ERM Energetics Exchange

Episode 8: Litigation trends and views on climate risks

• Energetics • Season 1 • Episode 8

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In this podcast episode, Energetics’ Dr Peter Holt is in conversation with Brendan Bateman, Partner at Clayton Utz and leader of the firm's Climate Change and Sustainability Group. He shares his insights on the legal implications associated with managing and disclosing climate risks, the need to consider both emissions reduction pathways and adaptation measures for a hotter, drier world, and the importance of engaging with climate science.

Featuring: Dr Peter Holt, General Manager, Strategy and Policy and Brendan Bateman, Partner, Clayton Utz

Note: The information and commentary in this podcast is of a general nature only and does not take into account the objectives, financial situation or needs of any particular individual or business. Listeners should not rely upon the content in this podcast without first seeking advice from a professional.

Introduction:

Welcome to the energetics exchange podcast conversations with energy and climate experts. Please note that the information and commentary in this podcast is of a general nature only, and does not take into account the objectives, financial situation, or needs of any particular individual or business business should not rely upon the content in this podcast without first seeking advice from a professional.

Peter Holt:

Hello, and welcome to energetics latest podcast. I'm dr. Peter Holt general manager here at energetics today with me, I have Brendan Bikeman. Brendan is a partner at Payton youth law firm, and is the firm's leader of climate change and sustainability group. He advises businesses and corporations on the risk of climate change and the implications of emerging government policy and legislations for a low carbon economy. So welcome, Brendan.

Brendan Bateman:

Thank you very much. Glad to be with you.

Peter Holt:

We've seen a, quite a high increase in climate related litigation over the last, uh, year in particularly accumulating with the Rocky Hill judgement and last year, what are you saying in the litigation space around climate related risks?

Brendan Bateman:

Uh, look, I think it's important to put this in context, Peter. Uh, one of the things that people don't realize that Australia is actually the second highest ranking country when it comes to climate related litigation. So Australia as well up there compared to a lot of other countries in the world in terms of the types of litigation that we've experienced and are experiencing, um, certainly Rocky Hill, as you mentioned, was a significant case last year, uh, and attracted a lot of attention, but there are also a number of other cases, different types of cases that we've seen, uh, not just planning, merits appeals in relation to projects, but we've also seen the McVeigh case, which is involving a member of a superannuation fund, bringing proceedings against the trustees of that fund, alleging that they've failed to pay sufficient regard to climate change risk when assessing the investments that they make on behalf of their members. So effectively alleging a breach of the trustee's duty is there. We've also seen other litigation involving shareholders bringing proceedings against a large corporates. In 2017, we had shareholders bring actions against the Commonwealth bank of Australia, where it was alleged that the, uh, the report saying the report and disclosures made by the CPA in 2016, didn't provide a fair and reasonable view of the bank's position in relation to climate change related risks. So we're seeing very different types of litigation, shareholder litigation member, superannuation fund litigation. In addition to the usual types of project approval project challenges, approvals that we might see, for example, in relation to the Adani coal mine.

Peter Holt:

So the combination of those litigation's then how have your clients need Australia, particularly in both rooms, respondent

Brendan Bateman:

look very, very big question and a very difficult question to provide a simple answer to, um, invariably the responses have been different. Uh, certainly my also my experience is that those attitudes and responses have changed over time. So certainly say 10 years ago, a lot of the reactions that I got from some of the corporate clients was one of denial was one of sighing. It particularly in the energy resources sector was one of, um, saying that, you know, the relevant attitude to take was to damn the torpedoes full speed ahead type of approach, which was to take on the action and demonstrate, um, the view of the corporate at that particular time. Certainly those attitudes changed and become much more responsive to the risk of climate change, to their own businesses. Understanding that regulatory environments are changing. And that certainly the critical mass, I think, particularly in the investor sector, but also in the business community itself is certainly moving very closely in alignment with the goals of the Paris agreement. And we're seeing a number of corporate setting net zero emissions targets. So in other words, they're assuming obligations, which currently they don't legally have, are under certainly laws in Australia,

Peter Holt:

sir, Brandon you've said, attitudes are changing. Are we just seeing the tip of the iceberg here? Or are we really getting a wholesale change of the market?

Brendan Bateman:

Uh, certainly I think if you were to look at it in particular sectors, um, and if you're looking in the financial services sector and including in that the insurance sector, you'd say that that is operating effectively on a sectoral basis, moving very quickly towards that. And I think that's attributable to a number of things. Firstly, uh, that sector gets risks. Its entire, uh, business model is around assessing investment risk, but also they are the ones that have been, um, I suppose, best equipped also to understand how it can be translated into a financial risk. And so they also have the benefit of the development of tools which have been used. So like take the science, uh, and take the objective facts and translate them then into how that might impact on the strategy, but also translate that into a financial metric. And I also have the benefit of the TCFD guidelines, which are, have assisted them in the development of their approach and response to dealing with climate related risk.

