Climate risk governance guide

Climate risk
governance guide
An introductory resource for directors
on climate risk governance
Discover more at aicd.com.au/cgia

C L I M AT E R I S K G OV E R N A N C E G U I D E
Table of contents
Purpose and scope of this guide 3 Part 3: What are the duties and
expectations of me as a director? 13
Part 1: What do I need to know
about climate change? 5 Directors’ duties 13
What is climate change? 5 Climate change and the best

interests of the company 14
Why is climate change an issue for
organisations and boards? 6 Duty of due care and diligence and
taking a proactive approach to
Which industries are impacted climate governance 14
by climate change? 8
Climate change and
Climate change key concepts 8 misleading disclosure 15
Heightened regulatory and

Part 2: How do I start my
stakeholder expectations 15
board’s climate change journey? 9
Litigation risks 17
Where are we now? 10
Governance — embedding sound Appendix 1: Glossary of key climate terms

foundations, processes and structures 11 and leading frameworks 18
The board in action — strategic Key climate terms 18
planning and risk oversight 11
Governance, management & disclosure
Reporting12 — current leading frameworks 20
Reflecting on your progress — next steps 12
Appendix 2: World Economic
Forum principles 23
Appendix 3: How the Board

Readiness Check works 24
Appendix 4: Resource library 28
aicd.com.au/cgia 2
Purpose and scope

of this guide
This guide is an introductory resource for directors Directors starting on their climate change journey
on climate change risk governance. might want to think about some of the questions
posed in the practical guidance in Part 2 and then
It provides a plain-language introduction to
use Parts 1 and 3 to build their understanding of
fundamental climate change concepts, and
this issue.
considers this issue in the context of the non-
executive directors’ role and duties. This guide is
general – it does not go into detail nor comment Climate Governance Initiative Australia
on specific duties that may apply in any The AICD is the host of the Climate Governance
given circumstance. Initiative Australia which assists in supporting
This guide considers the following questions from our members in meeting the challenges and
the perspective of a non-executive director: opportunities of governing climate change risk.
As host of the Australian Chapter of the Climate
art 1: What do I need to know about
P Governance Initiative, our members have
climate change? access to a global network of experts in risk
• Introduction to key climate change
and resilience and to non-executive directors
concepts and risks to develop your who are leading their organisations’ governance
understanding. response to climate change.
The Climate Governance Initiative (CGI) is an
art 2: How do I start my board’s climate
P active and rapidly expanding network of over
change journey? 20 bodies globally, whose Chapters promote the
• Key questions to ask yourself and your World Economic Forum Climate Governance
board about how to get climate change Principles for boards and effective climate
onto your agenda, establish good governance within their jurisdictions. The
governance structures, consider strategy principles are set out in Appendix 2 of this guide.
and risk, and report and disclose. The principles support directors to gain
awareness, embed climate considerations into
art 3: What are the duties and
P board decision making, and understand and act
expectations of me as a director? upon the risks and opportunities that climate
• How your duties as a director might change poses to their organisations.
interact with climate change risk and CGI chapters have already been established
opportunity, and the legal and strategic in many comparable countries, including the
issues you and your organisation may UK, US (hosted by the National Association of
need to consider. Corporate Directors), Canada (hosted by the
Institute of Corporate Directors) and France.
aicd.com.au/cgia 3
How do I use this guide to start

my board’s climate journey?
G
ET CLIMATE CHANGE EXAMINE GOVERNANCE STRUCTURES,
ON THE AGENDA STAKEHOLDERS AND REPORTING
This will enable the board to discuss climate-related To ensure your organisation is prepared to address
risks or opportunities which are not being addressed in the issue and understand stakeholder sentiment and
order to have a deeper conversation reporting expectations
READ READ
Part 1: What is climate change? art 3: Heightened regulatory and stakeholder
P
expectations
ppendix 1: Glossary of key climate terms and
A
leading frameworks Part 3: Climate change and misleading disclosure
CONSIDER CONSIDER
Part 2: Where are we now? art 2: Governance - embedding sound
P
foundations, processes and structures
Appendix 3: The Board Readiness Check tool
Part 2: Reporting
A
SSESS RISK ASSESS OPPORTUNITY
To ensure your organisation is prepared for the impact To ensure your organisation is in a position to benefit
of climate change on your organisation from the opportunities that climate change presents
(e.g. transition to a low-carbon economy)
READ
Part 1: Why is climate change an issue for READ
organisations and boards? Part 3: Directors’ duties
Part 3: Directors’ duties CONSIDER

art 2: The board in action - strategic planning and
P
CONSIDER
risk oversight
Part 2: The board in action - strategic planning and
risk oversight
TAKE ACTION
Once your board has taken these steps, take action and focus on continuous improvement
How? Agree an action plan, convey to management, implement, monitor and review
Monitor AICD for updates and more guides and assistance
aicd.com.au/cgia 4
PA RT 1:
What do I need to know

about climate change?
WHAT IS CLIMATE CHANGE? The additional volume of emissions has caused the
Climate change is a phenomenon that occurs layer of greenhouse gas to thicken. As it thickens,
from the accumulation of greenhouse gases it traps more and more heat within the Earth’s
(including carbon dioxide, nitrous oxide and atmosphere. Global average temperatures now
methane) in the atmosphere. exceed 1.1°C above those of pre-industrial times,
and more than 1.4°C above pre-industrial averages
Scientists have been in broad consensus about over Australia. Scientists have warned that current
the human contribution to climate change, for a emissions trajectories may result in catastrophic
number of decades. Human industrial activity has warming in excess of 4°C by the end of this century.
resulted in volumes of greenhouse gas emissions
significantly higher than the natural baseline. These In response, 196 countries have signed the Paris
activities include (for example) the combustion of Agreement, under which governments have
hydrocarbon-based fossil fuels (such as coal, oil and committed to reducing economic emissions to
gas) for both stationary energy and transport, the a level consistent with limiting global warming
release of methane from livestock and nitrogen in to well below 2°C above pre-industrial averages,
agricultural fertilisers, and the clearing of nature’s and to pursue efforts to limit warming to 1.5°C.
gas ‘sinks’ (such as forests and peats). This commitment, in turn, will require the global
economy to transform to a ‘net zero emissions’
norm (that is, one in which the volume of
greenhouse gas emissions produced is balanced
with the volume of emissions taken out of the
atmosphere) before 2050, and to halve its emissions
footprint by 2030.
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PA RT 1: W H AT D O I N E E D TO K N OW A B O U T C L I M AT E C H A N G E?
Figure 1: Australian average annual temperatures – observed and simulated to 2040
Source: Bureau of Meteorology, State of the Climate 2020, http://www.bom.gov.au/state-of-the-climate/future-climate.shtml.
WHY IS CLIMATE CHANGE AN ISSUE FOR heatwaves and drought, and gradual onset impacts such
ORGANISATIONS AND BOARDS? as rising sea levels, increasing average temperatures
and rainfall variation. These, in turn, have significant
Climate change has rapidly evolved from one seen as an
consequences for ecosystem loss, human health, the
ethical and environmental issue to one that presents material
integrity of the built environment and supply chains.
financial risks and opportunities for organisations – across
Consequences for organisations may include:
short, medium and long terms. This evolution has been driven
by developments in the climate science, and a stark shift in - Damage to assets and project delays – Increasing
institutional investor, debt finance, regulator, market and frequency of extreme weather events can heighten
community expectations. Today, many employees also see the risk of physical damage and associated costs to
their organisation’s environmental impact as an important projects, plant and equipment.
factor impacting their choice of employer.
- Uninsurability of projects and assets – Climate change
Climate change creates two primary financial risks: the can impact on insurance coverage and uninsured
physical impacts of a changing climate; and risks in the loss implications, together with additional capital
transition to a net zero emissions economy. expenditure requirements.
A failure to manage these risks can, in turn, give rise to - Supply chain disruptions – Severe weather events (such
significant risks to a company’s reputation and ‘social licence as extreme precipitation leading to inland flooding)
to operate’ and, ultimately, exposure to litigation risks. may disrupt operations and/or supply chains, which
can impact revenue.
These risks are discussed in turn below:
Physical risks compound over time and become significantly
• Physical risks1 – to the natural and built environment. worse under high emissions scenarios. However, scientists
These include both acute risks associated with an have made clear that even under ‘low emissions’ scenarios,
increase in the frequency and intensity of extreme where emissions are significantly reduced to a level that
weather events, such as coastal and inland floods, limits warming to 1.5°C above pre-industrial averages, both
extreme winds and precipitation, soil contraction, physical risks are now (and will continue to be) significantly
elevated versus historical experience.
1. Refer to the following key physical risk resources: Intergovernmental Panel on Climate Change (IPCC), Climate Change 2021: The Physical Science Basis, Summary for Policy
Makers, August 2021, https://www.ipcc.ch/report/ar6/wg1/downloads/report/IPCC_AR6_WGI_SPM.pdf. ; Regional fact sheet - Australasia, https://www.ipcc.ch/report/
ar6/wg1/downloads/factsheets/IPCC_AR6_WGI_Regional_Fact_Sheet_Australasia.pdf. ; and Interactive Atlas, https://www.ipcc.ch/report/ar6/wg1/#InteractiveAtlas.
See further Appendix 1 Glossary of key climate terms and leading frameworks and Appendix 4 Resources library.
aicd.com.au/cgia 6
• Economic transition risks2 – as governments, capital • Litigation transition risks – arise from a failure to
markets and the real economy shift in pursuit of low- manage or disclose the physical or economic transition
emissions targets. Transition risks include policy and risks. This includes areas such as directors’ duties,
regulatory responses (such as emissions reduction laws, misleading disclosure (in annual reports, fund raising
trade laws and tariffs, prudential regulation and heightened documents and contracts), contractual disputes (in
planning and building codes), technological developments areas from force majeure to pricing pass-throughs) and
(in areas such as renewable energy and electric vehicles) nuisance/negligence (where third parties suffer damage
and shifts in stakeholder preferences (including of investors, due to a failure of an asset owner to adapt their assets
insurers, customers and the community). to foreseeable climate-related risks). Further examples
The attention of governments, regulators and investors of these risks are set out in Part 3 of this guide.
has recently shifted to achieving the ‘stretch’ target In 2021, even despite the global COVID-19 pandemic, the
under the Paris Agreement, of limiting global warming World Economic Forum’s Global Risks Report identified a
to 1.5°C above pre-industrial averages, in an effort to failure of climate change action as the greatest risk to the
limit the worst physical impacts associated with climate global economy, and climate-related issues as five of the
change. Achieving that target would require a significant top six greatest risks.3
transformation in the global economy – which in turn
implies the potential for heightened economic transition The risks and opportunities associated with climate
risks (and opportunities) over short, medium and long change, and their potential financial impacts, is
term time horizons. summarised by the Taskforce on Climate-related Financial
Disclosures below.
Already, governments representing more than 70% of the
global economy have announced policies to transition
their economies to ‘net zero’ by 2050 (including every
Australian State and Territory) – in many cases with
commitments to halve emissions by 2030 as they work
towards the longer-term target. These global emissions
reduction commitments are increasingly being applied
across adjacent areas of regulation – including tariffs
and trade, and capital regulatory requirements.
Figure 2: Climate-related risks, opportunities and financial impacts
Source: Taskforce on Climate-related Financial Disclosures, 2017, Implementing the Recommendations of the TCFD, June, p 5.
2. Refer top the following key economic transition risk resources: Task force on Climate-related Financial Disclosures, Recommendations of the Task Force on Climate-related
Financial Disclosures, June 2017, https://assets.bbhub.io/company/sites/60/2020/10/FINAL-2017-TCFD-Report-11052018.pdf.; Sustainability Accounting Standards Board,
Climate Risk: Technical Bulletin, April 2021, https://www.sasb.org/knowledge-hub/climate-risk-technical-bulletin/.
See further Appendix 1 Glossary of key climate terms and leading frameworks and Appendix 4 Resource library.
3. World Economic Forum, 2021, The Global Risks Report 2021, 19 January, https://www.weforum.org/reports/the-global-risks-report-2021, (accessed 15 August 2021).
aicd.com.au/cgia 7
WHICH INDUSTRIES ARE IMPACTED BY CLIMATE CHANGE KEY CONCEPTS

