Climate chang(ing) the scope of Lender due diligence and annual reporting


On 7 August 2017, an Australian couple (the Applicants) filed a law suit against the Commonwealth Bank of Australia (CBA), where they allege that the CBA failed to disclose material risks in relation to climate change in their financial report for the 2016 financial year (CBA Application). As a listed company on the Australian Securities Exchange, CBA is required to prepare an annual financial report which is required to include its annual financial statements (AFS), notes on the AFS and an annual director's report in terms of the Corporations Act, 2001. South African companies have similar reporting obligations in terms of the Companies Act, 2008 and, in the case of public companies, the Johannesburg Stock Exchange Listing Requirements. The Applicants allege that by failing to identify the risks associated with the climate change impacts of the bank's investments, CBA had failed to disclose material issues that could impact the CBA's financial position and contravened the Corporations Act, 2001. The Applicants make particular reference to CBA's possible investment into the controversial Adani Carmichael coal mine project. Environmental groups have challenged the climate change impact of the project which is alleged to pose a significant threat to the Great Barrier Reef and forego numerous renewable energy opportunities in Australia. Our Companies Act, 2008 has a similar qualification that stipulates that the AFS of a company must not be "false or misleading in any material respect." The company's auditors are required to ensure that the AFS fairly represents the present financial position of the company being audited. Auditors essentially check that the information presented is accurate within an acceptable margin of error.

International implications - what does this mean for South African businesses?

The CBA Application, if successful, would set a significant precedent. Although we think reasonableness will prevail in this case, banks, other funding institutions and companies should take cognisance of these developments which highlight the global push to deal with the impacts of climate change.

At the very least, we suspect that climate change impact assessments will soon form part of the due diligence processes of any major investment / transaction and auditors will start requesting climate change monitoring reports before signing off on AFSs for companies.

We will be keeping a close eye on this case.