In the matter of Kathleen O’Donnell versus the Commonwealth Of Australia – 22 July 2020 to 11 October 2023.
Ms. O’Donnell commenced a class action against the Australian Government during a period when Josh Frydenberg was Treasurer, Simon Birmingham was Minister for Finance, Christian Porter was Attorney-General and Prime Minister Scott Morrison had acquired the first two (Health & Finance) of five secret ministries. It was also a period where the nation was still coming to terms with the largescale impacts of climate change-induced megafires in the August 2019- March 2020 fire season.
This class action which ran for over three years eventually caused the Australian Government to declare a potential for financial risks with regard to certain classes of investors in the face of the systemic risk climate change poses to Australia’s financial and economic position.
FEDERAL COURT OF AUSTRALIA
O’DONNELL V COMMONWEALTH OF AUSTRALIA [2023] FCA 1227
ORDERS VID 482 of 2020
Excerpts from the order - all yellow highlighting is my own
REASONS FOR JUDGMENT
MURPHY J:
INTRODUCTION
1 This is an application for Court approval of the proposed settlement of a representative proceeding brought under Div 9.2 of the Federal Court Rules 2011 (Cth) (the Rules). The applicant, Kathleen O’Donnell, brings the proceeding against the respondent, the Commonwealth of Australia, doing so on her own behalf and on behalf of all persons who at any time on or since 7 July 2020 have acquired one or more Exchange-traded Australian Government Bonds units (exchange traded government bonds) in the form of an eTIB with code GSIC50; and/or one or more government bonds in the form of an eTB with code GSBE47, and who continue to hold one or more government bond as at the date of the fourth amended pleading, 20 December 2022 (group members).
2 The proceeding relates to the real, but until more recently, underacknowledged risks that climate change poses to Australia’s financial position. It alleges that the Commonwealth published information to investors and potential investors in exchange traded government bonds via “Information Statements”, “Term Sheets”, “Information Memoranda”, and a relevant website, and that the Commonwealth failed to disclose information about:
(a) the alleged physical risks of climate change, meaning impacts caused directly by a changing climate, and associated costs; and/or
(b) the alleged transition risks of climate change, meaning the impact of global and domestic efforts to reduce greenhouse emissions, and associated costs.
3 The proceeding alleges that the existence of those risks mean that there was and is a real, rather than remote, risk that before the maturity dates of the exchange traded government bonds held by the applicant, there will be significantly increased Commonwealth budget deficits (by reason of reduced revenue and increased expenditure) relative to Australia’s annual GDP; and a significant increase in Commonwealth government borrowing, and accordingly a significant increase in government debt (relative to Australia’s annual GDP). In turn, and as a result of those risks, prior to the maturity date of the exchange traded government bonds held by the applicant and group members, it is alleged that there will be or is likely to be:
(a) a material and negative impact on the Commonwealth’s status and reputation as a reliable, safe and relatively risk-free insurer of sovereign debt securities;
(b) a higher risk of the Commonwealth not having the capacity to discharge its interest and principal obligations under the exchange traded government bonds held by the applicant and by the other persons holding exchange traded government bonds at the material times;
(c) a material and negative impact on the Commonwealth’s capacity to maintain its AAA status as an issuer of sovereign debt securities; and
(d) a likelihood of the Commonwealth heaving to pay higher interest rates than would otherwise be the case in respect of any new issue of exchange traded government bonds.
4 It is alleged that by failing to disclose material climate change information (being information that might reasonably be expected to have a material influence on the holders of exchange traded government bonds as to whether to hold or dispose of them and decisions by potential investors as to whether to purchase such bonds) the Commonwealth engaged in and continues to engage in conduct that is misleading or deceptive and/or likely to mislead or deceive in breach of s 12DA(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).
5 The proceeding seeks a declaration that the Commonwealth has engaged in misleading or deceptive conduct, but not damages.
6 Under the proposed settlement the Commonwealth has agreed to make a public statement in agreed terms regarding the systemic risk climate change poses to Australia’s financial and economic position, to be published on the website of the Department of Treasury within seven days. In return the applicants have agreed to seek Court approval of the proposed settlement and to seek leave to discontinue the proceeding on the basis that there be no order as to costs. The Commonwealth has agreed to support that application.