CLIMATE CHANGE? Appendix 1 of this Guide includes a glossary of key climate
Climate change risks and opportunities permeate terms and leading frameworks to help you understand the
most economic sectors and industries. Analysis by the relevant foundational concepts. It covers commonly used
Sustainability Accounting Standards Board (SASB) climate terms such as:
concludes that 68 out of 77 industry sectors across the • Emissions – scopes 1, 2 and 3;
economy are subject to material climate-related risks.4
Although climate risk cuts across almost every sector, its • ‘Net zero’ emissions;
impacts are differentiated depending on factors such as • The Paris Agreement;
the relevant market and geography.
• Stress testing and scenario analysis.
The influential Taskforce on Climate-related Financial
It provides an overview of two current leading frameworks:
Disclosures (TCFD) has recognised 16 industrial sectors
that are at ‘high risk’ of material climate-related risk. • Taskforce on Climate-related Financial Disclosures (TCFD)
These sectors traverse the vast majority of the Australian • Sustainability Accounting Standards Board (SASB)
economy, including:
It also references the leading international authority
• financial services – banks, insurance companies,
on climate science, greenhouse gas emissions and the
asset owners (including superannuation funds) and
impacts of climate change:
asset managers;
• The 6th Assessment Report of the United Nations
• energy – oil and gas, coal, electric utilities;
Intergovernmental Panel on Climate Change (IPCC).
• transportation – air freight and passenger transport,
maritime, rail, trucking, automotive and components;
• materials and buildings – metals and mining,
components, construction materials, capital materials,
real estate management and development; and
• agriculture, food and forest products – beverages,
agriculture, packaged foods and meats, paper and
forest products.
In addition, the health implications of climate change

are widely recognised as being material to organisations
involved in health and human services.
4. Sustainability Accounting Standards Board, 2021, Climate Risk Technical Bulletin, https://www.sasb.org/wp-content/uploads/2021/05/Climate-Risk-Technical-
Bulletin2021-042821.pdf, (accessed 15 August 2021).
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PA RT 2:
How do I start my board’s

climate change journey?
This Part of the guide provides a practical guide to assist directors of organisations
near the beginning of their climate change governance journey. It should not
be taken as a checklist of initiatives to guarantee due care and diligence in the
context of your particular board and organisation. However, it is a useful ‘ready
reckoner’ to help you take a constructive governance approach, and to assist in
building organisational capacity to consider climate change.
STAGE 1 STAGE 2 STAGE 3 STAGE 4 STAGE 5
WHERE ARE WE NOW APPROPRIATE THE BOARD IN ACCOUNTABILITY REFLECTING ON

– BOARD, COMPANY, GOVERNANCE ACTION – STRATEGY AND DISCLOSURE YOUR PROGRESS
MANAGEMENT? STRUCTURES AND RISK OVERSIGHT
Connecting the Next steps
A considered Embedding sound The key dots to financial
• Continuous
approach to foundations, importance of a positions and
improvement
complex issues processes and forward-looking prospects
structures lens • Further resources
• Board dynamics • Considering the
• Embedding • Assessing implications for
• Assessing
readiness and appropriate materiality financial position
capacity governance • Strategic
and prospects
structures considerations • What should we
• Introducing
climate change • Risk monitoring
disclose?
onto the agenda and oversight
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PA RT 2: H OW D O I S TA RT M Y B OA R D ’S C L I M AT E C H A N G E J O U R N E Y?
WHERE ARE WE NOW? • What should be done to introduce climate change on

the board agenda? What reports or other inputs do we
Climate change is an evolving and complex issue with require from management? Do we need external advice
the potential to significantly impact on organisational or assistance?
risk, opportunity and strategy. As with any dynamic issue,
• Can we have an effective and constructive conversation
consideration may require your organisation to embark
about climate change and its dynamics around the
upon a course of reflection and change. In beginning
board table? Do we need to consider how we work
your climate governance journey, it is important to take a
together to build consensus? What will be the effect on
constructive approach that is sensitive to the varying levels
board dynamics? Should we bring an external party in to
of understanding around the board table.
assist us with this process?
CLIMATE CHANGE IN OUR ORGANISATIONAL
CONTEXT — BOARD DYNAMICS ASSESSING READINESS AND CAPACITY —
ENSURING YOUR BOARD IS PREPARED
• Why is it important that the board considers climate
• Would the Board Readiness Check assist my board in
change, now? What are the evolving dynamics
(in regulation, in markets and in key stakeholder getting ready to discuss this topic?
preferences) that objectively elevate its significance to
The Board Readiness Check has been developed
the organisation, its risk, opportunities and strategy?
by Chapter Zero in the UK with the support of the
You can use Part 1 of this guide to help you consider Berkeley Partnership and Hughes Hall Centre for
the relevant issues through a financial, reputational Climate Engagement. It is a useful self-assessment
and liability lens – from potential impacts on your tool for boards to gauge their current level of
business operations and supply chains, to resource readiness as an organisation and as a collective. It
costs and availability, shifts in policy and regulation, has been designed to enable boards to self-assess
to technological developments, and shifts in the their ‘Current’ state, understand its implications and,
preferences of key stakeholders (investors, insurers, based on this, specify their intended ‘Target’ state
customers, employees and the community). regarding climate change.
• How should climate change be considered in the context

The Board Readiness Check is available here.
of the best interests of our organisation, its purpose and A summary of how the Board Readiness Check tool
values? What are the views of our key stakeholders? works is set out in Appendix 3 of this guide.
• Does the board have an appropriate level understanding
of climate change, its causes, its dynamics, and
potential risks (and opportunities) for our organisation?
What additional capacity-building may be required?
All board members should have an appropriate level

of understanding of key climate change concepts
such as those in Part 1 of this guide. The greater
the level of potential impacts on your organisation,
the greater the level of understanding that will be
necessary to allow you to undertake informed inquiry
and oversight.
You can also refer to the additional resources set out
in Appendix 4 of this guide. Depending on the size and
nature of your organisation, it may be appropriate to
arrange specific briefings for the board and executive
on current climate-related issues and relevant impacts.
aicd.com.au/cgia 10
OVERNANCE — EMBEDDING SOUND

