ENVIRONMENTAL SUSTAINABILITY & ITS IMPACT ON CORPORATE GOVERNANCE
ENVIRONMENTAL SUSTAINABILITY & ITS IMPACT ON CORPORATE GOVERNANCE
I INTRODUCTION
In recent years it has been established that global corporations have contributed immensely to climate change and the sustainability of the planet.1 Decisions made by corporations have impacted adversely on environmental resources2 through the production of greenhouse gases ('GHGs'), the unsustainable use of biodiversity, and by the production of toxic and hazardous substances and waste.3 Since the early 1990s, it has been documented that multinational corporations generate more than 50 per cent of global GHG emissions.4 However, over the past 45 years, since the actions of corporations were recognised as being potential threats to the environment, there has been a significant shift in thinking. Decisions made by companies, which are regulated by corporate law Governments worldwide are introducing stringent "climate laws" to curb further environmental damage.5 It is now becoming evident that corporations need to bear the lion's share of responsibility in actively curtailing their emissions into the global atmosphere.6
This essay focuses on the issues surrounding environmental sustainability and the impact it has on corporate governance. It will focus primarily on the changes that will occur for internal corporate governance in Australia once the new Carbon Pricing Scheme ('CPS') is implemented from 1 July 2012. A brief summary will be outlined regarding the emergence of international environmental law and ecological sustainability, the traditional ways corporations have been governed, and how the new CPS will affect corporate governance after 1 July 2012.
II THE EMERGENCE OF INTERNATIONAL ENVIRONMENTAL LAW & ECOLOGICAL SUSTAINABILITY
Environmental sustainability is one of the defining political challenges of the 21st century.7 Water scarcity, climate change and threatened biodiversity have emerged because humans have, for far too long, overlooked environmental externalities as a variable in decision-making processes.8 One of the challenges of sustainable development is for corporations to consider modes of industrial organisation, in addition to the internal organisation of a firm which will lead companies towards a future which promotes environmental protection and equity.9 This has led to unremitting debate regarding the introduction of an environmental tax for corporations that produce an extensive amount of carbon emissions, which impact negatively on the environment. Corporations already have national greenhouse and energy reporting obligations and national renewable energy targets.10 However, until recently, the obligations on corporations and the ramifications for failing to comply under the Australian Federal Government's proposed form of a national Carbon Pricing Scheme have remained somewhat elusive.11
In July 2011, the Australian Federal Government finally proposed the introduction of a new carbon pricing mechanism to target GHG emissions. The objectives of the Clean Energy Act 2011 (Cth) is to give effect to Australia's obligations under the United Nations Framework Convention on Climate Change12 and the Kyoto Protocol13; to 'support the development of an effective global response to climate change; and to take action towards meeting Australia's long-term target of reducing net GHG emissions and to do so in a flexible and cost-effective way'.14 While the Act15 has already been passed, the CPS that impacts corporations will be enforced from 1 July 2012. The CPS will price emissions of the six Kyoto Protocol16 GHGs17 which negatively affect the environment, and includes a number of new complementary measures and related governance designed to 'promote renewable energy, improve energy efficiency and conserve biodiversity and carbon stocks in the land sector'.18
III THE TRADITIONAL ROLE OF CORPORATE GOVERNACE
Corporate governance has been defined as 'the system by which companies are directed and controlled'19 and concerns issues such as the composition and structure of boards of directors and the accountability of boards to shareholders. Corporate governance limits the power and discretion of decision makers within corporations. These limitations upon directorial decision-making are found in various enforceable duties of directors.20 The traditional primary role of a director, and one that is required by law under section 181 of the Corporations Act 2001 (Cth), is to always act in the best interests of the corporation. That is to keep profits and share prices high, and to pass on these benefits to the shareholders of the company.21 Due to directors being constrained to make decisions which further the corporations interest, that being profitability, they are precluded from making decisions which are primarily motivated by human moral values such as those relating to environmental concerns.22 It has even been stated that '[b]usiness corporations are legally recognised collective organisations, which are primarily directed to the pursuit of profit and characterised by formal structures and rules that limit the moral autonomy of decision-makers.'23
However there are indications that this role is changing. The opportunities for corporations to contribute to the global protection of the environment are increasingly in the spotlight. This is in light of the recognition that corporations are among 'the world's most influential institutions'.24 It is evident that their role is essential in supporting government action to achieve environmental sustainability goals agreed at the international level, such as those outlined in the Kyoto Protocol.25
IV CORPORATE GOVERNANCE UNDER THE CARBON PRICING SCHEME
In recent years companies have been motivated to be environmentally responsible only to the extent ...
