Climate Change Class Action Relating to Australian Sovereign Bonds Permitted to Proceed
The Situation: There has been a proliferation of climate change-related litigation against Australian government entities over recent years. The majority of these claims involve challenges to administrative decisions with respect to environmental approvals in emissions intensive industries. In mid-2020, a 24-year-old university student commenced a representative action (a form of class action) against the Commonwealth of Australia ("the Commonwealth") and two public officials on behalf of retail investors in Australian sovereign bonds. The claim alleges that the Commonwealth has failed to disclose to investors in relevant disclosure documents material risks caused by climate change.
The Result: The Commonwealth sought orders to strike out the action. In October 2021, the Federal Court of Australia in O'Donnell v Commonwealth of Australia struck out two of the three claims, but permitted the third claim to proceed against the Commonwealth as a class action. The claim that will go forward alleges that the Commonwealth engaged in, and continues to engage in, misleading or deceptive conduct by not disclosing certain physical risks and transition risks posed by climate change to the long term investments in relevant disclosure documents.
Looking Ahead: This is the first class action worldwide brought against a national government for the alleged non-disclosure of climate change risks to investors in sovereign bonds. If successful, the action could have significant implications for the standard of disclosure required by issuers of bonds and other financial products, including governments and corporations, as well as relevant officers.
The Applicant's Claims
In July 2020, Ms. Kathleen O'Donnell commenced a representative proceeding on her own behalf and on behalf of all persons who at any time on or since 7 July 2020 have acquired certain types of Australian sovereign bonds with maturity dates in 2047 and 2050 respectively.
The claim was founded upon three causes of action, each of which arose from allegations that the Commonwealth had published disclosure documents pertaining to the sovereign bonds which failed to disclose climate change risks that would have a material adverse impact on the financial position of the Commonwealth and, in turn, the value of the bonds. The specific actions included:
- A claim that the Commonwealth had engaged in conduct in relation to a financial service that was misleading or deceptive, or likely to mislead or deceive, in contravention of s 12DA(1) of the Australian Securities and Investments Commission Act 2001 (Cth). Notably, under Australian law, the question of whether a statement is misleading or deceptive is judged by reference to objective facts. There is no need to establish any subjective state of mind, such as knowledge, intent or recklessness.
- A disclosure duty claim against the Commonwealth and the two Australian Government officials who were also named respondents, on the basis that, as promoters of the bonds, they owed (and owe) a fiduciary duty of utmost candour and honesty to investors who acquire or intend to acquire such bonds ("Disclosure Duty"). The respondents were alleged to have breached and continued to breach the Disclosure Duty.
- A claim against the two Australian Government officials alleging that they had breached and continued to breach their obligation to exercise their powers, perform their functions and discharge their duties with care and diligence pursuant to s 25(1) of the Public Governance, Performance and Accountability Act 2013 (Cth) ("PGPA Claims").
Ms. O'Donnell sought declarations to the effect that the alleged conduct and breaches of duty occurred, as well as injunctive relief to restrain the issue of further sovereign bonds until such time as the disclosure documents have been remedied by the inclusion of material climate change information as directed by the Court. No claim was made for damages or compensation.
The Court struck out the Disclosure Duty claim and the PGPA Claims on the basis that Ms. O'Donnell lacked standing to bring those claims. Key to the Court's determination was the absence of any evidence adduced by the Applicant to establish that had she been or were she to be provided with the climate change information, such information would likely have been or would likely be material to her decision as to whether to hold or dispose of her bonds. Without such evidence, Murphy J was not persuaded that Ms. O'Donnell had any "real interest" or "special interest" in the declaratory relief sought and concluded that she therefore lacked standing to bring the Disclosure Duty claim and PGPA Claims.
Use of Representative Action
The Federal Court Rules 2011 (Cth), rule 9.21(1) authorises an applicant to bring a proceeding in a representative capacity, in the following terms:
A proceeding may be started and continued by or against one or more persons who have the same interest in the proceeding, as representing all or some of the persons who have the same interest and could have been parties to the proceeding. (Emphasis added)
The Commonwealth sought to argue that the Court should exercise its discretion to discontinue the representative action as there was "a lack of commonality of interest" between Ms. O'Donnell and members of the represented group. The argument was premised on the effect of the relief sought which would compel corrective disclosures by the Commonwealth and result in a diminution of the value of the bonds, giving rise to loss on the part of the class members. As Murphy J observed, quoting counsel for the Commonwealth—Ms. O'Donnell "is not seeking to vindicate anybody's rights based on loss that they have suffered in the past. She is seeking to cause them loss in the future".
The Court was not persuaded by this argument and observed that a represented person who had the benefit of a declaration that the respondents had engaged in misleading or deceptive conduct would not be disentitled from claiming damages for any loss or damage causally connected to that contravening conduct. Justice Murphy further observed that all represented persons should be given notice of any potential detriment that could result from the relief sought and be provided an opportunity to opt out of the proceeding.
His Honour described arguments made by the Commonwealth that the representative proceeding lacked legitimacy because it was an improper attempt to garner public attention in a "pseudo climate change class action" as having little force (at ). The Court observed that "class actions and other representative procedures are often utilised by individuals, and groups of people, to bring forward cases based in their view of the public interest, doing so on behalf of a class asserted to have the same or similar legal claims and interests" (at ).
His Honour ruled that Ms. O'Donnell's misleading or deceptive conduct claim could continue as a class action.
Four Key Takeaways
- Australia has seen an upward-trending number of legal actions on climate change issues over recent years. This trend has accelerated in 2021 and is likely to continue given the ever-increasing focus of regulators, investors and the community on climate change, both domestically and globally.
- Plaintiffs, including activist shareholders and public interest groups, are finding new ways to deploy litigation to challenge Australian Federal and State governments, corporations and relevant officers on their position on climate-related risks. As a consequence, novel arguments and case theories are being tested which could have implications worldwide.
- This proceeding against the Commonwealth of Australia will bring into sharp focus whether and how the disclosures made in sovereign bond disclosure documents align with Government policies, data and reports, and statements made by the Australian Treasurer and other senior Government officials, concerning the impact and costs of climate change and Government responses to climate change. Similar comparative analyses and litigation risks may arise in other jurisdictions. The action highlights the importance of consistency in the assessment of climate risks which are documented publicly, and the risks, planning and actions that are documented internally through policies, operational strategies, reports and other communications.
- There are likely to be significant hurdles to this action succeeding. However, the action highlights the need for the issuers of bonds and other financial products to consider the disclosure and adequacy of disclosure of climate risks, including macroeconomic risks, in addition to product-specific risks. Such disclosures are likely to be representations as to future matters and as such, care should be taken to ensure that there are reasonable grounds for the disclosures. Under Australian law, an absence of reasonable grounds will have the result that the representation is taken to be misleading, giving rise to potential liability on the part of the person or entity which made the disclosure, as well as any directors or officers who facilitated the representation being made.
Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our “Contact Us” form, which can be found on our website at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.