G HE BOARD IN ACTION — STRATEGIC
T
FOUNDATIONS, PROCESSES AND STRUCTURES PLANNING AND RISK OVERSIGHT
• How are issues associated with climate change • What are the relevant risks and opportunities for our
integrated into our board governance (strategic and organisation – across the short, medium and long term?
oversight) responsibilities? Is this issue receiving
adequate time and focus within the board/committee At its core, climate change disrupts ‘business as
agenda? usual’. This can present both risks and opportunities.
Consider issues such as:
Should this be a matter for the full board, included
within the remit of a sub-committee (for example, · Have we considered how the changing climate
audit & risk) or, for your organisation, does it warrant may impact on our operations and supply chain?
a specific sustainability sub-committee? · Are there emerging regulatory or policy
developments that may signal future
• What is our organisational policy on climate change? market directions?
Do we need a specific policy document? · What are our competitors doing – and planning
• In what part(s) of the organisation does operational to do?
responsibility for climate-related issues (identification, · What are emerging customer trends and pressures,
assessment, management and monitoring) reside? and what feedback can we gather?
Who is responsible and accountable for this issue within
management? Are we satisfied that relevant staff (or · What opportunities may this bring for new product
the experts that they consult) have the appropriate or service development?
competence and resources? · What do our employees think?
Appropriate responsibilities and resourcing will · How can a proactive approach help in building
depend on the nature of your organisation and its our reputation and brand, and assist us to access
climate-related issues. competitive capital and insurance? What are the
consequences if we do not progress?
• What reports should be made to the board or its · How do we balance competing commercial or
committees, and how often? resourcing considerations, and short vs
long-term interests?
• How do we as a board, and senior management (including
legal, governance, finance and risk teams), ensure that we
are staying up to date in this dynamic area? • What are the relevant risk metrics and benchmarks?
What resources do we require to do so? What What guidance is available from leading frameworks
information and updates are made available by such as the Taskforce on Climate-related Financial
relevant regulators and industry bodies? Do we need Disclosures and Sustainability Accounting Standards
specialist advice? Board? Are there any industry-specific benchmarks
and guides? See Appendix 1 for an overview of these
leading frameworks.
• Are our remuneration structures aligned with our
strategic approach to climate change, or do they create
perverse incentives (for example that may favour
investment in assets at risk of being stranded in the
transition to a low-carbon economy)?
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• How should we consider both climate risk and • How is management held accountable for implementing
opportunity in our normal strategic planning process? the climate-related policies and strategies set by
Do we understand the role of stress testing and scenario the board?
analysis to assist in strategic planning? • Do we have the right leadership for the strategic
direction that we want the organisation to take? Do
Stress testing and scenario analysis (as set out in we need to recruit management with differing skills,
the Recommendations of the TCFD) have emerged experience or mindset?
as key tools to help organisations consider climate
risks and opportunities across the broad range of
potential futures. For some organisations, this will
be a complex exercise involving detailed economic REPORTING
modelling. For others, it will be a more qualitative • Where we have assessed climate change as a material
and intuitive process to help you consider how issue, how have we assessed its potential impact on our
climate change may impact on ‘business as usual’, financial position and prospects?
and to sense check your strategy across the range of
• For reporting entities, what are the appropriate
potential risks.
disclosures that should be made in our directors’ report
See Appendix 1 for more detail on stress testing and (including the Operating and Financial Review where
scenario analysis. relevant). Have we had regard to the Recommendations
of the TCFD – and if not, why?
• How should climate change be integrated into our
Directors should refer to guidance issued by ASIC
existing risk management framework? Is this framework (Regulatory Guide RG247 (Effective Disclosure in
appropriate to adequately evaluate and manage an Operating & Financial Review)) and the AASB
identified climate risks? and AUASB (Joint Guidance on Climate-related and
• How do we determine which climate-related risks other emerging risk disclosures (April 2019)).
present a material exposure to our strategy or operations
(in both absolute and relative terms), over what
• Have we put specific questions to the CFO (where
relevant timeframes? On what basis is the threshold of
applicable) about the impact of material climate
‘materiality’ set?
assumptions on asset useful lives, valuation and
• Is the risk acceptable: that is, within our risk appetite impairment, liability provisions, revenues, expenditures
and tolerance? What actions can we develop to mitigate and cash flows? What are the key assumptions made,
the risk consequences to bring it within tolerances? and metrics or statements requiring the most judgment?
• How do climate-related risks and opportunities impact Has there been adequate disclosure in the financial
on other risks and opportunities identified by the statements? Are we satisfied with the effectiveness of
organisation? How should we manage it in relation to our systems of internal control and risk management
those other risk and opportunities? that sit behind this assessment?
• How does management determine the order of priority • Has our reporting been subject to external audit or
of each relevant climate-related risk/opportunity? assurance?5 How was that decision reached?
• Should we introduce specific targets to reduce our

own greenhouse gas emissions? Should this include a
pathway to ‘net zero’ emissions? Over what timeframes? EFLECTING ON YOUR PROGRESS —
R
Should these be aspirational or firm commitments? Have NEXT STEPS
we considered the strategic and resourcing implications Once your board has these strong governance foundations
of those targets, and have a credible plan (or, at a in place, it is important to approach climate change
minimum, a genuine, demonstrable intention to work governance through the lens of continuous improvement.
towards that target) to achieve them? What are the This is particularly important for this issue, due to its fluidity.
reputation and competitive implications if we do not set
and pursue such targets? We have set out some more advanced resources in
Appendix 4 of this guide that can support you in taking the
next step to embed climate change governance maturity in
your organisation.
5. Not all reporting will be subject to audit, many NFP entities are not required to have their accounts audited. Where a board is obtaining information from management, and
resources permit, they may want external assurance over that information.
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PA RT 3:
What are the duties

and expectations of
me as a director?
DIRECTORS’ DUTIES Where climate change is a material and foreseeable
This Part of the guide considers the relevance of risk to an organisation, directors will have
climate change in the context of non-executive obligations to seek to address it as part of their risk
directors’ core duties. While this guide focuses on oversight role. To enliven directors’ duties, the risk
duties that apply to company directors incorporated (or opportunity) will need to be both foreseeable and
under the Corporations Act 2001 (Cth) (Corporations material. The bar for foreseeability is relatively low
Act), the directors or their equivalents (for example, and means ‘not far-fetched or fanciful’. Whether a
management committee members/ officers) of climate change risk (or opportunity) is material, will
most not-for-profit organisations (NFPs) and require consideration of the organisation’s strategy,
government business entities (GBEs) have similar financial position and prospects in the unique
duties under common law and specific legislation context of that organisation.
(such as applicable state and territory incorporated This does not mean that climate change necessarily
associations laws, and public entity governance laws). needs to be prioritised by directors over any
Refer here for the AICD’s tool on directors’ duties for other foreseeable risk. But it does mean that
further information. directors should inform themselves of the impact
of climate change risks and/or opportunities to
their organisation. If they determine such risks
and/or opportunities are material, directors must
appropriately consider these in their governance of
strategy and risk oversight – in the same manner as
they would any other foreseeable financial risk or
opportunity.
In particular, climate change may be relevant to

a director’s duty to act in the best interests of the
company and their duty of care and diligence.
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PA RT 3: W H AT A R E T H E D U T I E S A N D E X PEC TAT I O N S O F M E A S A D I R EC TO R?
CLIMATE CHANGE AND THE BEST INTERESTS DUTY OF DUE CARE AND DILIGENCE AND TAKING A
OF THE COMPANY PROACTIVE APPROACH TO CLIMATE GOVERNANCE
Section 181 of the Corporations Act requires directors to Section 180 of the Corporations Act imposes a duty of
act in good faith, for a proper purpose, and to act in the due care and diligence upon company directors. This duty
best interests of the company. There has been a long- of care and diligence has both subjective and objective
standing debate on the extent to which directors can or features. Directors are held to the objective standard of
should have regard to the interests of external stakeholders conduct – that of a reasonable person – in the subjective
in discharging their duty to pursue the ‘best interests’ of circumstances faced by that director, in that company.7
their organisation. Historically, ‘climate change’ was often
The duty of care is an obligation of robust process, rather
considered a ‘stakeholder issue’ - a purely environmental,
than one that dictates any substantive outcomes.
‘non-financial, ethical’ issue, and its consistency with the
‘best interests’ of the organisation questioned. It requires directors to take a proactive and robust
approach to interrogation of foreseeable risks, and
The stakeholder debate has moved on however, with
potential material impacts, for corporate strategy and
recognition that consideration of stakeholders such
risk management.
as customers, employees, the environment and the
community is often consistent with organisational long- This requires directors to exercise independent judgment
term interests. Put more bluntly, a failure to appropriately when evaluating contemporary climate change
manage those stakeholder interests often risks the best information and anticipated impacts on their organisation.
interests – including financial interests – of the company Directors have a positive obligation to apply an inquiring
and its shareholders/members. mind to their role, bringing to bear knowledge that
they ought reasonably have known about the entity, its
Former Australian High Court judge and financial services
functions and operational context.
royal commissioner Hon Kenneth Hayne, has gone further
in publicly stating that: ‘a director acting in the best Directors should take a proactive approach to considering
interests of the company must take account of, and the how climate-related risks can be managed and
board must report publicly on, climate-related risks and opportunities seized – particularly in those sectors with
issues relevant to the entity’.6 significant climate-related exposures (such as financial
services, resources, energy, infrastructure, materials and
Whether the foreseeable risks associated with climate
manufacturing, transportation, agribusiness and real
change have a material impact on a corporation’s strategy,
estate, amongst others). This requires directors to form
financial position or prospects, the magnitude of that
their own assessment and make their own decisions as to
impact and the appropriate organisational response, are
what action, if any, is to be taken. The questions in Part 2
matters that can only be determined in the unique context
of this guide aim to support directors in this work.
in which an organisation operates.
The greater the materiality of the potential risks, the
greater the degree of interrogation and assurance,
supported by advice from management and/or
independent expert advice, that may be warranted.
Hutley opinions on directors’ duties and