7 The agreed public statement includes the following:
4. Climate change is a systemic risk that presents significant risks and opportunities for Australia’s economy, regions, industries and communities. Achieving Australia’s emissions reduction commitments and realising the opportunities that accompany the transition will require significant investment by governments and the private sector. Uncertainty around the magnitude and timing of the physical impacts of climate change and the global transition to net zero emissions translates to uncertainty about the fiscal impacts of climate change. And, as a consequence, there is uncertainty about whether the fiscal impacts of climate change may affect (if at all) the value of Commonwealth Government Securities (also known as Australian Government Bonds or AGBs) and, in turn, eAGBs.
5. The economic and climatic changes brought about by climate change will have fiscal impacts. For example, the new industries and jobs emerging from the net zero transformation will impact the structure of the economy and, in turn, the tax base. Extreme weather events are also expected to occur with increased severity and frequency, which will increase demand for disaster relief payments and infrastructure repairs.
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7. The Government is developing a package of sustainable finance reforms, including the establishment of a sovereign green bonds program and regulatory reforms, to increase the transparency and credibility of Australia’s growing sustainable finance market. The Government’s intention is that these reforms will assist investors to align their investment decisions with net zero emissions targets and increase the flow of capital towards new opportunities that support Australia’s net zero pathway.
8. In accordance with the requirements of the Climate Change Act 2022 (Cth), the Commonwealth will continue to publish an Annual Climate Change Statement. Among other things, the Annual Climate Change Statement addresses the risks to Australia from climate change impacts, such as those relating to Australia’s economy. The first Annual Climate Change Statement was tabled in Parliament on 1 December 2022 and may be found at https://www.dcceew.gov.au/climate-change/strategies/annual-climate-change-statement.
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39 Turning then to the Commonwealth’s second point, it submits that another core difficulty with the applicant’s case is that it takes, in isolation, one possible cause of risks for the Australian economy and seeks to extrapolate from those risks an unpleaded and unprovable effect on exchange traded government bonds. It argues that after at least four attempts to plead her case over three years the applicant has still not been able to articulate:
(a) what risks she alleges the Commonwealth should have disclosed;
(b) what obligations she alleges the Commonwealth would not be able to honour (for example, the annual interest or the redemption of the exchange traded government bonds at maturity) and why, and when;
(c) how it is alleged that the Commonwealth would not be able to perform its obligations with respect to the applicant’s exchange traded government bonds considering that the Commonwealth has never defaulted on sovereign debt even in circumstances of global economic downturn;
(d) why the alleged climate change related risks would give rise to a reasonable expectation that those matters would be disclosed considering that the Commonwealth may have increases in expenditure and decreases in revenue caused by number of domestic and global circumstances and events including natural disasters, wars and pandemics unrelated to climate change; and
(e) how the information the applicant alleges the Commonwealth has not disclosed would have a material effect on the price of the exchange traded government bonds being traded on the market when the information she alleges has not been disclosed by the Commonwealth must be publicly known (if it is true) because it is referred to in the statement of claim in the proceedings.
40 These contentions are not without force, but they overstate the position. I doubt that it will be as difficult as the Commonwealth submits to establish that global warming and climate change gives rise to real, systemic risks to the Commonwealth’s coffers and therefore to the value of the change traded government bonds. For the purposes of the application I take judicial notice of the fact that the consensus position of leading climate scientists around the world is that global warming and climate change brings risks of more frequent and more intense bushfires, storm surges, coastal flooding, inland flooding, cyclones, droughts and other extreme weather events. To my mind, it seems likely that such events will give rise to a huge drain on Commonwealth resources and on the tax base over a very lengthy period, perhaps forever, and therefore also weigh on forecasts in relation to the Commonwealth’s financial and economic position.
41 I note that in Sharma v Minister for the Environment [2021] FCA 560; 391 ALR 1, Professor William Steffen, Emeritus Professor at the Fenner School of Environment and Society at the Australian National University gave unchallenged evidence that “[a]s an overview, the planet’s atmosphere and ocean are heating at an increasing rate, polar ice is melting, extreme weather events are becoming more extreme, sea levels are rising, and ecosystems and species are being lost or degraded” (at [54]). He gave evidence that, if over multiple decades the global average surface temperature could be stabilised at or very close to 2°C above the pre-industrial level (which was the best available outcome, and there are real risks it may not be achieved) the effects for Australia would include a significant increase in the likelihood in any given year of extreme weather events: a 77% likelihood of severe heatwaves, power blackouts and bushfires; and a 74% likelihood of severe droughts, water restrictions and reduced crop yields (at [67]).
42 Based on climate modelling by the CSIRO and the Commonwealth Bureau of Meteorology he projected the following changes to Australia’s climate over the next few decades (at [67]):
• Continued warming, with more extremely hot days and fewer extremely cool days.