This is a preview of the whole essay
However there are indications that this role is changing. The opportunities for corporations to contribute to the global protection of the environment are increasingly in the spotlight. This is in light of the recognition that corporations are among 'the world's most influential institutions'.24 It is evident that their role is essential in supporting government action to achieve environmental sustainability goals agreed at the international level, such as those outlined in the Kyoto Protocol.25
IV CORPORATE GOVERNANCE UNDER THE CARBON PRICING SCHEME
In recent years companies have been motivated to be environmentally responsible only to the extent necessary to avoid liability under applicable environmental laws.26 An example of this is a directors duty under section 299(1)(f) of the Corporations Act27 to report breaches of any significant environmental regulation under Commonwealth, state or territory laws. However, with the emergence of the 2012 CPS, it is now evident that national corporate governance regimes will now include legal mechanisms constraining company directors into ensuring that corporate activities not only abide by environmental laws, but work for overall environmental protections.28 Environmental considerations can now be deemed sufficiently important to bring them into the scope of a company directors duty. Therefore, the new CPS will have internalising effects, particularly in terms of their effects on corporate governance.29
A Liability Threshold & Entities
Businesses will be liable under the CPS if they operate a facility or conduct an activity, or import, produce or manufacture or supply certain upstream fuels or synthetic GHGs that emit GHGs with carbon dioxide that has the equivalence of 25,000 tonnes or more per year.30 It has been estimated that around 500 of Australia's largest carbon polluting businesses will be directly impacted by the new CPS. Some of these businesses include stationary energy, waste, rail, domestic aviation and shipping, industrial processing and fugitive emissions. Part 3 of the Clean Energy Act 2011 (Cth) outlines a broad range of legal liable entities, including companies, government entities (including local councils), joint ventures, partnerships, and other unincorporated entities.31
B The Duties of Directors & Chief Executive Officers
Arguable, given the ascendancy of the climate change issue, directors are under a duty to consider climate change when complying with their fiduciary duties under section 180 of the Corporations Act 2001 (Cth).32 Section 180(1) outlines that company directors are required to exercise their powers and discharge their duties with reasonable care and diligence.33 In addition, company directors have a responsibility to ensure that their companies implement strategies to manage liability under the CPS by introducing measures to reduce carbon emissions. Directors also need to ensure that they are aware of their obligations to report and make disclosures about the scheme.34
Furthermore, under section 248 of the Clean Energy Act,35 the Chief Executive Officers ('CEOs') of a corporation, such as directors and senior management, will be held personally liable if the corporation contravenes a civil penalty provision under the Act.36 This is pursuant to whether the CEO knew, or was reckless or negligent as to whether the contravention would occur, and that officer, being in the position to do so, failed to take all reasonable steps to prevent the contravention.37
C Obligations Under ASX
Companies listed with the Australian Securities Exchange ('ASX') are required to adhere to the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations.38 Principle 7, entitled 'Recognise and Manage Risk' is the most relevant relating to climate change. Recommendation 7.1 specifies that a company must establish policies for the oversight and management of 'material business risks' and disclose a summary of those policies.39 Although each company will need to determine what 'material business risks' it faces, the Principles specifically outline that a 'material business risk' will include environmental and sustainability risks. Such risks are likely to include impacts of climate change, carbon pricing or environmental and sustainability legislation on the company.40
In addition, under ASX Listing Rule 3.1, it provides that once a listed company becomes aware of any information that would reasonably be expected to have material effect on the price of its listed securities, it is required to immediately disclose that information to the ASX.41 The CPS is likely to increase cost of inputs and affect overall profits.42 As a result, listed companies must ascertain the effect of the scheme on financial forecasts. A failure to make appropriate disclosures will attract sanctions under section 674 of the Corporations Act.43
V CONCLUSION
There is no doubt that climate change is a major concern in relation to environmental sustainability in the 21st century. It is evident that the climate change net is being drawn increasingly tighter around corporations with respect to corporate governance obligations.44 The internationally agreed environmental principles such as the Kyoto Protocol,45 provide a legal basis for environmental interests to be included within corporate governance regimes. These principles reflect new norms that national and global corporations will be increasingly called upon to uphold.46 The Australian Federal Governments move to introduce a national Carbon Pricing Scheme only strengthens the stand it has on achieving the sustainable development objective that has thus far eluded international environmental law. By ensuring corporations and their directors adhere to the strict provisions, the Australian Government is taking the first step in securing an ecological sustainable future not only for its citizens, but also for the viability of its corporations.