climate change
A series of high-profile opinions by Noel Hutley SC and
Sebastian Hartford-Davis of Counsel in 2016, 2019 and
2021 (known as ‘the Hutley Opinions’) are useful reading
for directors embarking on their climate governance
journey. Refer here, and here, for an overview and links.
6. K Hayne, 2019, “What Kenneth Hayne says about climate change”, Financial Review, 9 December, https://www.afr.com/politics/federal/what-kenneth-hayne-says-about-
climate-change-20191206-p53hiw, (accessed 15 August 2021); J Fernyhough, 2019, “Hayne rebukes directors on climate risk failure”, Financial Review, 9 December, https://www.
afr.com/policy/energy-and-climate/hayne-rebukes-directors-on-climate-risk-failure-20191206-p53hnd, (accessed 15 August 2021).
7. ASIC v Adler (No 1) (2002) 168 FLR 253 at [372] (4) per Santow J; ASIC v Rich (2009) 75 ACSR 1 at 623 [7242] per Austin J.
aicd.com.au/cgia 14
CLIMATE CHANGE AND MISLEADING DISCLOSURE HEIGHTENED REGULATORY AND

Where climate change presents material risks to the best STAKEHOLDER EXPECTATIONS
interests of an organisation, including for its financial The regulatory environment in Australia has changed
position and prospects, directors should also consider how significantly in the last five years. Australian regulators
adequately the risks have been disclosed. acknowledge the foreseeability of climate-related financial
risks and are largely aligned on the economic/financial
Misleading disclosure occurs where a reasonable person
significance of climate-related risk.
in the audience would be led into error by the overall
impression that is conveyed. Silence or omission may give Compliance with the governance, strategy, risk
rise to a misleading impression. metrics and disclosure framework set out in the TCFD
Recommendations has evolved from ‘gold standard’
Directors must exercise due care and diligence in ensuring
to ‘base expectation’ for listed companies in many
that their organisation does not mislead the market on the
jurisdictions. One of the key TCFD Recommendations
impacts of climate change and the response to that risk –
relates to stress-testing and scenario planning of business
in the same way as for any other financial risk issue.
strategies against a plausible range of climate futures.
Misleading disclosure is most likely to apply to listed
companies (and other reporting entities) that produce REGULATORY EXPECTATIONS
public reports for shareholders. Climate-related misleading • ASIC
disclosure risks are particularly acute in relation to annual - Regards climate change as a ‘systemic risk that
reports, for which directors are required to attest that a could have a material impact on the future financial
‘true and fair view’ is presented of a company’s financial position, performance or prospects of entities’.9
position and performance, and to approve a directors’
- ‘Reminds’ listed companies to consider both physical
report that (amongst other things) outlines material
and transitional climate risk, develop and maintain
risks to a company’s prospects.8 Heightened regulatory
strong and effective corporate governance, which
and investor expectations on the kinds of climate-related
supports prudential risk management and where
information required to present a ‘true and fair view’ of
climate risk is material, to consider the TCFD
corporate position and prospects, and litigation trends in
recommendation when reporting.10
this area, are discussed below.
- ‘Greenwashing’ is an area of focus for ASIC. ASIC
However, misleading disclosure should be considered by all Commissioner Cathie Armour has encouraged boards
types of entities, including private companies and NFPs. to ‘look out for greenwashing and to ask whether their
This is because misleading disclosure risks can arise in company’s disclosure around environmental risks and
other kinds of public statement or external representation opportunities… accurately reflects their practices in
– from contracts, to statements made to donors, to this area’.11
advertising in trade or commerce. This includes misleading
or deceptive conduct under the Australian Consumer • APRA
Law (and equivalent State fair trading legislation), which - Expects regulated entities to understand and manage
governs the way in which organisations seek to promote climate-related financial risks through stress testing
the ‘green credentials’ of their organisation, or a specific and scenario analysis and disclose decision useful
product or service. information to the market.
One high-profile misleading disclosure risk associated with - Development of a draft Prudential Practice Guide12
climate change is known as ‘greenwashing’. In general is underway and APRA will incorporate climate
terms, greenwashing is conduct or representations that vulnerability assessments into its stress testing of
under-states the impact of climate change risks to a the financial system (starting with Australia’s largest
company, over-states the robustness of a company’s banks this year).
response to those risks, or otherwise over-emphasises
its environmental credentials. ASIC has stated that
greenwashing is an area of its enforcement focus.
8. Corporations Act 2001 (Cth) sections 295 – 297.

9. The regulator has updated its regulatory guidance on climate-related financial disclosures made in both offer documents (RG228) and Annual Report Operating and Financial
Reviews (RG247) to refer to the kinds of climate risks described by the TCFD.
10. ASIC, 2021, Corporate Finance Update – Issue 4, March, https://asic.gov.au/about-asic/corporate-publications/newsletters/asic-corporate-finance-update/corporate-
finance-update-issue-4/, (accessed 15 August 2021).
11. C Armour, 2021, “Green clean”, Company Director, 1 July, https://aicd.companydirectors.com.au/membership/company-director-magazine/2021-back-editions/july/the-
regulator, (accessed 17 August 2021).
12. APRA, 2021, Prudential Practice Guide: Draft CPG 229 Climate Change Financial Risks, April, https://www.apra.gov.au/sites/default/files/2021-04/Draft%20CPG%20229%20
Climate%20Change%20Financial%20Risks_1.pdf, (accessed 15 August 2021).
aicd.com.au/cgia 15
• RBA OTHER STAKEHOLDERS

