O'Donnell v Commonwealth sovereign bonds case settles ... - The Australian Financial Review

Federal court: Katta O’Donnell v Commonwealth sovereign bonds case settles; government acknowledges climate change risk

Government settles climate risk to bonds case, makes a key concession

Hannah Wootton Reporter

The federal government was forced to acknowledge the potential risks of climate change on the value of sovereign bonds as it settled a landmark case on Monday that alleged it had misled or deceived investors, and the Federal Court judge involved said global warming would likely be “a huge drain on Commonwealth resources”.

In a three-year legal battle, bondholder and law student Katta O’Donnell, 26, pushed the Commonwealth to declare climate change risk associated with bonds and to ban the promotion and sale of bonds until such a declaration was made.
Katta O’Donnell and the Commonwealth have settled the law student’s claim that it is obliged to disclose climate risk to sovereign bonds. Josh Robenstone

The government maintained that it was not obliged to disclose climate change risk to sovereign bondholders, despite imposing similar duties on private companies and admitting it may need to support businesses and individuals hurt by global warming.

But a statement published on Monday as part of the settlement said the economy faced “significant risks” from climate change and that it was not yet clear whether this would bite into the value of government bonds.

“Climate change is a systemic risk that presents significant risks and opportunities for Australia’s economy,” says the statement, which was posted on the Treasury website.

“The economic and climatic changes brought about by climate change will have fiscal impacts” which “may affect” the value of sovereign bonds, it says.

While uncertainty about the magnitude and timing of global warming’s “physical impacts” and the energy transition meant it was not yet clear what those consequences on value would be, the statement acknowledged that credit rating agencies were increasingly examining the relationship between climate change and sovereign bonds.

In exchange, Ms O’Donnell agreed to drop a claim that the Commonwealth engaged in misleading conduct and agreed that there would be no legal costs orders in the case.

The case was one of several before the courts in which applicants are trying to improve climate change disclosures and emissions reduction policies before alleged environmental harm occurs.

Warning signal

Equity Generation Lawyers associate Clare Schuster, who represented Ms O’Donnell, said the settlement was “an important step forward in acknowledging this evolving connection between climate change and the financial system”.

“Before this case was filed in July 2020, a lot of the focus of climate risk was to companies and to the stockmarket, whereas we think our client’s case has really brought to light the fact that climate change will have a really significant impact on sovereign debt as well,” she said.

“As a result of the settlement, investors get better disclosure via Treasury’s website, and I think it signals more broadly to the rest of the US$91 trillion global bond market that climate change not only poses risks but that governments should be doing something about them.”

Approving the settlement, Federal Court Justice Bernard Murphy said there was scientific consensus that climate change would bring risks of significant extreme weather events and that this would likely hit government coffers.

“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,” he said.

He pointed to the possible exodus of residents and businesses from disaster-prone areas as one possible “substantial cost”, as the government may have to foot the bill for those moves and to protect public infrastructure against extreme weather.

But he said it was “likely to be complex and difficult” for Ms O’Donnell to prove that these factors amounted to a material risk that Australia would default on the bonds, contributing to his approval of settling the case.

Hannah Wootton is a reporter for the Financial Review. Connect with Hannah on
hannah.wootton@afr.com

Introducing your Newsfeed

Follow the topics, people and companies that matter to you.
Find out more

Read More

Latest In Financial services

Fetching latest articles