From international law to boardroom risk: The ICJ and Directors’ Climate Duties

At its core, the ICJ Opinion confirms that states are subject, under international law, to a duty to prevent significant harm to the climate system. The court recognised limiting global warming to 1.5°C above pre‑industrial levels as the primary temperature goal and framed climate change as a matter engaging fundamental obligations of due diligence.

States must use all means at their disposal to prevent activities within their jurisdiction or control from causing climate harm. That obligation extends beyond state‑owned activities to the regulation of private actors, backed by effective enforcement and monitoring mechanisms.

The court was explicit in identifying certain forms of state conduct that may breach international obligations, including:

• fossil fuel production and consumption;
• the granting of fossil fuel exploration licences; and
• the provision of fossil fuel subsidies.

The ICJ also highlighted the importance of environmental impact assessments, including of downstream and cumulative effects.  A failure to regulate emissions or conduct adequate assessments may constitute internationally wrongful acts.

The court affirmed that the right to a clean, healthy and sustainable environment is inherent in the enjoyment of other human rights. 

Where a state breaches its obligations, it may be required not only to cease the wrongful conduct, but also to revoke legislative or administrative measures and take all necessary steps to reduce greenhouse gas emissions.

While the ICJ Opinion is directed at states, its implications flow directly into domestic regulatory, legislative and litigation risk environments – where corporations and their directors operate.

Climate‑related risks are now well established as foreseeable risks of harm to most, if not all, Australian corporations. This premise underpins the mandatory sustainability reporting regime in Part 2M.3 of the Corporations Act 2001 (Cth), which requires disclosure of material financial climate‑related risks and places ultimate responsibility for those disclosures on directors.

The Advice adopts the definition of climate‑related risks used in sustainability reporting standards: the potential negative effects of climate change on a corporation. These risks are commonly categorised as:

• Physical risks
  Acute, event‑driven risks – such as extreme weather events damaging assets – or chronic risks arising from longer‑term shifts in climate patterns, affecting operations, supply chains or labour availability.
• Transition risks
  Legal, policy, market, technological and reputational risks arising from the transition to a low‑carbon economy. Transition risks can manifest as increased operating costs, asset impairment or reduced demand for products.

Climate‑related risks are not confined to direct financial impacts. They may also pose risks to other interests of the corporation, including its reputation, its ability to operate lawfully, and its standing with regulators, investors and communities. All these interests are relevant to assessing whether a director has met their duty of care.

The ICJ Opinion is likely to amplify both physical and transition risks by accelerating regulatory action, shifting market expectations, and strengthening the legal basis for climate‑related litigation.

The Advice outlines that under section 180(1) of the Corporations Act, directors and officers must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise having regard to the corporation’s circumstances and the director’s role and responsibilities.

This is an objective standard. The corporation’s circumstances include the nature of its business and the risks inherent in its operations. A more exacting standard of care may be expected where a director has particular experience, skills or responsibilities in relation to sustainability or climate‑related matters.

A director may only be liable where their act or omission exposes the corporation to a foreseeable risk of harm. That concept is not limited to immediate financial loss and extends to harm to the corporation’s reputation and its interest in carrying on lawful business, particularly in an evolving regulatory and social environment.

The Advice emphasises that statutory obligations – most notably sustainability reporting obligations – inform the content of the duty of care. Directors are required to take all reasonable steps to comply with, and to secure compliance with, Part 2M.3 of the Corporations Act, including approving declarations as to the accuracy and completeness of annual sustainability reports.

The Advice explains that the ICJ Opinion does not alter directors’ duties directly. Rather, its influence is expected to be felt through legal and regulatory developments that heighten climate‑related risks to corporations. As the magnitude or likelihood of those risks increases, too may the standard of care expected of directors.

There are several pathways by which this may occur.

The ICJ Opinion strengthens the legal basis for more stringent state regulation of emissions‑intensive activities. Governments in Australia and internationally may rely on the ICJ’s reasoning to justify tighter controls on fossil fuel projects, subsidies, approvals and emissions profiles. For corporations whose profitability depends on such activities, this creates a clear risk of harm.

It is already being cited in domestic decision‑making and litigation. It has been relied upon in Australian cases challenging approvals for fossil fuel projects and cited in regulatory and policy processes, including the setting of Australia’s 2035 emissions target. If courts and decision‑makers interpret environmental laws in light of the Opinion, emissions‑intensive projects may face increased difficulty in obtaining approvals.

The ICJ Opinion may influence climate‑related litigation risks. It may be used by states to defend regulatory action against investor‑state claims. Private litigants may rely on it in domestic proceedings, including claims alleging misleading or deceptive conduct – such as representations that activities are ‘Paris‑aligned’ despite expansion of fossil fuel production – or in tort claims for climate‑related harms.

Although Australia is a ‘dualist’ system when it comes to international law, international principles still play a role in statutory interpretation and in the development of the common law. The Advice highlights that the ICJ Opinion may affect corporate exposure even without direct incorporation into domestic legislation.

In this environment, directors who do not properly consider and respond to foreseeable climate‑related risks may expose the corporation – and potentially the directors themselves – to legal, regulatory and reputational harm.