BIBLOGRAPHY
. Articles/Books/Reports
Allens Arthur Robinson, Climate Change: Carbon Pricing Scheme (12 July, 2011) <http://www.aar.com.au/pubs/cc/foccjul11.htm> at 5 July 2012.
Angel, Jeff, 'CSR - Saving the Environment?' (2005-2006) 87 Reform Issue 32.
ASX - Australian Securities Exchange, Listed Entities Update: Important Information for ASX Listed Entities (05/11 ed, 19 July 2011) <http://www.asx.com.au/resources/newsletters/companies_update/archive/CompaniesUpdate_20110718_0511_HTML.htm> at 5 April 2012.
ASX Corporate Governance Council, ASX Corporate Governance Principles and Recommendations (2nd ed, 2010) <http://www.asx.net.au/governance/corporate-governance.htm> at 9 April 2012.
Baxt, Robert, Corporations Legislation 2011 (Thomson Reuters, 2011).
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Bubna-Litic, Karen, 'Climate Change and Corporate Social Responsibility: The Intersection of Corporate and Environmental Law' (2007) 24 Environmental and Planning Law Journal 253.
Deane, Felicity, 'A New Legal Avenue for Pricing GHG Emissions? To Trade or to Tax?' (2011) 28 Environmental and Planning Law Journal 111.
Dine, Janet, The Governance of Corporate Groups (Cambridge University Press, 2000).
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Horn, Laura, 'Multinational Enterprises and Sustainable Development' (2008) 21(3) Australian Journal of Corporate Law 186.
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Lipman, Zade, 'An Evaluation of Compliance and Enforcement Mechanisms in the Environment Protection and Biodiversity Conservation Act 1999 (Cth) and their Application by the Commonwealth' (2010) 27 Environmental and Planning Law Journal 98.
Livingstone, Mia Louise, 'Who Will Be Liable for Australia's Solution to Pollution? An Analysis of the Scope of Businesses' Liability Under the Carbon Pollution Reduction Scheme' (2009) 26 Environmental and Planning Law Journal 292.
Lyster, Rosemary, 'Australia's Clean Energy Future Package: Are We There Yet?' (2011) 28 Environmental and Planning Law Journal 446.
Lyster, Rosemary, 'Chasing Down the Climate Change Footprint of the Private and Public Sectors: Forces Converge' (2007) 24 Environmental and Planning Law Journal 281.
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McGrath, Dr Chris, 'Australia's Draft Climate Laws' (2009) 26 Environmental and Planning Law Journal 267.
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2. Legislation
Clean Energy Act 2011 (Cth).
Corporations Act 2001 (Cth).
3. Treaties
Kyoto Protocol, United Nations Framework Convention on Climate Change, 26 November 2009.
UN General Assembly, United Nations Framework Convention on Climate Change adopted by the General Assembly, 20 January 1994, A/RES/48/189.
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Australian Legal Guide to Citation (Melbourne University Law Review Association Inc, 2nd ed, 2002).
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Meltzer, Gideon, Corporate & Commercial February 2012 Newsletter (27 February, 2012) Cornwall Stodart Legal Expertise, <http://cornwalls.com.au/sharing-knowledge/legal-updates/corporate--commercial-february-2012-newsletter.aspx> at 5 April 2012.
Vijayaraghavan, Akhila, CSR and Corporate Governance - What's the Distinction? (27 December, 2010) JustMeans Business Better <http://www.justmeans.com/editorials?action=readeditorial&p=41038> at 5 April 2012.
World Resources Institution, World Resources 2002-2004: Decisions for the Earth: Balance, Voice, and Power (2003) <http://www.wri.org/publication/world-resources-2002-2004-decisions-earth-balance-voice-and-power> at 9 April 2012.
Rosemary Lyster, 'Chasing Down the Climate Change Footprint of the Private and Public Sectors: Forces Converge' (2007) 24 Environmental and Planning Law Journal 281, 281.
2 Karen Bubna-Litic, 'Climate Change and Corporate Social Responsibility: The Intersection of Corporate and Environmental Law' (2007) 24 Environmental and Planning Law Journal 253, 253.
3 Elisa Morgera, Corporate Accountability in International Environmental Law (Oxford University Press, 2008), 5.
4 UN Comission on Transnational Corporations (UNCTC), Climate Change and Transnational Corporations: Analysis and Trends (Geneva, UN, 1993) in Morgera, above n 3, 5.
5 Lyster, above n 1.
6 Ibid.
7 Kirk Simmons, 'Why Nothing in the World is Certain Except Death and (Environmental) Taxes' (2011) 28 Environmental and Planning Law Journal 368, 368.
