‘A wake-up call’: why this student is suing the government over the financial risks of climate change



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Jacqueline Peel, University of Melbourne and Rebekkah Markey-Towler, University of Melbourne

As the world warms, the value of “safe” investments might be at risk from inadequate climate change policies. This prospect is raised by a world-first climate change case, filed in the federal court last week.

Katta O’Donnell – a 23-year-old law student from Melbourne – is suing the Australian government for failing to disclose climate change risks to investors in Australia’s sovereign bonds.




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Sovereign bonds involve loans of money from investors to governments for a set period at a fixed interest rate. They’re usually thought to be the safest form of investment. For example, many Australians are invested in sovereign bonds through their superannuation funds.

But as climate change presents major risks to our economy as well as the environment, O’Donnell’s claim is a wake-up call to the government that it can no longer bury its head in the sand when it comes to this vulnerability.

Katta O'Donnell smiles at the camera in a long-sleeved black top.
Katta O’Donnell is bringing the class action lawsuit against the Australian government.
Molly Townsend

O’Donnell’s arguments

O’Donnell argues Australia’s poor climate policies – ranked among the lowest in the industrialised world – put the economy at risk from climate change. She says climate-related risks should be properly disclosed in information documents to sovereign bond investors.

O’Donnell’s claim alleges that by failing to disclose this information, the federal government breaches its legal duty. It alleges the government has engaged in misleading and deceptive conduct, and government officials breached their duty of care and diligence.

This is a standard similar to that owed by Australian company directors. Analysis from leading barristers indicates that directors who fail to consider climate risks could be found liable for breaching their duty of care and diligence.

O’Donnell argues government officials providing information to investors in sovereign bonds should meet the same benchmark.

Climate change as a financial risk

Under climate change, the world is already experiencing physical impacts, such as intense droughts and unprecedented bushfires. But we’re also experiencing “transition impacts” from steps countries take to prevent further warming, such as transitioning away from coal.

Combined, these impacts of climate change create financial risks. For example, by damaging property, assets and operations, or by reducing demand for fossil fuels with the risk coal mines and reserves become stranded assets.

This thinking is becoming mainstream among Australian economists. As the Australian Prudential Regulation Authority’s Geoff Summerhayes put it:

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.

Why safe investments are under threat

Sovereign bonds are a long-term investment. Katta O’Donnell’s bonds, for example, will mature in 2050. These time-frames dovetail with scientific projections about when the world will see severe impacts and costs from climate change.

And climate change is likely to hit Australia particularly hard. We’ve seen the beginning of this in the summer’s ferocious bushfires, which cost the economy more than A$100 billion.




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Over time, climate risks may impact sovereign bonds and affect Australia’s financial position in a number of ways. For example, by impacting GDP when the productive capacity of the economy is reduced by severe fires or floods.

Frequent climate-related disasters could also hit foreign exchange rates, causing fluctuations of the Australian dollar, as well as putting Australia’s AAA credit rating at risk. These risks would reduce if the government took climate change more seriously.

Already, some investors are voting with their feet. Last November, Sweden’s central bank announced it had sold Western Australian and Queensland bonds, stating Australia is “not known for good climate work”.

Unprecedented, but not novel

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

Australia has been a “hotspot” for climate litigation in recent years, but the O’Donnell case is the first to sue the Australian government in an Australian court.

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

The O’Donnell case is also unique in its focus on sovereign bonds. But cases alleging misleading climate-related disclosures are themselves not new.

In Australia, shareholders sued the Commonwealth Bank of Australia in 2017 for failing to disclose climate change-related risks in its 2016 annual report. The case was settled after the bank agreed to improve disclosures in subsequent reports.




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In another headline-making case, 23-year-old council worker Mark McVeigh is taking his superannuation fund, Retail Employees Superannuation Trust, to court seeking similar disclosures.

The O’Donnell case builds on this line of precedent, extending it to disclosures in bond information documents. As such, courts will likely take it seriously.

What precedent might it 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.

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. 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, much in the way that the Urgenda case has spawned copycat proceedings from Belgium to Canada.

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’s clear climate-related financial risks have entered the corporate boardroom. With this case, they’ve now come knocking at the government’s door.The Conversation

Jacqueline Peel, Professor of Environmental and Climate Law, University of Melbourne and Rebekkah Markey-Towler, Research assistant, University of Melbourne

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Why is the Australian energy regulator suing wind farms – and why now?



