Law student sues government over climate change risk

In a world-first climate change case, a 23-year-old Melbourne law student is suing the Australian government for failing to disclose climate change risks to investors in Australia’s sovereign bonds.

In the Federal Court on 22 July, Katta O’Donnell filed her case against the Commonwealth of Australia “for its failure to disclose the climate change risks that investors faced”.

O’Donnell’s argument is that as the world warms the value of ‘safe’ investments is in danger of collapse because of the government’s inadequate climate change policies.

She is suing the government for failing to reveal the risks that investors face in buying Australia’s sovereign bonds. Sovereign bonds involve loans of money from investors to governments for a set period at a fixed interest rate.

Many investors believe the bonds are among the safest places to put their money, especially if the bonds are held by their superannuation funds.

But, as climate change creates increasing risks to the Australian economy as well as the environment, the federal government can no longer avoid its vulnerability.

O’Donnell argues that Australia’s poor climate policies put the economy at increasing risk because of the changing climate and that these risks should be properly disclosed in the information provided to bond investors.

By failing to disclose this information, the federal government is also guilty of breaching its legal duty.

According to O’Donnell, the government has engaged in ‘misleading and deceptive conduct’ while government officials breached their duty of care and due diligence.

As she says, under Australian law, company directors who fail to take account of climate risks could be found liable for ‘breaching their duty of care and diligence’.

O’Donnell argues that government officials who provide advice or information to investors in sovereign bonds should meet the same benchmark.

Climate change – A financial risk

She is not alone in holding that position and her views are becoming mainstream among Australian economists.

They include an executive board member of the Australian Prudential Regulation Authority, Geoff Summerhayes, who told a recent conference: “When a central bank, a prudential regulator and a conduct regulator, with barely a hipster beard or hemp shirt between them, start warning that climate change is a financial risk, it’s clear that position is now orthodox economic thinking.”

Due to the changing climate, the world – and Australia in particular – is already suffering dangerous consequences, including intense droughts and unprecedented bushfires, Summerhayes said.

These climate change induced effects also generate financial risks such as property damage, assets destruction and reducing demand for fossil fuels that could lead to coal mines and oil reserves becoming what financiers call ‘stranded assets’.

‘Safe’ investments under threat

Sovereign bonds are a long-term investment and Katta O’Donnell’s bonds, for example, will mature in 2050.

But these timeframes also dovetail with projections by scientists about when the world will experience the severe impacts and costs of climate change.

And climate change is likely to hit Australia particularly hard. The nation’s ferocious bushfires last summer are estimated to have cost the economy more than A$100 billion (US$71.6) while also destroying tens of thousands of hectares of forests.

Impact of bushfires

The bushfires also affected Katta O’Donnell because she lives in a high-risk bushfire zone.

“I have friends who’ve lost their homes and lost their family members,” she said, adding that the “black summer” led her to take on the class action.

She isn’t alone in looking for action on climate change and she joined with thousands of young people across the world protesting last year with Greta Thunberg.

“Unfortunately, it has fallen on young people because we know that it’s our future,” O’Donnell said.

“It’s an issue that causes anxiety. I think it's really personal to everyone because our leaders are not taking [climate change] seriously.

“It hurts that we know the answers and we know the solutions, but they’re just not being put in place,” she said.

Unprecedented, but not novel

O’Donnell’s case against the federal government is an unprecedented climate change case, even if its arguments are not novel.

Australia has been described as a ‘hotspot’ for climate litigation in recent years, but the O'Donnell case is the first where the Australian government has been sued in an Australian court.

Previous cases suing governments have often raised human rights issues, such as a high-profile 2015 case against the Dutch government. This was the first in the world to establish that governments owe their citizens a legal duty to prevent climate change.

A Dutch court ordered the government to cut the country’s greenhouse gas emissions by at least 25%. The O'Donnell case, however, is unique in its focus on sovereign bonds.

But cases alleging misleading climate-related disclosures are themselves not new and the O'Donnell case builds on this line of precedent, extending it to disclosures in bond information documents. As such, courts seem certain to take it seriously.

A new precedent to be set?

If the O’Donnell case is successful it could establish the need for disclosure of climate-related financial risks for a range of investments.

Financial observers say that, at a minimum, a ruling in O’Donnell’s favour may compel the Australian government to disclose climate-related risks in its information documents for investors.

In turn, this might make people think twice about how they choose to invest their money, especially as investors seek to ‘green’ their portfolios.

It could also give rise to litigation using the same legal theory in sovereign bond disclosure claims against other governments.

Whether the case provides the impetus for further government action to improve the effectiveness of Australia’s climate policies remains to be seen.

Still, it is clear that climate-related financial risks have entered Australia’s corporate boardrooms, just as they have now come knocking at the government’s door.