O’Donnell v. Commonwealth

The plaintiff, Ms. Kathleen O’Donnell, is a 23-year-old law student who invests in government bonds. The Australian Corporations Act 2001 requires that investors in government bonds are provided with an information statement that sets out the general risks of investing in sovereign bonds.

Ms. O’Donnell is bringing a class action proceeding on behalf of all persons who also hold certain government bonds, alleging that the Australian Commonwealth’s investor information statements (Information Statements) were misleading as they failed to disclose the risks of climate change to potential investors.

Government bonds (also known as sovereign bonds) are issued by countries to fund government spending. Retail investors, like Ms. O’Donnell, participate indirectly in the wholesale market for Australian Government Bonds by trading on the Australian Stock Exchange. As of October 8, 2021, Australia had issued $847 billion AUD in Australian Government Securities.

Climate change presents real risks to the future value of government bonds. Climate change will require governments around the world to increase spending on mitigation and transitional measures, as well as on policies required to reach the targets of the Paris Agreement. At the same time, climate change will have potentially disastrous effects on industries such as agriculture and tourism. Other revenue sources, such as Australia’s fossil fuel sector, will also likely be affected by changes in demand and consumption related to the global transition away from fossil fuel use.

Ms. O’Donnell alleges that the government’s failure to disclose the risks of climate change breached three obligations:
(1) Its duty to not engage in misleading or deceptive conduct under the Australian Securities and Investments Commission Act 2001 (ASIC Act);
(2) Its fiduciary duty of candor and honesty to investors; and
(3) Its duty under the Public Governance, Performance and Accountability Act 2013 (PGPA Act).

The respondents moved to dismiss Ms. O’Donnell’s claim, arguing that it did not include any reasonably arguable cause of action. The respondents also tried to prevent Ms. O’Donnell from bringing the case as a representative proceeding (i.e., class action suit).

Strike-Out Judgment

On October 8, 2021, Judge Murphy of the Federal Court of Australia dismissed the respondents’ strike-out application (i.e., request to dismiss) with respect to the misleading and deceptive claim and allowed Ms. O’Donnell to continue the case as a class action/representative proceeding.

As the proceeding concerned a request to dismiss the case, the Court’s focus was on the nature of the plaintiff’s pleadings (i.e., submissions to the Court) and whether they complied with technical pleading requirements. Although Judge Murphy recognized that the applicant’s pleadings were not flawless, this largely was the result of information asymmetries between the parties that would likely be cured through discovery.

Ms. O’Donnell sorted the risks likely to result from climate change that should have been disclosed to potential investors into two categories: physical risk and transition risk.

Physical risk

Physical effects are impacts caused directly by a changing climate. In Australia, anthropogenic climate change is already increasing the frequency and severity of wildfires and droughts, and the warming and acidification of oceans is having disastrous effects on the Great Barrier Reef.

These physical effects will impact the Australian economy and, in doing so, will negatively impact the value of government bonds. They will reduce the profitability of several of Australia’s most profitable industries, including agriculture, natural resources, and tourism, and impact communities located in bushfire, drought, and heatwave-prone areas. The economic impacts of climate change are already clear in Australia. For instance, one estimate is that the true economic costs of the devastating bushfires in 2019-2020 could be as much as $100 billion AUD.

Transition Risk

Transition effects relate to the impacts of global and domestic efforts to reduce greenhouse gas emissions. The policies and measures required of the government to meet its Paris Agreement targets will impact the value of its government bonds.

This is a particular problem in Australia, where the carbon-driven economy depends on fossil fuel exports for income. As a result of other countries seeking to reduce emissions, global demand for exports of Australia’s fossil fuels will likely decrease before 2050, resulting in a reduction in revenue.

In addition, the less time that Australia has to meet the Net Zero Target, the more the government will need to spend on implementing measures and countering any adverse impacts to the Australian economy as a result of its delayed response.

Judge Murphy noted the policy importance of the government completing full and complete disclosures in its Information Statements. Although disclosure does not require the Commonwealth to identify and disclose to potential investors every possible event, economic change, or policy that might impact the value of government bonds, the plaintiff’s pleadings were narrower than that.

The plaintiff argued that climate change is a “significant risk” which “might reasonably be expected to have a material influence on decisions to acquire, hold, or dispose of the bonds” (at ¶114 of the Complaint). Judge Murphy held that the fact that Ms. O’Donnell could not specify the nature of those risks, nor explain which particular information could have been disclosed by the Commonwealth at such an early stage in the proceedings, was not fatal to her claim.

The judge nonetheless held that he would require Ms. O’Donnell to file a revised pleading following discovery.

That said, Judge Murphy did dismiss the other two causes of action on the basis that Ms. O’Donnell lacked standing. She did not have a sufficient interest to meet the “real interest” test required for the fiduciary duty claim, nor a “special interest” as required under the PGPA. The effects of the alleged non-disclosure on Ms. O’Donnell were too abstract and hypothetical, and Ms. O’Donnell had not adduced any evidence that demonstrated her special interest.

A substantive hearing on the misleading and deceptive conduct claim has not yet occurred.

Applying a developed body of law in the context of climate change

Ms. O’Donnell’s arguments draw on corporate law to directly challenge government inaction on climate change. She seeks to apply existing areas of corporate law – typically focused on private sector actors – to government actors. This case builds on the growing consensus on the financial risks of climate change. While there have been other cases which have challenged financial providers’ and companies’ non-disclosure of the risks of climate change, this is the first case using those arguments directly against a national government.

In addition, rather than being centered around environmental planning laws, human rights, or constitutional rights arguments, it seeks to directly hold the Australian government accountable under corporate law principles and obligations.

Standing

Standing continues to be a common challenge for plaintiffs in climate change litigation. Although one of Ms. O’Donnell’s causes of action was not struck out, two of them were on the basis that Ms. O’Donnell lacked standing. The judge did not accept that Ms. O’Donnell had “any real interest in whether the value of her [government bonds] is materially affected by the risks of climate change.” As a result, “her position is no different from any other member of the public.”

The judge did seem reluctant to deny Ms. O’Donnell standing, and his decision turned on the fact that the plaintiff did not file “any evidence” to establish a special interest. In fact, Judge Murphy noted that “it should have been straightforward for the applicant” to have provided such evidence. Potentially, had the plaintiff filed evidence that showed how disclosure of information about the climate change risks would have materially impacted her decision to hold the government bonds, the judge’s decision would have been different. This underscores the importance of filing evidence to support arguments on standing.

Procedural hurdles are not always fatal

This stage of the case was procedural, focusing on the nature and level of detail in Ms. O’Donnell’s pleadings. The respondents argued that the pleadings failed to articulate what information the government should have disclosed and that the causes of action were “pleaded at such a level of generality as to be meaningless.”

The Court rejected these arguments, noting that the “misleading or deceptive conduct claim is relatively straightforward” and that the respondents had sufficient information and knowledge about the claim made against them.

But the Court also emphasized the “substantial asymmetry of information between the applicant and respondents.” This is a common challenge in climate change litigation against governments, as it is the government who will generally be in possession of critical information. In this case, that information concerned the likely risks of climate change on the Commonwealth’s financial position. Given this information asymmetry, Judge Murphy thought it would be unfair to hold the plaintiff to any higher standard.

Regardless of the outcome of the case, it is important to focus on the financial impacts of climate change

Compared to cases focusing on the humanitarian impacts of climate change, there have been few cases focusing on its financial and economic impacts. This case could open the door to other litigation as well as the imposition of higher standards on other financial service providers. It also highlights how all aspects of life, including the economy, stand to be affected by climate change.