- Deputy Governor acknowledged that the physical and Stakeholders also have increasingly heightened
transition risks associated with climate change as expectations in relation to how an organisation considers
‘likely to have first-order economic effects.’13 and addresses climate change. These include:
• Australian Accounting Standards Board and Auditing and • Customers – both consumers and business customers
Assurance Standards Board increasingly expect their suppliers to demonstrate
- Released a joint bulletin stating that climate change- environmental sustainability in a transparent way. A failure
related assumptions have the potential to be a to meet customer expectations can result in significant
material accounting estimation variable, impacting reputational damage, and ultimately lead to a decline in
on asset useful lives, fair valuation, impairments and demand, revenue, competitiveness and profitability.
provisions for bad and doubtful debts. Although the • Employees – employees are placing increased importance
guidance is ‘voluntary’, the standard setters made on alignment between their personal values and those
clear that they ‘expect’ it will be applied by report of their employer. Environmental sustainability, and
preparers and auditors.14 climate change in particular, have emerged as key issues
- The Australian position on integration of material for staff in choosing, and remaining with, an employer.
climate-related assumptions into financial statement Organisations with poor climate credentials may find it
accounting estimates has now been echoed in increasingly difficult to attract, and retain, top talent.
guidance by the body responsible for international • Community – changing and increasingly demanding
accounting standards, IFRS.15 environmental and social standards from communities
across Australia. Heightened community pressure
INVESTOR EXPECTATIONS may lead to adverse publicity and scrutiny of strategy
An increasing proportion of mainstream institutional and decisions.
investors (including the world’s largest investor, BlackRock,
members of the US$52 trillion Climate Action 100+, IIGCC, NFPs may need to consider the perspectives of
PRI,and Net Zero Asset Managers’ Initiative) have intensified important stakeholders like members, volunteers,
commitments to engaging with investee companies on donors, funders and the general public. For example,
climate-related financial risk and disclosure, and set out a sporting club may need to consider the expectations
accelerated expectations in relation to disclosures. More of its sponsors on the issue of climate change or have
recently, focus has centred on how investees plan to in place an extreme heat policy. Government funding
transition to ‘net zero’ in line with Paris Agreement goals. grants may also include expectations around climate
change action.
13. G Debelle, 2021, Climate Change and the Economy with the RBA’s Guy Debelle, Public Forum, Centre for Policy Development, 17 August, https://cpd.org.au/2019/03/climate-
change-economy-rbas-guy-debelle-public-forum-march-2019-2/, (accessed 17 August 2021).
14. Australian Accounting Standards Board and Australian Auditing and Assurance Standards Board, 2019, Climate-related and other emerging risks disclosures: assessing financial
statement materiality using AASB/IASB Practice Statement 2, April, https://www.aasb.gov.au/admin/file/content102/c3/AASB_AUASB_Joint_Bulletin_Finished.pdf, (accessed
15 August 2021).
15. IFRS Foundation, 2020, Effects of climate-related matters on financial statements, November, https://www.ifrs.org/content/dam/ifrs/supporting-implementation/
documents/effects-of-climate-related-matters-on-financial-statements.pdf, (accessed 15 August 2021).
aicd.com.au/cgia 16
LITIGATION RISKS • Financial risk disclosures – misleading disclosure and
Climate-related litigation has increased over recent years due care and diligence. In July 2020, a claim was filed in
with a number of cases, both in Australia and globally, the Federal Court against the Commonwealth alleging
testing the bounds of government and corporations’ that the investor information statements issued in
obligations. Some of the most significant recent actions, relation to Commonwealth bonds were misleading or
in both Australia and internationally, are set out below. deceptive contrary to section 12DA(1) of the ASIC Act.
Whilst not all set a binding formal precedent for Australian This was alleged on the basis that the disclosures did
organisations, they illustrate the increasing proactivity not contain adequate information about the economic
of strategic litigants in this space, and may influence the and fiscal risks associated with climate change, and
development of the law in our own jurisdiction. associated credit risks. The claim further alleges that, in
approving the disclosure documents, the Secretary to the
Recent examples include: Department of Treasury and the CEO of the Australian
Office of Financial Management failed to discharge
• Emissions reduction targets and credibility of strategy.
their statutory obligation to exercise due care and
In May 2021, the Dutch District Court found that Shell’s
diligence under section 25(1) of the Public Governance,
failure to reduce emissions on a trajectory consistent
Performance and Accountability Act 2013. The claim
with the Paris Agreement was a breach of its duty of
remains on foot, and is unlikely to be heard until 2022.
care to, and human rights of, Dutch citizens, and ordered
it to increase its emissions reduction policy to 45% by • Negligence – failure to take reasonable precautions
2030 (against a 2019 baseline). The Court was critical against the reasonably foreseeable risks associated
of Shell’s prevailing emissions reduction policy, finding with climate change. In January 2019, the South
that it was ‘not concrete, has many caveats and is Australian Royal Commission into the Murray-Darling
based on monitoring social developments rather than Basin Plan published a report concluding that that the
the company’s own responsibility for achieving a CO2 Murray Darling Basin Authority (Authority) had acted
reduction.’ with gross negligence and maladministration in the
manner in which it had (or, more particularly, had not)
• Duty of due care and diligence – investing on behalf
taken climate-related issues into account in discharging
of superannuation beneficiaries. In July 2018, an
its obligation to implement and manage the Murray-
Australian superannuation fund member sued the
Darling Basin Plan. The Commissioner pointed to failures
corporate trustee of his superannuation fund REST
including the Authority’s (a) reliance on historical data,
alleging a breach of its duty of care on the basis that it
rather than climate change-adjusted forecasts, as the
had failed to integrate climate change considerations
primary source of authority, (b) treatment of the best
into its investment strategy. The matter settled in
available science as an ‘inconvenience to be worked
November 2020. REST agreed to take further steps
around’ rather than as a key input to decision-making,
to ensure its investment managers actively consider,
and (c) its deferral of consideration of climate change
measure, manage and report back on the financial
until future strategic cycles.
risks posed by climate change, to commit to a target
of net zero carbon footprint for the fund by 2050, • Misleading advertising. In February 2020, BP was forced
and to report on portfolio holdings, risk management to withdraw its Advancing Possibilities – We’re Working
processes and decarbonisation progress in line with the to Make Energy Cleaner marketing campaign following
Recommendations of the TCFD.16 a complaint filed by public interest law firm ClientEarth,
alleging that the ads conveyed a misleading impression
of BP’s focus on low-carbon energy when its investment
in renewable activities represented less than 4% of its
exploration and development spend.
16. McVeigh v REST NSD1333/2018, Federal Court of Australia, http://climatecasechart.com/climate-change-litigation/non-us-case/mcveigh-v-retail-employees-

superannuation-trust/, (accessed 15 August 2021).
aicd.com.au/cgia 17
APPENDIX 1:
Glossary of key climate terms

and leading frameworks
KEY CLIMATE TERMS • ‘Net zero’ emissions
• Emissions ‘scopes’ – 1, 2 and 3 Net zero emissions refers to achieving a balance

To mitigate the effects of climate change, a between greenhouse gas emissions produced by
wide-scale transition to a low carbon economy humans and greenhouse gases removed from
is required. In order for an entity to set a credible the atmosphere. In 2018, the United Nations’
emissions reductions strategy the organisation’s Intergovernmental Panel on Climate Change
emissions profile must first be understood. An Special Report Global Warming of 1.5°C made
effective emissions reduction strategy covers clear the imperative of reaching net zero global
emissions across an organisation’s full value emissions by 2050 in order to mitigate the effects
chain, which includes Scope 3 emissions. of global warming. In order to reach net zero by
2050, global emissions must be halved by 2030.
The Greenhouse Gas Protocol categorises
greenhouse gas emissions by ‘Scopes’: As outlined above, countries around the world
with economies representing more than 70%
- Scope 1 – direct emissions from entity owned or of greenhouse gas emissions have announced
controlled sources. ‘net zero emissions’ economic targets – including
- Scope 2 – indirect emissions from the generation the EU, the UK, South Korea, Japan and China.
of purchased electricity, steam, heating and In Australia, all States and Territories have
cooling consumed by the entity. announced net zero by 2050 targets, with a
number (including Victoria) having incorporated
- Scope 3 – includes all other indirect emissions these into law. As at the date of publication, the
that occur in an entity’s value chain. Commonwealth Government has not formally
Scope 3 emissions are often the largest part of an committed to a net zero by 2050 target although
entity’s emissions portfolio and also the hardest it has said that it would like to achieve that
to measure. goal as soon as possible and preferably by 2050.
These emissions reduction commitments are
increasingly being applied across adjacent areas
of regulation – including tariffs and trade, and
capital regulatory requirements.
aicd.com.au/cgia 18
A PPE N D I X 1: G LO S S A RY O F K E Y C L I M AT E T E R M S A N D L E A D I N G F R A M E WO R KS
• IPCC and AR6
The Intergovernmental Panel on Climate Change (IPCC) is a United Nations body that assesses the state of science
relation to climate change. In August 2021 the IPCC published its 6th Assessment Report Climate Change 2021: The
Physical Science Basis (AR6). The report is a product of peer review of more than 14,000 individual studies (themselves
all peer-reviewed), by scientists from 66 countries. It is considered the ‘gold standard’ of climate science.
AR6 concludes that human-induced climate change is already affecting every region across the globe. The Australasia
regional fact sheet (refer to Figure 3 below) details regional changes that include average warming of 1.4°C, an
increase in heat extremes and extreme bushfire danger days, decrease in cold extremes, sea level rise contributing to
increased coastal flooding and shoreline retreat, and projected increases in heavy precipitation and inland flooding.
AR6 includes an online tool, the Interactive Atlas, that allows users to explore specific impacts on their region under
different warming scenarios, across different timeframes.
Figure 3: Regional fact sheet - Australasia
Source: IPCC, 2021, “Regional fact sheet – Australasia”, Sixth Assessment Report, p 1.
aicd.com.au/cgia 19
• Paris Agreement For some organisations, stress testing and scenario

In December 2015, 196 countries signed the Paris planning will be a complex exercise involving detailed
Agreement, under which governments have committed economic modelling. For others, it will be a more
to reducing economic emissions to a level consistent qualitative and intuitive process to help you consider
with limiting global warming to well below 2°C above how climate change may impact on ‘business as usual’,
pre-industrial averages, and to pursue efforts to limit and to sense check your strategy across the range
warming to 1.5°C. This commitment, in turn, will require of potential risks. Either way, at its core, it is a risk
the global economy to transform to a net zero emissions management tool to allow organisations to consider
norm before 2050. the spectrum of climate-related risks in the face of
uncertainty. At one end of the spectrum – what if there is
Under the Paris Agreement, countries must submit a swift and disorderly transition to a net zero economy?
their own emissions reductions targets, referred to as What does that mean for our organisational strategy
Nationally Determined Contributions (NDC). Australia and business plan? What would we need to do to thrive
submitted its first NDC in 2015 (and reaffirmed this in in that transition? At the other extreme – how would
2020), with a target to reduce greenhouse gas emissions we be impacted if the climate tips into a high warming
by 26% to 28% below 2005 levels by 2030. Every five scenario? How are we placed to manage the relevant
years, countries are required to submit more ambitious physical risk impacts to our business and supply chains?
NDC targets under the review and rachet mechanism of What risk management and adaptation strategies can
the Paris Agreement. Australia has not yet committed to we sensibly consider, now?
increasing its emissions reduction targets.
Key guidance on stress testing and scenario analysis is
• Stress testing and scenario analysis found in the Recommendations of the TCFD.
Climate change has catalysed a ‘new normal’ for risk
– one in which historical experience alone no longer
provides a proxy for the present or future. However, GOVERNANCE, MANAGEMENT & DISCLOSURE –
the range of plausible climate futures presented by CURRENT LEADING FRAMEWORKS
the changing climate remains radically uncertain.
Mainstream investors now identify climate change-related
Stress testing and scenario analysis over a plausible
disclosures as decision-useful, particularly in high-risk
range of climate-futures has emerged as a critical
sectors (such as energy, infrastructure, transport and
risk management and strategic planning tool for an
agriculture). Both the physical and economic transition
organisation in the face of such uncertainty.
risks associated with climate change are characterised by
Scenario analysis is a process for identifying and uncertainty. However, the one thing that is certain about
assessing the potential implications of a range climate change is that the physical and market landscape
of plausible future states, and provides a tool for of the future will look very different.
organisations to consider how the future might look if
Tools to assist corporate risk management in the face
certain trends continue or certain conditions are met.
of such uncertainty, such as stress testing and scenario
The necessity to apply a forward-looking lens has been
analysis, have emerged as critical inputs for diligent
reinforced by stakeholders across the board (including
governance and strategic planning. Two of the current
investors, regulators and credit ratings agencies).
leading frameworks are the Taskforce on Climate-related
Financial Disclosures (TCFD) recommendations, and
the Sustainability Accounting Standards Board (SASB)
reporting standards.
aicd.com.au/cgia 20
TASKFORCE ON CLIMATE-RELATED A central requirement of the TCFD is forward-looking stress

