Directors’ duties with respect to climate risk

About this guide

The directors’ duty of care diligence and skill under the Public Administration Act 2004 requires consideration of risk, including climate change-related risks. (Climate change-related risks will be referred to as ‘climate-related risks’ in this guide.)

With over 3000 public sector boards in Victoria(opens in a new window), board members play a critical role in overseeing management of climate-related risks to the delivery of services relied on by the Victorian community.

Disclaimer

This guidance material is intended to provide general information only, current at the time of publication. It does not constitute legal advice, is not intended to be a substitute for legal advice and should not be relied upon as such. Formal legal advice should be sought in particular matters.

The Public Administration Act 2004 (Vic)(opens in a new window) (PAA) is the primary source of duties for directors of public entities.

The PAA defines public entities in section 5. The definition of public entities is broad. Note, public entities that are established under the Corporations Act 2001 (Cth)(opens in a new window), that are not exempt public authorities, must also comply with the duties contained in the Corporations Act(opens in a new window). Sections 180 and 181 of the Corporations Act(opens in a new window) contain similar duties to those in sections 79(1)(b) and (e) of the PAA.

The PAA contains a duty of care, diligence, and skill:

Section 79 (1) A director of a public entity must at all times in the exercise of the functions of his or her office act — (b) in good faith in the best interests of the entity and (e) with a reasonable degree of care, diligence and skill.

This means that public entity directors have a responsibility to consider foreseeable risks of harm to the interests of their entity and to exercise care, diligence and skill while addressing their oversight, risk management and strategic functions.

Climate-related risks are likely to present foreseeable risks of harm to the interests of Victorian public entities in the vast majority of cases. Foreseeable risks of harm may arise from adverse impacts to assets, service delivery and financials as well as reputational losses or other consequences.

If you do not consider climate-related risks when considering risks to your entity, you may be exposed to liability for breach of your directors’ duty of care, diligence, and skill, among other obligations.

In addition to the requirements of the PAA, the Code of Conduct for Directors of Victorian Public Entities 2016 requires that your decisions be formulated on ‘the best information available at the time’, and upon the basis of advice where necessary. (Public entity directors are bound by the Code pursuant to ss.40(b), 61 and 62 of the PAA. The Code reiterates and expands upon the duty of care, diligence and skill in s.79 of the PAA.)

Ignorance and inaction are not defences for breach of your duty of care. This is because you have a positive obligation to consider knowledge you ought to have reasonably known.

This guidance note provides an overview of how Victorian public entity directors may consider climate change in discharging their general duty of care, diligence and skill. It does not cover other climate change-related obligations or legislative duties, such as those found in in the Climate Change Act 2017 (Vic)(opens in a new window) or elsewhere.

What you need to know about climate risk

Victoria’s climate has changed in recent decades – in general becoming warmer and drier with an increase in extreme weather events. These changes are expected to continue into the future.
Climate change poses physical and transition (including liability) risks.
Physical risks from climate change can be event-driven (acute), such as increased severity of extreme weather events. They can also relate to longer-term (chronic) impacts (for example, sea level rise).
Transition risks of climate change are risks associated with the shift to a low-carbon economy. They comprise policy, legal, reputational, technology and market risks.
Climate-related risks (both physical and transitional) are likely to represent a foreseeable risk of harm (and/or an opportunity) to the interests of public entities.
Climate-related risks are likely to comprise not only a foreseeable but material and significant risk for Victorian public entities. ‘Material’ refers to that information which if omitted, misstated or obscured could reasonably be expected to influence decisions that the primary users of general purpose financial reports make on the basis of those reports: refer Australian Accounting Standards Board, ‘AASB Practice Statement 2: Making Materiality Judgements’ (2020)(opens in a new window). The Sustainability Accounting Standards Board issued a Technical Bulletin on Climate Risk in April 2021(opens in a new window) which identified that climate-related risks are likely to be material for 69 out of 79 industry sectors.

What is the Victorian Government's position on climate change?

Victoria’s Climate Change Act 2017(opens in a new window) (the Act) provides the framework for the Victorian Government’s climate change response, including emissions reduction and adaptation to the impacts of climate change.