Peter Holt:

So on that, do you think we have the right financial metrics to assess these risks yet?

Brendan Bateman:

Uh, I'd have to say that it is developing. It's also challenging in the sense that whilst there are tools that are being developed, I think it's a case of that. It's a learning by doing approach that's happening at the moment. That's not to say that that's wrong. Indeed. I think it's a very important part of the exercise. It needs to be able to take and by business and corporates. And I think that there needs to be a building of capability, internal capability, uh, within organizations to understand climate related risk and how that translates then into financial assessment of the risks posed by climate change.

Peter Holt:

So you mentioned earlier also the, uh, the role that the task force on climate related financial disclosures or the TCFD is playing in this space as well. And that provides a very useful framework for businesses and investors to learn. Um, and we're seeing that through particularly a lot of the resilience testing and scenario analysis that businesses are undertaking. What kind of resilience testing are you seeing your clients undertaking at the moment?

Brendan Bateman:

Again, I'd have to say that there's different levels of sophistication when it comes to that. Certainly there are a number of sectors and businesses that are very well equipped at doing that type of scenario analysis. Uh, and that's one of the important elements as you probably appreciate pedal with climate change is, is that it's not uniform. It has different effects over different geographical areas, as well as different sectors, uh, and different players within those particular sectors as well. So it is a very amorphic, uh, thing that needs to be assessed and then seek to try and translate into some, uh, objective, uh, assessable means, um, that having been said, the financial metric tools are improving. Uh, they have to, uh, develop and evolve over time. And certainly I think from our perspective and what I'm saying is that there's a greater level of sophistication in saying that we need to understand from a risk perspective, the types of scenarios that we're going to have to be exposed to. And that runs from, you know, the net zero emissions scenario through to various other less attractive scenarios as well.

Peter Holt:

So it is a very complex space as well. And that's been one of the challenges for businesses and for the financial sector to get their heads around. Do you think we've overcome that barrier now?

Brendan Bateman:

I think that from my perspective and what I'm saying is that there certainly is overcoming the barrier to engage with the issue of climate change and climate related risk, but there's a seem to be a need not just be seen, but also to actually do a, and we've seen that through not just the responses of business to the particular risks that they're exposed to, but also because of the attitudes of investors, uh, shareholders, but also regulators, not just in Australia, but also overseas. There's a growing expectation that businesses not only need to assess, uh, climate related risks to their particular business and their investment strategy, but also disclose it. And whilst it isn't mandatory at the moment, there seems to be an inevitability about that. We will getting to a point where not only will climate related risks, native feature in annual reports as they are currently required to, but also that there'll be a mandatory disclosure requirement relation to them as well.

Peter Holt:

So all of the mandatory disclosure are browned and we've seen quite strong wording from apprehend February this year. And, um, some updates to the RFR from asset last year has been challenged in terms of what your clients are thinking about, what they can actually disclose to what they can say versus what they need to be saying.

Brendan Bateman:

I think that's a really great question, Peter, because it is quite challenging because whilst there is a requirement for companies to be able to assess and disclose and report as relevant to their financial and operational review requirements in their annual reports, it's important that it's not seen as a ticket box exercise and there needs to be a robustness in the assessment because much in the same way as disclosure, uh, can be for the purposes of distill or for presenting the truth side or the, uh, financial affairs and operational affairs at the company. It also needs to be a genuine one that's been tested. So I think it's important that when companies are looking at it that they're not looking at it as being just an immediate extension of a sustainability report, that it needs to be front and center. And so therefore the attention that needs to be given to it needs to be a robust one. It needs to be actually quite strongly tested to ensure that what they are presenting is a fair and reasonable view of that business's assessment of the climate change risk, which they're exposed to and what implications that has for their investment strategy and their financial strategy overall.

Peter Holt:

And just building on that bridge. And, uh, we, we find very similar kind of robust discussions occurring with some of our clients as well and what we find and that we have a challenge between uniformity and comparability of say scenarios and particularly which scenarios, um, businesses would want to compare and benchmark themselves with yet. Each business is nuanced. It's different, they have different accents, uh, their different geographical positions. Do we really need comparable scenarios?