FINANCIAL DISCLOSURES testing and scenario analysis across the plausible range
of climate futures, including a ‘well below’ 2°C emissions
The recommendations of the G20 Financial Stability Board’s pathway consistent with Paris Agreement targets. Since
Taskforce on Climate-related Financial Disclosures are a the publication of the TCFD Recommendations in 2017,
recognised key benchmark against which to assess the market expectations have continued to focus on the Paris
strategic approach of corporations to managing climate Agreement ‘stretch’ target of 1.5°C.
change risk. The TCFD recommendations:
The TCFD highlights governance as a foundational building
• provide a framework for the kind of information that block of effective climate-related risk and opportunity
must be analysed and disclosed in order to truly and management. Without effective climate-related
fairly represent (and enable assessment of) the impact of governance structures in place, a company will not be
climate-related risks on financial positions and prospects; able to make informed strategic decision or appropriately
• call for information to be disclosed in a comparable and manage the risks.
consistent form that is decision-useful for investors,
Investors, regulators and other stakeholders increasingly
lenders, and insurance underwriters; and
expect the TCFD recommendations to be used to navigate
• contemplate not only the disclosures themselves, but the the physical, economic transition and liability risk exposures
metrics and targets, strategy and governance processes relevant to their organisation. In addition, disclosure in
within which climate risk issues are managed. accordance with the TCFD recommendations could in fact
be used as a strategy to publicly demonstrate compliance
with directors’ duties and disclosure obligations.
Figure 4: The TCFD recommendations and supporting recommended disclosures

Governance Strategy Risk management Metrics and targets
Disclose the organisation’s Disclose the actual and Disclose how the Disclose the metrics and
governance around potential impacts of organisation identifies, targets used to assess
climate-related risks and climate-related risks assesses, and manages and manage relevant
opportunities and opportunities on the climate-related risks. climate-related risks and
organisation’s businesses, opportunities where such
strategy, and financial information is material.
planning where such
information is material.
Recommended Disclosures Recommended Disclosures Recommended Disclosures Recommended Disclosures
a) Describe the board’s a) Describe the climate- a) Describe the a) Disclose the metrics used
oversight of climate- related risks and organisation’s processes by the organisation to
related risks and opportunities the for identifying and assess climate-related
opportunities. organisation has assessing climate-related risks and opportunities
identified over the short, risks. in line with its strategy
medium, and long term and risk management
process.
b) Describe management’s b) Describe the impact of b) Describe the b) Disclose Scope 1, Scope
role in assessing and climate-related risks organisation’s processes 2, and, if appropriate,
managing climate- and opportunities on the for managing climate- Scope 3 greenhouse gas
related risks and organisation’s businesses, related risks. (GHG) emissions, and the
opportunities. strategy, and financial related risks.
planning.
c) D
escribe the resilience c) Describe how processes c) Describe the targets used
of the organisation’s for identifying, by the organisation to
strategy, taking into assessing, and managing manage climate-related
consideration different climate-related risks risks and opportunities
climate-related scenarios, are integrated into the and performance against
including a 2°C or organisation’s overall risk targets.
lower scenario. management.
Source: TCFD, 2017, Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures, June, p 14.
aicd.com.au/cgia 21
SUSTAINABILITY ACCOUNTING STANDARDS BOARD INTERNATIONAL SUSTAINABILITY STANDARDS BOARD

The Sustainability Accounting Standards Board (SASB) The IFRS Foundation, which is responsible for the
publishes sustainability reporting standards in relation International Accounting Standards that form the basis
to ESG issues that are material to investors, including of Australian Accounting Standards, is establishing an
climate-related issues. Resources include a Conceptual International Sustainability Standards Board. This will
Framework and Application Guidance, and 77 industry- set standards for reporting on an entity’s performance
based Sustainability Disclosure Standards across 11 sectors on material sustainability issues. It has announced its
(consumer goods, extractives and minerals processing, intention to release its first standard, on climate-related
financials, food and beverage, health care, infrastructure, reporting, in mid-2022. If incorporated into Australian
renewable resources and alternative energy, resource standards, this may further change how Australian entities
transformation, services, technology and communications report on climate matters.
and transportation).
In April, SASB released its 2021 edition of the Climate

Risk Technical Bulletin (Bulletin). The Bulletin provides
recommendations on how industry-specific climate risk
can be more effectively measured, managed and, disclosed
thereby ensuring markets have the information they need to
price climate-related risks (and opportunities). The Bulletin
finds that climate risk is likely to materially affect almost
every one of the 77 industries covered by SASB’s materiality
map, although the nature of those risks, and likely impact
on the organisation varies across different sectors.17
The Bulletin identifies the categories of climate-related

risk that are most likely to be material for an organisation
in each sector (classified across physical, transition and
regulation risks), and the risk metrics (both quantitative
and qualitative) that are likely to provide decision-useful
information to investors in relation to each risk. Each
sector-specific Standard contains additional detail on the
relevant sustainability issues faced by organisations in
the sector, and further commentary on the risk metrics
recommended for disclosure.
The SASB Standards are voluntary but are favoured by

many investors.
SASB recently merged with the International Integrated

Reporting Council (IIRC) to form the Value Reporting
Framework. This merged entity intends to harmonise the
SASB Standards with another leading ‘integrated reporting’
framework, the IIRC’s Integrated Reporting Framework.
17. SASB, 2021, Climate Risk – Technical Bulletin, 12 April, https://www.sasb.org/knowledge-hub/climate-risk-technical-bulletin/, (accessed 15 August 2021).
aicd.com.au/cgia 22
A P P E N D I X 2:
World Economic
Forum principles
1. Climate accountability on boards - The board 5. Strategic and organisational integration -

is ultimately accountable to shareholders for The board should ensure that climate
the long-term stewardship of the company. systemically informs strategic investment
Accordingly, the board should be accountable for planning and decision-making processes and
the company’s long-term resilience with respect is embedded into the management of risk and
to potential shifts in the business landscape that opportunities across the organisation.
may result from climate change. Failure to do so
may constitute a breach of directors’ duties. 6. Incentivisation - The board should ensure that
executive incentives are aligned to promote the
2. Command of the (climate) subject - The board long-term prosperity of the company. The board
should ensure that its composition is sufficiently may want to consider including climate-related
diverse in knowledge, skills, experience and targets and indicators in their executive incentive
background to effectively debate and take schemes, where appropriate. In markets where it
decisions informed by an awareness and is commonplace to extend variable incentives to
understanding of climate-related threats and non-executive directors, a similar approach can
opportunities. be considered.
3. Board structure - As the stewards for long-term 7. Reporting and disclosure - The board should
performance and resilience, the board should ensure that material climate-related risks,
determine the most effective way to integrate opportunities and strategic decisions are
climate considerations into its structure consistently and transparently disclosed to all
and committees. stakeholders – particularly to investors and,
where required, regulators. Such disclosures
4. Material risk and opportunity assessment - The should be made in financial filings, such
board should ensure that management assesses as annual reports and accounts, and be
the short-, medium- and long-term materiality subject to the same disclosure governance as
of climate-related risks and opportunities for the financial reporting.
company on an ongoing basis. The board should
further ensure that the organisation’s actions 8. Exchange - The board should maintain regular
and responses to climate are proportionate to exchanges and dialogues with peers, policy
the materiality of climate to the company. makers, investors and other stakeholders to
encourage the sharing of methodologies and to
stay informed about the latest climate-relevant
risks, regulatory requirements, etc.
aicd.com.au/cgia 23
A P P E N D I X 3:
How the Board