The Act establishes a long-term target of net zero greenhouse gas emissions by 2050. It also requires the Victorian Government to set interim emissions reduction targets for five-year periods until 2050 in order to reach net zero. The first interim targets are to reduce the state’s greenhouse gas emissions from 2005 levels by:

28 to 33% by 2025 and
45 to 50% by 2030.

In addition, the Act requires:

sector pledges (5-yearly), and
a whole of Victorian Government emissions reduction pledge (5-yearly).

The first government pledge is set out in Cutting Victoria’s Emissions 2021 to 2025: Whole of Victorian Government emissions reduction pledge (PDF, 2.19KB)(opens in a new window) (2021).

The Act requires publication of a Climate Change Strategy every 5 years. The first of these, Victoria’s Climate Change Strategy(opens in a new window), was published in 2021 and sets out the Victorian Government’s current action on climate change (including the emissions reduction pledges) and next steps.

Under the Act, Adaptation Action Plans(opens in a new window) will be published every 5 years for 7 key systems:

the built environment
the natural environment
the water cycle
primary production
transport
health and human services; and
education and training.

These plans will set out roles and responsibilities of the Victorian Government in relation to adaptation planning in Victoria, including the government’s own adaptation efforts.

For an overview of climate science for Victoria, start by consulting Victoria’s Climate Science Report 2019(opens in a new window).

For information on Victoria’s greenhouse gas emissions, refer to Victoria’s latest annual greenhouse gas emissions report(opens in a new window).

For more information on Victorian Government action on climate change, refer to the Victorian Government’s climate change website(opens in a new window).

What you need to do to discharge your duty of care, diligence and skill with respect to climate risk

At minimum, you must:

be proactive and inquisitive in considering foreseeable risks, including climate risks
obtain advice from management or independent experts where required
actively monitor the entity’s affairs and critically evaluate the matters for which you are responsible; identify and understand relevant issues to ensure that your consideration is properly informed, and
actively apply independent judgment to the issue, weighing all relevant facts and fair criteria, in good faith and for proper purposes.

The dynamic, forward-looking nature of climate change risks means the standard of care to which public entity directors will be held continues to increase. Consideration of climate risks must be proactive and ongoing as opposed to a static, singular review.

The proportionality of standard of care

The particular standard of care owed by you as a director of an entity and the reasonableness of your conduct will be assessed against:

the particular legislation applicable to your entity (in essence, whether this imposes specific responsibilities with respect to climate change)
the magnitude of the physical and transitional risks applicable to your entity’s industry sector (scope, scale, probability of relevant risks)
the size and nature of your entity
your actual responsibilities as a director within the organisation, and
the circumstances in which relevant decisions arise.

So, for example:

Entity A is an independent statutory authority, with almost 1000 staff members, an annual budget of about $200 million, and a net worth of approximately $150 million. It has a seven-person professional board with extensive industry experience. Its enabling legislation contains climate change-related obligations that the entity is required to implement. The entity is significantly exposed to both physical and transition risks of climate change.
Entity B is a volunteer committee of management. It has twelve volunteer members, each of whom has minimal board experience. The entity has annual income of less than $10,000. The entity’s enabling legislation does not refer to climate change. The entity manages a small parcel of land which is somewhat exposed to the physical risks of climate change.

In this example, it is likely that a board member of Entity A would be held to a very high standard of care, whereas a board member of Entity B would be held to a comparatively lower standard of care as is reasonable to expect of directors in this context.

Relevant timeframes

Your appointment as a board member may be for a period of between 1 to 5 years. However, for risk management purposes, you need to consider long-term risks to your entity that extend beyond the period of your appointment. Many climate risks will exceed your period of appointment.

The 6 Es Framework

It is recommended that you follow the 6Es framework to help you discharge your duty: Educate, Enquire, Examine, Evaluate, Express, Execute. This is a high-level, principles-based framework that seeks to guide the questions that directors ask.

This guide should be considered as a starting point only. You should obtain specific advice as to any additional obligations or considerations that may apply in your entity's unique context.

The indicative questions that relate to Educate and Enquire can be used to gather the necessary information required to understand the risks to the entity presented by climate change.

The indicative questions for Examine, Evaluate, Express and Execute relate to the individual director's assessment and management of climate-related risks to which the entity is exposed.

Educate

Maintain a core of contemporary knowledge of the entity’s operations, financial position, regulatory environment and broader industry context.