Brendan Bateman:

Again, very challenging question. Um, I think from my perspective, it's important that one, if businesses are going to be assessing climate change related risks to their particular business, then they need to have a starting point. That starting point is to be looking at particular scenarios, the stress testing that we would be recommending that businesses undertake in relation to their assessment necessarily involves nuanced approach. In other words, they need to understand, um, whether or not some of the risks that have been identified, how they translate are they material in terms of the business's operations and financial position. And that does require looking at the particular circumstances of that business. So I think whilst yes, we do need to understand and work from particular scenarios that needs then to be translated into the particular businesses situation. And part of that can also be effectively for want of a better expression comparing against peers. So identifying who your peers are in your market and working out whether or not from what they're reporting and disclosing, there is a comparability between them. We can't ex expect that they will be identical, but they need to understand that. Well, if that particular business that also operates in my sector understands that this is a particular risk to them, then I need to review and revisit my assessment to ensure not that I'm copying them, but for the purposes of understanding how these particular selection of scenarios operate within my particular sector.

Peter Holt:

So it's quite a nuanced approach we're really talking about here as well,

Brendan Bateman:

which is why I think that one of the important things that needs to be addressed here is the building of internal capability within organizations to understand climate related risks. Then actually, how then translate that from the meaning assessment, from the science point of view, to how it then operates within the business, assessing the risk to the business, but then also dealing with the legal requirements and the emerging legal requirements that the expectations of the regulators regarding assessment reporting and disclosure.

Peter Holt:

So one of the things that we've seen particularly over the last three months throughout this year really is that science has come to before again, um, we've through the Bush fires, uh, earlier this year in late last year to now a global pandemic, uh, we've really had to listen to the science and respond to the facts. And we've seen a lot of the big banks now, employing climate scientists, um, already employed by insurers and rain choice for very long period of time. And now coming and translating that into business impacts. What are you saying then from a legal perspective from the science?

Brendan Bateman:

Um, not a great deal at the moment. I'd have to say. Um, I think what we're seeing at the moment is that to the extent that, um, science is coming to the fore and take litigation for an example, um, what we're probably seeing is the emergence of probabilistic risk assessment, uh, and applying what was, uh, a science based approach to, for example, in relation to, um, um, tobacco, uh, in the, in the seventies and eighties, we're now seeing that type of approach being applied to climate science. So what we're seeing is an assessment being done both in relation to event, uh, occurrence, but source attribution, uh, being looked at in terms of how liability can be, um, uh, attracted based on a probabilistic risk assessment of climate related risk. Um, so we're seeing that, like I said, in relation to events, so is the increased risk of a particular event occurring attributable to climate change? And if so, how has that, uh, been responsible for a particular incident or damage that has been suffered, but also in terms of source attribution? I think one of the interesting things that came out last year was some work being done out of the U S which was able to, I think, count for, um, 70% around that percentage, 70% of the world's emissions attributed to 100 companies. And so when we're seeing that type of merging, um, research, um, and both in the science, but also in the legal area and the legal academia, and we're seeing a lot of research papers put out by lawyers as well in relation to, uh, probabilistic risk, uh, attribution, uh, that there is a growing science and legal understanding of how the science applies to potential liability for in the future for climate related risk.

Peter Holt:

So if we looked at historical events and heart historical relationships, if we combine that then with the climate projections, now we often talk about our variety of climate projections for different, uh, one and a half degree world up to a six degree world. But if we look at those projections, it's actually really quite a narrow band within the next 20 years in that we've got approximately 1.1 degree of common warming locked into our system, and it's the decade or a response about a climate system that regardless of any immediate action, it will take approximately two decades for things to change. So you saying that then the climate projections that we've been produced by leading comment, scientists will then come in quite a foreseeable way into potential future liability for businesses and their directors and directors responsibilities.

Brendan Bateman:

Uh, I, I think that's, without a doubt that will occur.

Peter Holt:

And does that thing go to some of the questioning, this app is really asking about what climate information, um, or, uh, accessing to make future investment decisions.

Brendan Bateman:

Yeah, absolutely. In the sense that they need, not only to be appraised of the issue, but also understand and seek the right information in order to be able to make the decisions that they need to be making in relation to the future investment strategy of particular business.

Peter Holt:

Do you think many businesses in Australia are doing that at the moment?

Brendan Bateman:

Again? I think it's a case of it's, um, different businesses within different sectors are doing it better than others. And, uh, as I mentioned, I think the financial services sector and the insurance sector are certainly leading the charge on that front. Uh, other sectors, I think, are particularly in the energy resources sector are certainly, um, moving forward faster than what they had previously done. Uh, whereas other sectors, I think it's a much more of a struggle, uh, particularly in the manufacturing sector, uh, where very difficult for them to find the resources, to be able to look at the science, let alone the R and D side of things as well.

Peter Holt:

And we often talk about the impacts to infrastructure or, um, market segments, but do we also need to consider the human element here, both from a human wellbeing perspective? So for example, if we're asking workers to work in more extreme conditions with hotter temperatures and more of a different changing of physical environments, do we need to consider those issues as well?

