Prudence, profit and the perfect storm: climate change risk and fiduciary duty of directors

A ‘Perfect Storm’ is named for its unique converging forces that individually would each create a ‘strong storm’ but together feed perfectly into each other to create the ultimate storm. Many warn such are the combining forces of climate change. Likely to happen concurrently and change constantly, the converging risks of climate change will take many forms. This paper reviews the potential business risks of climate change considered both highly likely and earliest to occur, and explores if Australian company directors have a fiduciary obligation to respond. Businesses are already warned to expect exposure to a combination of physical changes, changing market conditions, new sources of competition and new government regulations due to climate change. These changes will likely affect different industries in different ways, different companies within industries in different ways and different regions and countries differently. This review found Australian directors have a fundamental fiduciary duty to manage business risks with the care and diligence comparable to a reasonable person in that position. They are also required to actively inform themselves while managing those material risks. It is clear that climate change represents a significant risk to many Australian businesses. As such, Australian directors have a fiduciary duty to assess the impacts of climate change on their business and, if sufficiently material, to disclose the exposure to the market and respond to mitigate the risk.