Directors are back in the hot seat on climate risk

Lessons from the International Court of Justice’s advisory opinion regarding Australian Directors’ duties in respect of climate-related risks

On 26 March 2026 Ruth Higgins SC[1] and JK Robinson published an International Court of Justice (ICJ) advisory opinion (Advisory Opinion) about the consequences for company directors of the ICJ’s Opinion on the Obligations of States in respect of Climate Change (ICJ Opinion).

This article and accompanying short video considers the implications for directors, particularly those of companies in the mining and other high-emitting sectors, and for Directors & Officers Liability (D&O) insurers. There is a clear potential for, even likelihood of, increased regulatory and litigious climate-related action. While two significant Australian cases to date failed, the Advisory and ICJ Opinions, albeit non-binding, may impact significantly upon how Courts view the actions and inactions of corporations and their directors.

Statutory obligations

The Advisory Opinion was guarded about what may follow from the ICJ Opinion but clearly pointed to immediate obligations in light of duties cast on directors by the Corporations Act 2001 (Cth) (Act).

First, directors have a duty of care and diligence. They are exposed to liability under s180(1) of the Act if their acts or omissions expose the corporation to a foreseeable risk of harm. The nature and requirements of the duty will depend upon the individual circumstances of the corporation (such as its type, size, business and board composition) and of the specific director (such as his or her office and responsibilities, experience and skills and arrangements between the board and management). A director with particular responsibilities, experience or skills in relation to sustainability will be held to a higher standard of care.

Courts called upon to determine whether directors have breached their s180(1) duties balance:

’… the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the corporation from the conduct … one expects management including the directors to take calculated risks. The very nature of commercial activity necessarily involves uncertainty and risk taking …’[2]

Therefore, breach is not established merely by foreseeable risk of harm alone, or by a failed activity that causes loss to the corporation. Courts will consider those matters in the context of all of the corporation’s interests.

Secondly, Part 2M.3 of the Act sets out a regime for disclosure of (amongst other things) material financial climate-related risks. Directors of corporations subject to annual sustainability reporting[3] must:

• pass a resolution and certify compliance with the Act – in practice, confirming  that sustainability reports do not make misleading statements about financial climate-related risks or omit material information. Pending case law about Part 2M.3, guidance comes from cases about directors’ declarations about financial statements, which require the directors to have ‘the ability to read and understand the financial statements … [and] an understanding of the need to disclose certain events post balance sheets …’.  A Director could not vote without in fact holding the requisite opinions[4], and
• take all reasonable steps to comply with, or secure compliance with, the Act (including the Part 2M.3 obligations).

Part 2M.3 is concerned with the financial impacts of both:

• Physical risks – arising from events like flood and heatwaves and from longer-term shifts in climatic patterns.  Financial impact could arise directly (damaged assets) or indirectly (supply-chain disruptions) or may be the longer-term results of ‘changes in precipitation and temperature [leading]… to sea level rise, reduced water availability, biodiversity loss and changes in soil productivity.
• Transition risks – arising from efforts to move to a lower-carbon emission economy. Financial impact could arise from ’increased operating costs … shifting consumer demands and the development and deployment of new technology’.

Content and breach of the s 180(1) duty

The Advisory Opinion pointed to two significant factors relating to financial climate-related risks and the s.180(1) duty:

1. the Part 2M.3 sustainability reporting obligations are premised on the ‘well established’ proposition that many, perhaps all, Australian corporations face foreseeable risks of harm due to climate change, and
2. the duty requires an inquiry into how things should be, not how they are. It is a matter of ’public concern not just private rights’[5] and will move with the times[6].

The s 180(1) duty relating to the Part 2M.3 sustainability reporting obligations will also move with the times, given recent developments including both Part 2M.3 annual sustainability reporting obligations and case law, both local and international. The Advisory Opinion’s authors suggested that:

1. two UK claims failed both due to a lack of evidence and because they were overly ambitious. The corporations had, and planned to achieve, emissions reduction targets, the claimants just did not consider the targets and plans adequate, and
2. similar claims have been made in Australia against corporate trustees and responsible entities[7] (but not yet against directors). The threat of litigation is real, not theoretical, and regulators and aggrieved shareholders may be the litigators, along with public interest organisations.

At a minimum, to address their obligations in respect of financial climate-related risks, directors must:

1. have sufficient knowledge of risks facing the corporation. What is sufficient will depend on both the corporation’s and director’s circumstances. Directors, particularly non-executives, are generally ’entitled to rely without verification on the judgment, information and advice of management and other officers’[8] but this will depend on whether the responsibility was delegated appropriately, the delegate’s honesty and competence and whether facts have come to the director’s attention that should reasonably have awoken suspicion, in which case further enquiries must be made[9]
2. take ‘a diligent and intelligent interest in information’ about financial climate-related risks, ensure an understanding of that information and apply an inquiring mind to their responsibilities
3. act, or decline to act, in accordance with a ’rational and informed assessment of the corporation’s best interests’, having considered and sought advice about financial climate-related risks, and
4. take all reasonable steps to ensure that the corporation discloses financial climate-related risks in accordance with Part 2M.3 and all statements they approve, particularly those contained in Part 2M.3 annual sustainability reports, are accurate and do not omit any financial climate-related risks.

