O’Donnell v Commonwealth of Australia

Equity Generation Lawyers represented Kathleen (Katta) O’Donnell in the first legal action that sought to hold the Australian Government to account over climate change risks.

It was the first, and is still the only, legal action in the world that sought to hold a sovereign nation accountable for not disclosing the risks of climate change to sovereign bond investors.

The class action was filed on 22 July 2020 and was subject to a failed attempt by the Commonwealth to completely strike out the claim.

The matter has been reported by the New York Times, Financial Times, The Economist, Bloomberg, Reuters and all major Australian media outlets.

Michael Burger, Executive Director of the Sabin Centre for Climate Change Law at Columbia University, stated in the Financial Times:

This case, if successful, could fundamentally alter the way national governments and corporations approach climate-related financial disclosures.

Ms O’Donnell, in the class action, represented all retail bondholders who, during the period 7 July 2020 and 20 December 2022 acquired, and continued to hold, one or more units of Australian:

• exchange-traded Treasury Indexed Bonds (eTIB) maturing in 2050 with ASX code GSIC50; and
• exchange-traded Treasury Bonds (eTB) maturing in 2047 with ASX code GSBE47.

Ms O’Donnell, on behalf of the class, sought a declaration that the Commonwealth of Australia misled and deceived investors for the duration of the class period by not disclosing climate change risks in bond issue documents and on the website of the Australian Office of Financial Management.

Ms O’Donnell, on her own behalf, sought a declaration that the Commonwealth of Australia, since 7 July 2020, and continued since then to, mislead and deceive investors by not disclosing climate change risks in bond issue documents. She also sought an injunction to restrain or prohibit behaviour that would result in ongoing misconduct.

Sovereign bond market

Sovereign bonds are issued by nation states to fund government expenditure. The Commonwealth raises debt through a wholesale market for Australian Government Bonds, in which financial institutions participate.

Retail investors, like Ms O’Donnell, participate indirectly in the wholesale market for Australian Government Bonds by obtaining “depository interests” of wholesale bonds. Those depositary interests are traded on the ASX. The prices for retail and wholesale bonds are linked.

As at 8 October 2021, Australia had issued $847 billion in Australian Government Securities.

Key text from the Australian Government’s Intergenerational Report 2021 was reproduced in the judgment on the strike out application:

Climate change is expected to have physical effects and transition effects on Australia’s economy. Physical effects are impacts caused directly by a changing climate. Transition effects relate to the impacts of global and domestic efforts to reduce greenhouse gas emissions. This includes the costs of Australia’s own mitigation efforts, as well as changes to demands for our exports due to mitigation actions by our trading partners. There could also be impacts on global capital flows.

A reduction in real GDP associated with climate change would have a fiscal impact through reducing taxation revenue, as well as increasing pressure on expenditure. Other revenue sources such as fuel excise and mining royalties could also be affected by changes in demand and consumption related to a global transition away from fossil fuel use.

Any reduction in GDP is likely to be unevenly distributed across sectors and regions. The agricultural sector is particularly vulnerable to the physical effects of climate change, the resources sector is particularly vulnerable to the transition effects, and the financial sector is vulnerable to both.

The decision on the application also cited a 2021 report by FTSE Russell “Anticipating the climate change risks for sovereign bonds Part 2: Insights on financial impacts” dated June 2021.

Amongst other things it states that in a “disorderly transition” scenario in which appropriate climate change policy is not introduced until 2030, leading to deeper emission reductions than in an “orderly transition” scenario, Australia faces a 156% increase in its debt to GDP ratio.

Bond investors are taking climate risk seriously. In November 2019, Sweden’s Central Bank, Sveriges Rijksbank, divested Queensland and Western Australian bonds on the twin bases that Australia is “not known for good climate work” and the issuing jurisdiction’s per capita domestic carbon emissions were so high as to create a financial risk for the bank.

The strike out application

On 11 March 2021 the Commonwealth filed an application to strike out Ms O’Donnell’s claim.

A one-day hearing on the strike out application took place on 29 July 2021 before Justice Murphy of the Federal Court of Australia.

The decision on the strike out application was handed down on 8 October 2021. It is O’Donnell v Commonwealth of Australia [2021] FCA 1223 and can be accessed here.

The Court permitted the claim in misleading or deceptive conduct to proceed and refused the Commonwealth’s application to disband the class action. Ms O’Donnell’s claims with respect to a duty of disclosure and against Commonwealth officials were struck out.

The decision sets out details of the applicant’s claim, including the allegations that:

• physical and transition risks from climate change are material risks for bondholders;
• transition risks will be exacerbated the longer Australia takes to commit to a net zero emissions target and the longer it takes to implement effective measures to reach net zero;
• not disclosing climate change risks to bond investors is misleading or deceptive under s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth).

The Commonwealth sought to strike out the claim in its entirety arguing that the applicant had failed to sufficiently articulate precisely what risks should be disclosed. Justice Murphy rejected that argument and referred to the information asymmetry between the parties.

In relation to the misleading or deceptive conduct claim, the Court found that the Statement of Claim had sufficiently articulated the nature of the dispute for the stage of the proceedings.

Under modern case management principles, the appropriate process was for the applicant to be granted access to internal government documents by way of the ‘discovery’ process. Once those documents were provided, the applicant could then further refine her claim.

The Court disagreed with the Commonwealth’s contention that it had no case to answer. Even despite the information asymmetry, for the purposes of the strike out application, it was found that the applicant had put on sufficient evidence to imply the existence of a case.

The Pleadings

Ms O’Donnell’s Fourth Further Amended Statement of Claim filed on 20 December 2022 is available here.

The Commonwealth’s Amended Defence filed on 3 March 2023 is available here.

Discovery

On 1 July 2022, the Court made orders setting out the categories for discovery to be provided by the parties. Those orders are available here.

Mediation

On 21 March 2023, the Court made orders referring the matter to mediation. Those orders are available here. Mediation took place on 11 May 2023 in Melbourne.

Settlement

On 7 August 2023, the parties informed the Court that, subject to the Court’s approval, they have agreed to settle the proceeding in terms set out in a Heads of Agreement. 

On 14 August 2023, the Applicant filed and served an application for settlement approval. 

The Notice of Proposed Settlement, including the settlement terms as agreed by the parties, is available here.

The settlement application was approved by Justice Murphy of the Federal Court of Australia on 11 October 2023. Reasons for judgment, published on 13 October 2023, are available here. 

As part of the settlement, the parties agreed to publish a statement that contains an acknowledgement that climate change is a systemic risk that may affect the value of government bonds. The statement, as published on the Department of Treasury’s website, is available here. It is also available on our website here.

Ms O’Donnell’s legal team

Ms O’Donnell was represented by Equity Generation Lawyers.

Ron Merkel KC and Thomas Wood were Ms O’Donnell’s counsel.