Insights / February 27th, 2023

Will the new mandatory ISSB climate disclosures increase director liability?

In 2016, Noel Hutley SC and Sebastian Hartford-Davis issued an opinion[1]  (“the Hutley & Davis Opinion”) which advised that the director’s duty of care, skill and diligence within section 180(1) of the Corporations Act 2001 (Cth) (“Corps Act”) requires directors to consider and respond to climate change risks to the extent that they intersect with the interests of their entity. In 2023, with impending climate litigation and mandatory climate disclosure requirements, directors are being increasingly scrutinised on their entity’s action against climate change (or lack thereof) and the adequacy of their climate strategies and disclosures.

This article will discuss how a director’s failure to prepare and comply with an appropriate strategy, or to produce adequate climate disclosures aligned with that strategy, may lead to a breach of director’s duties under the Corps Act or allegations of “greenwashing” and whether mandatory climate disclosures will increase a director’s liability.

Mandatory vs voluntary climate disclosures

Mandatory disclosures for climate related risks currently exist for listed companies who must disclose “whether it has any material exposure to environmental or social risks and… how it manages or intends to manage those risks”.[2] For non-listed entities, climate disclosures are currently not mandatory under the accounting standards issued by the Australian Accounting Standards Board (“AASB Standards”).

The International Sustainability Standards Board are finalising IFRS S1 and IFRS S2 (collectively, “the Standards”) for sustainability and climate disclosures which are set to be finalised and released in June 2023 with effect from 1 January 2024. The Standards will become mandatory in Australia upon formal adoption by the Government.[3]

A group of institutional investors sought advice from barristers Sebastian Hartford-Davis and Kellie Dyon on the requirements of the Standards (“ISSB Advice”).[4] This builds on the advice stipulated in the Hartford and David Advice. This ISSB Advice confirms that’s the ISSB Standards are broadly consistent with existing requirements for listed companies in Australia and requires disclosures of items that should already be considered in the proper discharge of a director’s duties. For example, AASB 125 paragraph 101 requires that entities disclose information about future assumptions that “that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities”. Arguably, the existing AASB Standards require entities to report reporting on climate related assumptions and its effects on the balance sheet values.

While the Standards increase the “number and kinds of forward-facing matters that directors are required to disclose”, the Standards should not increase a directors’ exposure. Whilst the Standards will bring about “heightened” expectations of Directors in terms of the “forward looking” information disclosed this does not bring about a heightened risk and reflects the need for directors to adapt and respond to climate risk issues facing their companies”.[5]

Interestingly, the Standards have prompted calls for a “safe harbour” to be introduced for directors for any climate disclosures that are “forward looking” - meaning that directors would not be personally liable for an entity failing to meet those projections. The ISSB Advice has confirmed that a safe harbour for forward looking disclosures is not necessary as the Standards, in providing a consistent disclosure framework, will likely have the overall positive effect of:

(a)     exposing existing bad practices;

(b)     improving sub-standard disclosure practices; and

(c)     standardising the disclosures,

which a safe harbour would actually hinder.[6]

Director’s duties and greenwashing

Whilst the Standards should not increase liability for directors overall, directors should be aware of the risks associated with the content and quality of their disclosures. 

Climate disclosures which are not aligned with an entity’s climate action plan, or climate action plans that fail to meet Australia’s emissions reductions requirements of the Paris Agreement (as encoded in Australia under the Climate Change Act 2022 (Cth)) may result in directors being found personally liable in shareholder cases for breaches of director’s duties.

Directors also need to ensure that their disclosures and climate plans do not misrepresent the extent that their products or services are environmentally friendly or sustainable.  ASIC has now issued penalties to various entities for “greenwashing”, which is the term coined for misleading and deceptive climate and sustainability disclosures.

What does this mean for directors? 

The introduction of mandatory climate disclosures in combination with the string of ASIC action and litigation against entities is a wakeup call to directors to ensure that entities are:

  • developing climate action plans that are aligned with global emissions reduction targets; and 

  • undertaking actions aligned with their climate action plans to address the risks that climate change poses. 

In this waiting period until the implementation of the Standards, directors should be revisiting climate action plans and ensuring that any disclosures made about an entity’s actions not only align with these climate action plans, but also reflect the practical steps being undertaken. 

[1] “Climate change and directors’ duties”, Noel Hutley SC and Sebastian Hartford-Davis, 7 October 2016.

[2] Recommendation 7.4 ASX Corporate Governance Councils Principles and Recommendations.

[3] The consultation period closes 27 February 2023.

[4] “Advice regarding potential liability of Directors under the ISSB Draft Standards for forward looking statements” by Sebastian Hartford-Davis and Kellie Dyon, 16 December 2022.

[5] Ibid.

[6] “Advice regarding potential liability of Directors under the ISSB Draft Standards for forward looking statements” by Sebastian Hartford-Davis and Kellie Dyon, 16 December 2022.

This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice.  You should not act upon the information contained in this publication without obtaining specific professional legal advice.  No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.