Brendan Bateman:

Yeah, certainly. Um, uh, as a result of the, um, Bush fires that occurred, I think, uh, recently in the Southeast coast of Australia, that there has been significant attention being brought to bear on the wellbeing of workers and individuals, because there are real issues associated with the risks that the particular employees are exposed to, not just in the localities where they work, which may be exposed to higher risks of climate related events, caring, but also in the response to those incidents. So for example, in relation to the impacts that occurred as a result of the Bush cost, take the example to infrastructure, telecommunications and electricity transmission infrastructure about the potentially higher risk that, uh, individual, um, um, employees were being exposed to by reason of being required to respond to those risks in order to take works in those high risk areas. So certainly there are being questions asked, and I think that there is a growing understanding of the need to assess the increased risk to employees as a result of climate related events occurring. Um, and certainly to take the much broader picture, which is for example, the increased incidents of, um, uh, hot days occurring. Certainly the predictions indicate that it's, I think it's in Melbourne, it's gonna quadruple in the next several decades. And in those circumstances that there needs to be review of the relevant, uh, work health and safety policies that apply to particular industries and sectors, which are going to be operating during those events occurring. So certainly it is very much also being looked at from an employee individual point of view. And I think there is a growing awareness and that will continue to occur

Peter Holt:

turning on online now to adaptation requirements because clearly we have, um, climate change is locked in, we will need to adapt and we will need to change how we do things, but we're also asking our workers and to adapt different operating environmental conditions as well. So do we need to think about how, not only the adaption side, but how these people are working, what they can be doing different productivities different measures to actually assist them?

Brendan Bateman:

Absolutely. Uh, I think this is the short answer to that question. Uh, there is a whole range of measures that could be looked at. I mean, we also have with just the recent covert, uh, uh, exemptions that have been applied in relation to business and industry sectors to them to work effectively observing social distancing, uh, and that has concluded a relaxation of, uh, hours of operation, both in relation to businesses, whether it be the supermarkets, being able to take deliveries outside of the usual operating or hours or restrictions that operate or alternatively doing work, um, being able to accommodate work at different periods of time, suspending the operation of hours of operation for planning, approvals, and consent. So certainly there has they're there they are concrete examples of changes that need to be made in terms of adapting to the particular circumstances that we're facing. And I think climate change will be very much also like that. Unlike covert, it is one that will continue to, uh, because it isn't uniform, uh, and it's also, uh, whilst severe and acute, uh, is going to be over. And we hope we'll be over in a few more months time, but climate change is not like that. It is both severe and will be an ongoing issue that needs to be addressed. And so certainly I think we'll see an evolution of the way in which we adapt our working environment, uh, and the way in which businesses operate to address that and try and accommodate that.

Peter Holt:

So we've spoken quite a lot about the risks, uh, to businesses and investors today. What about some of the opportunities? Do you see opportunities in this future environment?

Brendan Bateman:

Absolutely. Uh, and that's the flip side of the coin is that, um, someone else's risk is someone else's potential opportunity and so businesses that are aware of climate related to risk and see what the risks are to their business, uh, necessarily also are looking at how they can mitigate that risk and that also discloses opportunities. Um, so that certainly from, and this goes to the fundamental, uh, sustainability of businesses that they need to be looking not only at the environment, which they're currently operating, but also looking into the short long term and in circumstances where the science is telling us that we need to reduce our emissions as quickly as we possibly can and reach net net zero emissions, as soon as possible, uh, or at least try and seek to achieve the goals of the Paris agreement. In those circumstances, you see a significant change in the operating environment that it will have to occur over not just the next few years with regulatory changes, but also after the next decade or two decades as you indicate a painter. So certainly they're changing in the environment and changing the economics means that there needs to be a full review of the options available to a business, to be a sustainable business. And by that I'm not just meaning being green, um, but being actually a business that will have a future that will be able to continue to operate successfully in a changed economic environment.

Peter Holt:

So on that night, uh, I'd like to thank you for your time today. Brandon, what is your final piece of advice to, to the board of directors and investors in businesses that are listening to this podcast?

Brendan Bateman:

Um, I think, uh, the way I would try to leave it would be, um, even if you don't believe that you feel as though that there is a material significant risk with climate change, you need to actually be able to document that rationale and reasoning. So I don't think it's sufficient now to be able to say we've looked at it. And we think that for various reasons that we're not exposed to our risk, I think it needs to be properly documented and articulated and tested. And I think through that process, people and boards in particular will realize that that may raise a risk that exists that needs to be managed. Well, thank you very much for your time today. Brendan, on that note, thank you, listeners energetics exchange, podcast conversations with energy and climate experts.

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