Readiness Check works
The Board Readiness Check18 has been 4 KEY LEVELS OF ATTAINMENT

developed to enable boards to self- Within the tool, there are a number of questions. Each question
assess their current state, understand its has a set of four sample answers each representing a stage on the
implications and, based on this, specify continuum of Climate Change Action from ‘1. Unprepared’ to
‘4. Leading’.
their intended target state and establish
their need for change. For each question, the user is asked which answer best represents
‘Current’ state and intended ‘Target’ state.
The following outline is adapted from the
Chapter Zero: A climate change boardroom toolkit In broad terms, the four stages on the continuum are
(pp 15-20), with Chapter Zero’s permission (a member characterised as follows:
of the Climate Governance Initiative network).
CLIMATE CHANGE ACTION LEVEL
1. UNPREPARED 2. COMPLIANT 3. PROACTIVE 4. LEADING

Not sufficiently prepared Aware of and taking Aware of the risks of As for ‘3. Proactive’, but
to mitigate or adapt action to meet current climate change and the the action they are taking
to the risks of climate rules and regulations – opportunities presented is ahead of others in their
change – or realise but typically not going by being a low-carbon sector in level of ambition
the opportunities of beyond legal obligations business. Proactively and achievement – and
transitioning to the low- to address bigger taking action to address extends across their end-
carbon economy. and broader risks and these which goes beyond to-end value chain in
opportunities. regulations – but is partnership with suppliers,
typically focused within consumers, producers of
their business and is complementary products,
perhaps behind others etc. Typically, they are
in their sector in level also leveraging their
of ambition. low carbon stance as a
source of commercial and
competitive advantage.
18. Chapter Zero: The Directors’ Climate Forum, Board Readiness Check,https://www.chapterzero.org.uk/board-readiness-check/, (accessed 26 August 2021).
aicd.com.au/cgia 24
A PPE N D I X 3: H OW T H E B OA R D R E A D I N E S S C H EC K WO R KS
5 AREAS OF ASSESSMENT
The questions asked are divided into the following 5 areas of assessment:
A. FOOTPRINT: Understanding and improving your carbon footprint

Covers knowing what your carbon footprint is and its key drivers and taking measurable action to
reduce it.
B. COMPLIANCE: Adhering to the rules on climate change

Covers being clear on duties and obligations under current climate change and emissions rules and
regulations and being sighted on and prepared for policy/regulatory change.
C. SENTIMENT: Ensuring your business is in tune with stakeholder sentiment on climate change
Covers being clear on and aligned/ in tune with stakeholder sentiment on climate change. Stakeholder
groups include investors, customers (B2B), consumers, and current/prospective employees.
D. RISK: Ensuring you’re prepared for the impact of climate change on your business
Covers being clear on how the business and operations will be impacted by climate change in future
and having governance, disclosures, plans and resources in place to mitigate any physical and
transition risks (e.g. with regards to supply chain, asset values, financial/ cost base, customer base,
compensation claims, etc.).
E. OPPORTUNITIES: Ensuring your business benefits from the transition to a low-carbon economy
Covers being clear on and acting to realise opportunities to deliver enhanced business performance
through the transition to a low carbon economy (e.g. reducing operational cost (resource efficiency),
gaining access to government incentives, leveraging positive impact on brand and reputation to
achieve competitive advantage, etc.).
aicd.com.au/cgia 25
WHAT ARE THE OUTPUTS PROVIDED BY THE SELF-ASSESSMENT – AND HOW TO USE THEM
The tool surfaces ‘current’ vs ‘target’ comparisons for each question, to help the user understand where
and to what extent the business will need to change to achieve its intended ‘target’.
UNPREPARED
Based on the answers selected for each
No. We get the concept of a carbon footprint in general terms, but we question, the Board Readiness Check
are not clear in specific terms what it is or how you measure it. returns illustrative implications to
provide guidance on how the ‘current’
and ‘target’ selections made might
COMPLIANT impact the business.
We know in measurable terms, but only in the sectors and facilities
The contrast in ‘current’ vs. ‘target’
which are subject to emissions regulations such as European ETS.
risk/ performance may prompt the
user to adjust their answers for ‘target’
state ambition.
PROACTIVE
We know in measurable terms for all aspects of our in-house
operations – but we still struggle with end-to-end value chain.
LEADING
We have a clear, measurable view for all aspects of our end-to-end
value chain, both internally and externally.
aicd.com.au/cgia 26
WHEN AND HOW TO USE THE BOARD READINESS CHECK

The Board Readiness Check can be used in a wide variety of different scenarios. For example:
1. This is the first time you’re discussing climate action as a board and want to establish your current state and its
implications – and define a target state ambition as a precursor to determining and planning the change required to
achieve your agreed ‘target’.
2. You’re not sure if or why climate action is relevant to your business – and want to find out more about the subject and
the relative current state of your business in order to take an informed view.
3. You’re already on the journey and want to do a quick ‘litmus test’ of the progress you’re making – and what areas for
development remain.
4. You think you’ve already done everything that needs to be done with respect to climate action – but want to undertake
a high-level review to make sure.
As a whole-of-board exercise, it may be useful to use a facilitator to manage the process.
STEP 1 STEP 2 STEP 3

Get each board member to fill in Summarise what the aggregated Bring the board together to review.
the Self-Assessment in the Board results tell you. i. Discuss the aggregate results
Readiness Check, based on their i. Where is the board aligned on above - and to align on (a)
own personal understanding and ‘current’ state and where is it ‘current’ state, (b) implications
views – prior to getting them not? of ‘current’ state and consequent
together as a group to discuss it. need for action/change, and (c)
ii. What are the implications
Doing this has the following of ‘current’ state in terms of intended ‘target’ state.
benefits: business performance and risk? ii. Agree on action plan to
i. By using the Self-Assessment (that is, the need for action). undertake more detailed analysis
they’ll get familiar with the iii. Where is the board aligned on and planning to identify specific
issues and potential implications ‘target’ state and where is it not? improvements.
of different choices. iii. Agree how to factor climate
ii. You’ll get to see any key action into board level
disparities in understanding of governance on an ongoing basis
‘current’ state and intended and monitor and report back
‘target’ state. on progress and achievement to
iii. You’ll know in advance where to the board.
prompt for evidence to back up
claims (e.g. if someone has said
they think they are ‘4.Leading’
on ‘A. Understanding and
improving your carbon footprint’
- and everyone else has said
‘1. Unprepared’).
aicd.com.au/cgia 27
A P P E N D I X 4:
Resource library
ENERAL OVERVIEW OF CLIMATE CHANGE-RELATED

G NITED NATIONS, SCIENCE
U
FINANCIAL RISKS AND THE PARIS AGREEMENT
PHYSICAL RISKS ECONOMIC TRANSITION RISKS 11. UNFCCC, Paris Agreement

and Nationally-Determined
1. IPCC, Climate Change 2021: The 7. International Energy Agency, Net
Contributions (overview)
Physical Science Basis, Summary Zero by 2050 – A roadmap for the
for Policymakers, August 2021 global energy sector, May 2021 12. IPCC, Climate Change 2021: The
Physical Science Basis, Summary
2. IPCC, Climate Change 2021: The 8. BlackRock, Larry Fink’s 2021
for Policymakers, August 2021
Physical Science Basis, Australasia Annual letter to clients and CEOs
Regional Fact Sheet, August 2021 13. United Nations, Sustainable
9. Guy Debelle, Deputy Governor of
Development Goals
3. Climate Governance Initiative / the Reserve Bank of Australia,
Chapter Zero, Primer on physical Speech: Climate Change and
climate risk, July 2020 the Economy, March 2019 and
4. World Economic Forum, Financial Stability Review in
Global Risks Report 16th edn, October 2019
January 2021 10. Deloitte, A new choice:
5. IAG and US National Center for Australia’s climate for growth,
Atmospheric Research, Severe November 2020
Weather in a Changing Climate
(Insurance), v2 September 2020
6. Bureau of Meteorology and CSIRO,
State of the Climate 2020,
November 2020
aicd.com.au/cgia 28
A PPE N D I X 4: R E S O U RC E L I B R A RY
ITIGATION RISK AND