8 Ibid.
9 Richard Welford, Environmental Strategy and Sustainable Development: The Corporate Challenge for the 21st Century (1995), 23 in David Ong, 'The Impact of Environmental Law on Corporate Governance:
International and Comparative Perspectives' (2001) 12(4) European Journal of International Law 685, 691.
0 Mia Louise Livingstone, 'Who Will Be Liable for Australia's Solution to Pollution? An Analysis of the Scope of Businesses' Liability Under the Carbon Pollution Reduction Scheme' (2009) 26 Environmental and Planning Law Journal 292, 292.
1 Ibid.
2 UN General Assembly, United Nations Framework Convention on Climate Change adopted by the General Assembly, 20 January 1994, A/RES/48/189.
3 Kyoto Protocol, United Nations Framework Convention on Climate Change, 26 November 2009.
4 Rosemary Lyster, 'Australia's Clean Energy Future Package: Are We There Yet?' (2011) 28 Environmental and Planning Law Journal 446, 447.
5 Clean Energy Act 2011 (Cth).
6 Kyoto Protocol, above n 13.
7 The six major GHGs targeted through the Kyoto Protocol include carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, hydrofluorocarbons, and perfluorocarbons.
8 Allens Arthur Robinson, Climate Change: Carbon Pricing Scheme (12 July, 2011) <http://www.aar.com.au/pubs/cc/foccjul11.htm> at 5 July 2012.
9 John E Parkinson, Corporate Power and Responsibility: Issues in the Theory of Company Law (1994) viii, in David Ong, 'The Impact of Environmental Law on Corporate Governance: International and Comparative Perspectives' (2001) 12(4) European Journal of International Law 685, 686.
20 Jim Jackson, LAW00527 Corporations Law (Southern Cross University, 4th ed, 2012) 89.
21 Fiona MacMillan, WTO and the Environment, (Sweet & Maxwell Ltd, 2001) 230 in Laura Horn, 'Multinational Enterprises and Sustainable Development' (2008) 21(3) Australian Journal of Corporate Law 186. According to MacMillan, 'the shareholder primacy model of the corporation, which requires it to put the interests of its shareholders in the generation of corporate profits above other considerations, may tend to induce corporate behaviour that is environmentally harmful.'
22 Jackson, above n 20, 89.
23 Ibid, 90.
24 World Resources Institution, World Resources 2002-2004: Decisions for the Earth: Balance, Voice, and Power (2003) <http://www.wri.org/publication/world-resources-2002-2004-decisions-earth-balance-voice-and-power> at 9 April 2012, 107.
25 Elisa Morgera, above n 3, 8.
26 Valerie Ann Zondorak, 'A New Face in Corporate Environmental Responsibility: The Valdez Principles' (1991) 18 Boston College Environmental Affairs Law Review 457, 457 in David Ong, 'The Impact of Environmental Law on Corporate Governance: International and Comparative Perspectives' (2001) 12(4) European Journal of International Law 685, 688.
27 Corporations Act 2001 (Cth) s 299(1)(f).
28 Janet Dine, The Governance of Corporate Groups (2000) 162.
29 David Ong, 'The Impact of Environmental Law on Corporate Governance: International and Comparative Perspectives' (2001) 12(4) European Journal of International Law 685, 716.
30 Livingstone, above n 10, 297.
31 Clean Energy Act 2011 (Cth), Pt 3.
32 Lyster, above n 1, 309.
33 Corporations Act 2001 (Cth) s 108(1).
34 Gideon Meltzer, Corporate & Commercial February 2012 Newsletter (27 February, 2012) Cornwall Stodart Legal Expertise, <http://cornwalls.com.au/sharing-knowledge/legal-updates/corporate--commercial-february-2012-newsletter.aspx> at 5 April 2012.
35 Clean Energy Act 2011 (Cth).
36 Ibid.
37 Ibid, ss 248(1), 248(2) and 248(3).
38 ASX Corporate Governance Council, ASX Corporate Governance Principles and Recommendations (2nd ed, 2010) <http://www.asx.net.au/governance/corporate-governance.htm> at 9 April 2012.
39 Ibid.
40 Alfonso Grillo, ASX to Review Disclosure of 'Environmental' and 'Sustainability' Risks in Corporate Governance Statements of Listed Companies (TressCox Lawyers, 18 August, 2008).
41 Allens Arthur Robinson, above n 18, 9.
42 Gideon Meltzer, above n 34.
43 Corporations Act 2001 (Cth) s 674.
44 Lyster, above n 1, 281.
45 Kyoto Protocol, above n 13.
46 Nazli Choucri, 'Corporate Strategies Towards Sustainability' (1994) in Ong, above n 29, 695.
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