Michael Coghlan/Flickr, CC BY-SA

Samantha Hepburn, Deakin University

The Australian Energy Regulator (AER) is suing four of the wind farms involved in the 2016 South Australian blackout – run by AGL Energy, Neoen Australia, Pacific Hydro, and Tilt Renewables – alleging they breached generator performance standards and the national electricity rules.

These proceedings appear to contradict the conclusions of a 2018 report which said while the AER had found some “administrative non-compliance”, it did not intend to take formal action given the “unprecedented circumstances”.




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However the AER has since said this report focused on the lead-up and aftermath of the blackout, not the event itself. The case hinges on whether the wind farms failed to provide crucial information during the blackout which hindered recovery.

In particular, the AER is arguing the software protecting the wind farms should have been able to cope with voltage disturbances and provide continuous energy supply. On the face of it, however, this will be extremely difficult to prove.

Rehashing the 2016 blackout

The 2016 South Australian blackout was triggered by a severe storm that hit the state on September 28. Tornadoes with wind speeds up to 260 km/h raced through SA, and a single-circuit 275-kilovolt transmission line was struck down.




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After this, 170km away, a double-circuit 275kV transmission line was lost. This transmission damage caused the lines to trip and a series of subsequent faults resulted in six voltage dips on the South Australian grid at 4.16pm.

As the faults escalated, eight wind farms in SA had their protection settings activated. This allowed them to withstand the voltage dip by automatically reducing power. Over a period of 7 seconds, 456 megawatts of power was removed. This reduction caused an increase in power to flow through the Heywood interconnector. This in turn triggered a protection mechanism for the interconnecter that tripped it offline.

Once this happened, SA became separated from the rest of the National Energy Market (NEM), leaving far too little power to meet demand and blacking out 850,000 homes and businesses. A 2017 report found once SA was separated from the NEM, the blackout was “inevitable”.




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What went wrong at the wind farms?

The question then becomes, is there any action the wind farms could reasonably have taken to stay online, thus preventing the overloading of the Heywood interconnector?

The regulator is arguing the operators should have let the market operator know they could not handle the disruption caused by the storms, so the operator could make the best decisions to keep the grid functioning.

Wind farms, like all energy generators in Australia, have a legal requirement to meet specific performance standards. If they fall short in a way that can materially harm energy security, they have a further duty to inform the operator immediately, with a plan to remedy the problem.

To determine whether a generator has complied with these risk management standards, a range of factors are considered. These include:

  • the technology of the plant,
  • whether its performance is likely to drift or degrade over a particular time frame,
  • experience with the particular generation technology,
  • the connection point arrangement that is in place. A generator will have an arrangement with a transmission network service provider (TNSP) that operates the networks that carry electricity between generators and distribution networks. TNSP’s advise the NEM of the capacity of their transmission assets so that they can be operated without being overloaded.
  • the risk and costs of different testing methods given the relative size of the plant.

Plenty of blame to go around

The series of events leading up to the 2016 blackout was extremely difficult to anticipate. There were many factors, and arguably all participants were involved in different ways.

  • The Heywood interconnector was running at full capacity at the time, so any overload may have triggered its protective mechanism.

  • The transmission lines were damaged by an unprecedented 263 lightning strikes in five minutes.

  • The market operator itself did not adopt precautionary measures such as reducing the load on the interconnector, or providing a clearer warning to electricity generators.

Bearing this in mind, the federal court will be asked to determine whether the wind farms complied with their generator performance standards and if not, whether this breach had a “material adverse effect” on power security.

This will be difficult to prove, because even if the generator standards require the wind farms to evaluate the point at which their protective triggers activated, it is unlikely the number of faults, the severity of the voltage dip, and the impact of the increased power flow on the Heywood interconnector could have been anticipated.




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The idea AEMO could have prevented the blackout if the wind farms had alerted it to the disruptive potential of their protective triggers is probably a little remote.

None of the participants could have foreseen the series of interconnected events leading to the blackout. Whilst lessons can be learned, laying blame is more complex. And while compliance with standards and rules is important, in this instance, it is unlikely that it would have changed the outcome.The Conversation

Samantha Hepburn, Director of the Centre for Energy and Natural Resources Law, Deakin Law School, Deakin University

This article is republished from The Conversation under a Creative Commons license. Read the original article.