Directors:

• are not held to perfection[10]. A mistake, error of judgment or failure to take the ideal course of action[11] will not of itself be a breach. The Courts acknowledge that directors often ’[take] decisions and [embark] upon action which may promise much, on the one hand, but which are, at the same time, fraught with risk …’ and the duty is not intended to ’dampen business enterprise and penalise legitimate but unsuccessful entrepreneurial activity’[12], and
• having a defence under s 180(2), the ’business judgment rule’, if they inform themselves, to the extent they reasonably believe appropriate, about the subject matter of a decision, act in good faith and for a proper purpose, have no material personal interest in the subject matter of a decision and rationally believe that the decision is in the corporation’s best interests. They cannot rely on the defence if they fail to properly monitor and oversee, deliberately fail to comply with duties under the Act[13] or are simply uninformed, making no conscious decision and exercising no judgment.

Directors should:

• have a solid working knowledge of the background issues, particularly the Part 2M.3 regime and the corporation’s risks, particularly if it already has Part2M.3 reporting requirements
• have adequate systems in place for them to ensure they are continually aware of developments posing or exacerbating the corporation’s risks
• avoid taking a passive role and instead, apply an enquiring mind to information about the corporation’s risks and ensure they understand that information
• make rational decisions based on an informed assessment of the corporation’s best interests, which are likely to be much broader than purely financial considerations
• consider their directors’ duties, in particular, the duty to act with care and diligence, through a broad lens, which includes Environmental, Social and Governance considerations (including climate-related risks)
• ensure the corporation complies with any disclosure obligations, and
• do everything reasonably necessary to ensure that statements they approve, particularly in annual Part2M.3 reports, are accurate and do not omit any material information about risks.

Lessons for D&O insurers and corporations seeking D&O cover:

Taking up some of the themes considered in the Advisory Opinion, insurers assessing risk associated with many resources corporations will want to understand if:

• their Boards include directors who are keenly aware of and suitably qualified and experienced to assess climate-related risks: those individuals are likely to be held to higher standards
• Boards in high-emitting sectors have considered whether climate-related risks have intensified, particularly if there are any plans to expand emissions-intensive activities:  if so, the standard of care expected of directors in those sectors may have correspondingly increased
• Australian corporations in high-emitting sectors are likely to be more exposed to legislative or regulatory action that increases the costs of business or limits or even prohibits certain profit-generating activities 
• the phase out of fossil fuels (coal, oil and gas) poses potential risks to corporations that derive revenue from fossil fuel-based activities[14].  Profit-generating activities derived from oil and gas exploration and production, coal mining and refining and energy generation and supply may be limited, prohibited or rendered financially unviable.  Insurers may want to know if Boards have considered whether assets associated with fossil-fuel extraction, production and/or supply could become stranded or result in significant decommissioning costs  
• regulatory and policy developments in other jurisdictions inform the climate-related risks facing an Australian corporation if it sells products or services into export markets, is related to foreign corporations, or has activities or projects in foreign jurisdictions, and
• Boards have taken reasonable steps to ensure that climate-related risks have been disclosed in accordance with the corporation’s disclosure obligations, including the reporting obligations imposed by Part 2M.3, following a rational and informed assessment of the risk. 

For the same reasons, corporations should look closely at Board composition to maintain ongoing insurability and protect against significant premium escalation. 

[1]     Who, within a couple of weeks, was announced as the new Commonwealth Solicitor General from 6 June 2026.

[2]     ASIC v Mariner Corporation Ltd & Ors (2015) 241 FCR 502; [2015] FCA 589 at [451]-[452].

[3]     Group 1 entities - Australia’s largest emitters – have been subject to these obligations since 1 January 2025. The next phases commence on 1 July 2026 and 1 July 2027.

[4]     ASIC v Healey (2011) 196 FCR 291; [2011] FCA 717 at [264].

[5]     ASIC v Cassimatis (No 8) (2016) 336 ALR 209; [2016] FCA 1023 at [27].

[6]     Cassimatis at [451].

[7]     For instance, ASIC v Fiducian Investment Management Services Limited in the Supreme Court of NSW, which is ongoing, and McVeigh v Retail Employees Superannuation Pty Ltd which settled on terms requiring a media release from the corporation acknowledging the “material, direct and current financial risk” associated with climate change and committing to taking active steps to consider, measure and manage it.

[8]     ASIC v Bekier (Liability Judgment) [2026] FCA 196 at [363].

[9]     Bekier at [365].

[10]    Bekier at [360].

[11]    ASIC v Rich (2009) 236 FLR 1; [2009] NSWSC 1229 at [7242].

[12]    Vrisakis v ASIC (1993) 9 WAR 395 at 449.

[13]    Bekier at [420] – [421].

[14]  After Australia became one of 80 signatories to the Belem Declaration on the Transition Away from Fossil Fuels in November 2025 which calls for the “just, orderly and equitable” transition away from fossil fuels consistent with achieving the goal of limiting warming of the world’s average surface temperature to 1.5°C above pre-industrial levels.