality.

What’s more – and given that we understand that the temperature is likely to go up a few notches – if a board was to invest in an asset that stands to drop dramatically as a direct result of the earth’s warming, it is pretty easy to mount the case that the chair and directors had failed to act with care and diligence.

Okay, it’s a crazy example, but imagine for a moment that an Australian public company decides a low-lying tropical island, enjoying a vibrant tourism boom and boasting a wonderful spread of luxury hotels and resorts, is a good investment bet.

It seizes the moment and pays an absolute fortune for a 50 per cent stake in part of this infrastructure.

It does so with scant regard for the science that suggests that if we don’t do something about addressing climate change, this piece of paradise will all but be under water in the next few decades and the assets will have to be written off.

A bit extreme, I know, but the point is this: the legal challenge by the small group of Commonwealth Bank shareholders could well provide a hint of the climate that lies ahead…

Until next time,

Kate.

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