• A decrease in cool season rainfall across many regions of the south and east, likely leading to more time spent in drought.
• A longer fire season for the south and east and an increase in the number of dangerous fire weather days.
• More intense short-duration heavy rainfall events throughout the country.
• Fewer tropical cyclones, but a greater proportion projected to be of high intensity, with ongoing large variations from year to year.
• Fewer east coast lows particularly during the cooler months of the year. For events that do occur, sea level rise will increase the severity of some coastal impacts.
• More frequent, extensive, intense and longer-lasting marine heatwaves leading to increased risk of more frequent and severe bleaching events for coral reefs, including the Great Barrier and Ningaloo reefs.
• Continued warming and acidification of its surrounding oceans.
• Ongoing sea level rise. Recent research on potential ice loss from the Antarctic ice sheet suggests that the upper end of projected global mean sea level rise could be higher than previously assessed (as high as 0.61 to 1.10 m global average by the end of the century for a high emissions pathway, although these changes vary by location).
• More frequent extreme sea levels. For most of the Australian coast, extreme sea levels that had a probability of occurring once in a hundred years are projected to become an annual event by the end of this century with lower emissions, and by mid-century for higher emissions.
Professor Steffen projected much worse effects if the global average surface temperature could not be stabilised at a 2°C increase, and instead increased by about 3°C or 4°C: at [68] and [69].
43 The respondent in that proceeding was the Commonwealth Minister for the Environment. The Minister made no challenge to the scientific evidence advanced by the applicants, and by and large did not dispute “the nature of the risks and the dangers from global warning, including the possible catastrophe that may engulf the world and humanity”: see Minister for the Environment v Sharma [2022] FCAFC 35; 291 FCR 311 at [2]. There are good reasons to doubt that the Commonwealth would take any different stance in the present case in relation to the risks posed by climate change.
44 To my mind, it does not stretch imagination to think that the applicant may be able to establish that climate change bringing rising sea levels and coastal erosion, storm surges causing sea flooding of low-lying areas, more intense and more regular fires and floods, and droughts caused by increased temperatures and reduced rainfall, carries a real risk that it will have a substantial impact on communities, business, government infrastructure and the environment. In some areas insurance against bushfires and extreme weather events may become unavailable, or prohibitively expensive such that it is effectively unavailable. There may be an exodus of residents and businesses from some areas because of repeated and intense fires, floods, and other extreme weather events or the risk thereof. There must be a risk that the government will be forced to meet the substantial costs that result where individuals and businesses cannot do so, including through home buyback schemes, public housing projects, farm relocation assistance and the like. And it seems likely that there will be substantial costs for the Commonwealth government in protecting government infrastructure from such events, repairing or remediating government infrastructure after such events, and relocating core government services such as schools and hospitals. And if businesses and employment opportunities are degraded the tax base available to fund government expenditure reduces.
45 Of course, in a wealthy country like Australia, which has never defaulted on its sovereign debt obligations, it is likely to be complex and difficult for the applicant to establish that catastrophes of the nature described are likely to be such a drain on the public purse that there is a material risk that the Commonwealth may, in the future, be unable to perform its obligations with respect to exchange traded government bonds. Doing so will require the applicant to call expert witnesses about the relationship between such catastrophes, or the likelihood of them, on Australia’s financial and economic position and the likely effect on the value of exchange traded government bonds, in circumstances where there is no internationally agreed framework for assessing such risks. And it will be necessary for the applicant to prove any underlying assumptions about Australia’s economic and financial position and assessments about that position in the future so that the experts engaged in her case can express their opinions in terms applicable to Australia’s particular circumstances. This will be far from straightforward, and it will involve real complexities and difficulties for the applicant. There must be a real risk that the applicant will be unable to establish this.
46 Ninth, the applicant’s case has always been that the Commonwealth provided no information whatsoever to investors and potential investors about any risks of material adverse impacts on the Commonwealth’s financial position and to the value of the relevant exchange traded government bonds as a result of climate change. The information to be provided by way of the agreed public statement is some information about such risks. Whether, in the event the applicant is successful in the proceeding, the Commonwealth would be required to provide more extensive information than this will depend upon the evidence advanced about the extent of any risk found to exist. Put another way, the agreed public statement arguably falls within the range of reasonable outcomes in the proceeding in terms of the disclosure of the risks posed by climate change to the value of exchange traded government bonds.
47 I have accordingly made orders to approve the proposed settlement and to grant leave to the applicant to discontinue the proceeding with no order as to costs.
I certify that the preceding forty-seven (47) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Murphy.
Associate:
Dated: 13 October 2023