L ORPORATE GOVERNANCE
C OOR ESG GOVERNANCE
P
DISCLOSURE AND DIRECTORS’ DUTIES AND UNDERPERFORMANCE
34. Principles of Responsible
14. Climate Governance Initiative 22. Climate Governance Initiative
Investment, Making voting
and Commonwealth Climate and and Commonwealth Climate and
count: principle-based voting
Law Initiative, Primer on Climate Law Initiative, Primer on Climate
on shareholder resolutions,
Change: Directors’ Duties and Change: Directors’ Duties and
March 2021
Disclosure Obligations – In support Disclosure Obligations – In support
of the Principles for Effective of the Principles for Effective 35. New York Times, Companies See
Climate Governance, June 2021 Climate Governance, June 2021 Climate Change Hitting Their
Bottom Lines in the Next 5 Years,
15. Sustainability Accounting 23. Climate Governance Initative /
4 June 2019
Standards Board, Climate Risk Chapter Zero, Acclimatise and
Technical Bulletin, April 2021 MinterEllison, Questions to 36.Sydney Morning Herald, Mark
assist non-executive director Vaile quits Newcastle University
16. AASB, Climate-related and
oversight of physical climate risk chancellor role amid backlash over
other emerging risks disclosures:
management, July 2020 coal links, June 2021
assessing financial statement
materiality using AASB Practice 24. Deloitte, Remuneration 37. The Guardian, ExxonMobil and
Statement 2, April 2019 Committee update – considering Chevron suffer shareholder
ESG and climate change, rebellions over climate, May 2021
17. Deloitte, TCFD reporting
requirements and assurance February 2021
considerations: A guide for audit 25. Deloitte, TCFD reporting TRESS TESTING AND
S
committees, 2021 requirements and assurance SCENARIO PLANNING
18. ASIC, What is ‘greenwashing’ and considerations: A guide for audit
committees, 2021 38. TCFD, Final Report,
what are its potential threats?
Recommendations od the
July 2021 26. Climate Governance Initative Taskforce on Climate-related
19. ASIC – RG247 (OFRs) and 228 / Chapter Zero, Change Financial Disclosures, June 2017
(prospectuses) Management Toolkit
39. TCFD, Annex, Implementing
20. MinterEllison, Misleading 27. Wolff Olins and Chapter Zero, the Recommendations of the
climate-related disclosure: are How can brands battle the Taskforce on Climate-related
your verification and disclosure climate crisis?, February 2020 Financial Disclosures, June 2017
processes defensible? July 2020 28. MinterEllison, Top five 40.IPCC, Climate Change 2021: The
21. Noel Hutley’s 2016 Legal Opinion considerations for meaningful Physical Science Basis, Interactive
on Climate Risks and Directors’ climate-related corporate Altas, August 2021 (note – physical
Duties, the 2019 Update and the governance, June 2020 risk only)
2021 Update 29. MinterEllison, The ‘next normal’: 41. CSIRO, Climate Change in
climate change risk governance in Australia, Projection Tools
a pandemic age, May 2020 (note – physical risk only)
30.Law Institute of Victoria, Directors’ 42. Queensland Government,
duties: At your peril, July 2021 Climate change (physical) risk
31. ACSI, ACSI Launches New Climate management tool for small
Change Policy, April 2021 business, September 2020
(note – physical risk only)
32. MinterEllison, New Hutley Opinion:
What does it mean for directors?,
April 2021
33. MinterEllison, Understanding
directors’ duties and climate
risk: An interview with Philippe
Joubert, CEO of Earth on Board,
May 2021
aicd.com.au/cgia 29
About the author
MinterEllison is the Asia-Pacific’s largest commercial law firm, with offices across Australia, New Zealand, mainland China and
Hong Kong, Mongolia, and the United Kingdom. The firm’s dedicated Climate Change & Sustainability Risk Governance team is
an integral part of its leading Environmental, Social and Governance practice.
Sarah Barker is a Partner, and Head of Climate Change & Sustainability Risk Governance at MinterEllison. She has more than
two decades’ experience as a corporate lawyer, and is regarded as one of the world’s foremost experts on climate change
risk assessment, strategy and liability. She brings a unique practical lens as a director of one of Australia’s largest super
funds, the $30 billion Emergency Services & State Super. Sarah is a faculty member of the Cambridge University’s Institute for
Sustainability Leadership’s Earth on Board programme, and has been a facilitator of the AICD’s flagship Company Directors’
Course for more than 15 years. She was the instructing solicitor on a brief to Mr Noel Hutley SC widely cited as authority on
directors’ duties and climate change.
Charlotte Turner is a Senior Associate in the Climate Change & Sustainability Risk Governance team at MinterEllison. Building
on her background as an experienced litigation and administrative disputes lawyer, Charlotte now specialises in climate
risk through a finance, corporate governance and liability lens, with a particular focus on the public sector, health and
agribusiness. Charlotte has particular expertise in the management of climate related risks and opportunities in commercial
procurement and supply contracts. She is a leading member of the Asia Pacific team of The Chancery Lane Project, a
global initiative assisting lawyers to integrate sustainability risks and opportunities into contracts without compromising
commercial risk-return.
About us
The Australian Institute of Company Directors is committed to strengthening society through world-class governance.
We aim to be the independent and trusted voice of governance, building the capability of a community of leaders for
the benefit of society. Our membership includes directors and senior leaders from business, government and the
not-for-profit sectors.
Disclaimer
The material in this publication does not constitute legal, accounting or other professional advice. While reasonable care
has been taken in its preparation, the AICD does not make any express or implied representations or warranties as to the
completeness, reliability or accuracy of the material in this publication. This publication should not be used or relied upon as
a substitute for professional advice or as a basis for formulating business decisions. To the extent permitted by law, the AICD
excludes all liability for any loss or damage arising out of the use of the material in the publication. Any links to third party
websites are provided forconvenience only and do not represent endorsement, sponsorship or approval of those third parties,
any products and services offered by third parties, or as to the accuracy or currency of the information included in third party
websites. The opinions of those quoted do not necessarily represent the view of the AICD. All details were accurate at the time
of printing. The AICD reserves the right to make changes without notice where necessary.
Copyright
Copyright strictly reserved. The text, graphics and layout of this guide are protected by Australian copyright law and the
comparable law of other countries. The copyright of this material is vested in the AICD. No part of this material can be
reproduced or transmitted in any form, or by any means electronic or mechanical, including photocopying, recording or by any
information storage and retrieval systems without the written permission of the Australian Institute of Company Directors.
© Australian Institute of Company Directors August 2021
For more information, please contact:
Australian Institute of Company Directors

t: 1300 739 119
e: contact@aicd.com.au
08021-1_21
aicd.com.au/cgia

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What is climate change? 5 Climate change and the best

Heightened regulatory and

Governance — embedding sound Appendix 1: Glossary of key climate terms

Appendix 3: How the Board

Appendix 4: Resource library  28

Purpose and scope

How do I use this guide to start

Part 3: Directors’ duties CONSIDER

Monitor AICD for updates and more guides and assistance

What do I need to know

Figure 1: Australian average annual temperatures – observed and simulated to 2040

Source: Bureau of Meteorology, State of the Climate 2020, http://www.bom.gov.au/state-of-the-climate/future-climate.shtml.

Figure 2: Climate-related risks, opportunities and financial impacts

WHICH INDUSTRIES ARE IMPACTED BY CLIMATE CHANGE KEY CONCEPTS

In addition, the health implications of climate change

How do I start my board’s

STAGE 1 STAGE 2 STAGE 3 STAGE 4 STAGE 5

WHERE ARE WE NOW APPROPRIATE THE BOARD IN ACCOUNTABILITY REFLECTING ON

WHERE ARE WE NOW? • What should be done to introduce climate change on

• How should climate change be considered in the context

All board members should have an appropriate level

 OVERNANCE — EMBEDDING SOUND

• Should we introduce specific targets to reduce our

What are the duties

In particular, climate change may be relevant to

Hutley opinions on directors’ duties and

CLIMATE CHANGE AND MISLEADING DISCLOSURE HEIGHTENED REGULATORY AND

8. Corporations Act 2001 (Cth) sections 295 – 297.

• RBA OTHER STAKEHOLDERS

LITIGATION RISKS • Financial risk disclosures – misleading disclosure and

16. McVeigh v REST NSD1333/2018, Federal Court of Australia, http://climatecasechart.com/climate-change-litigation/non-us-case/mcveigh-v-retail-employees-

Glossary of key climate terms

KEY CLIMATE TERMS • ‘Net zero’ emissions

• Emissions ‘scopes’ – 1, 2 and 3 Net zero emissions refers to achieving a balance

• IPCC and AR6

Figure 3: Regional fact sheet - Australasia

• Paris Agreement For some organisations, stress testing and scenario

TASKFORCE ON CLIMATE-RELATED A central requirement of the TCFD is forward-looking stress

Figure 4: The TCFD recommendations and supporting recommended disclosures

Recommended Disclosures Recommended Disclosures Recommended Disclosures Recommended Disclosures

SUSTAINABILITY ACCOUNTING STANDARDS BOARD INTERNATIONAL SUSTAINABILITY STANDARDS BOARD

In April, SASB released its 2021 edition of the Climate

The Bulletin identifies the categories of climate-related

The SASB Standards are voluntary but are favoured by

SASB recently merged with the International Integrated

1. Climate accountability on boards - The board 5. Strategic and organisational integration -

How the Board

The Board Readiness Check18 has been 4 KEY LEVELS OF ATTAINMENT

CLIMATE CHANGE ACTION LEVEL

1. UNPREPARED 2. COMPLIANT 3. PROACTIVE 4. LEADING

A. FOOTPRINT: Understanding and improving your carbon footprint

B. COMPLIANCE: Adhering to the rules on climate change

WHEN AND HOW TO USE THE BOARD READINESS CHECK

As a whole-of-board exercise, it may be useful to use a facilitator to manage the process.

STEP 1 STEP 2 STEP 3

 ENERAL OVERVIEW OF CLIMATE CHANGE-RELATED

PHYSICAL RISKS ECONOMIC TRANSITION RISKS 11. UNFCCC, Paris Agreement

 ITIGATION RISK AND

What is climate change? 5 Climate change and the best

Appendix 4: Resource library 28

Part 3: Directors’ duties CONSIDER

OVERNANCE — EMBEDDING SOUND

ENERAL OVERVIEW OF CLIMATE CHANGE-RELATED

ITIGATION RISK AND