Director responsibilities are becoming increasingly complex due to mandatory climate reporting. The new reporting regime aims to provide stakeholders with a comprehensive view of how companies are managing their environmental impact and the associated risks.
When a company is required to prepare a sustainability report, directors will need to make a declaration that their sustainability report complies with the Climate Reporting Legislation (including compliance with the mandatory climate reporting standard, AASB S2). Directors must ensure that the report presents a true and fair view of the organisation’s financial performance, position and prospects, ensuring it is not misleading or deceptive. In making their declaration, directors must exercise due care and diligence in overseeing the robustness of corporate reporting systems and processes, and in assessing the materiality of climate-related risks and opportunities to their organisation.
Climate reporting will require entities to make certain forward-looking disclosures such as:
- significant climate-related risks and opportunities
- anticipated changes to the organisation’s business model
- the entity’s transition plan and climate targets, and
- an assessment of how resilient the entity’s strategy and business model are with a scenario analysis at 1.5oC and 2oC warming.
Materiality must consider qualitative as well as quantitative factors such as the industry that the entity operates in and investor expectations of what constitutes a climate-related risk. The potential impact on the entity and if omission could qualitatively influence investors’ decisions, regardless of the quantitative impact on the financial statements.
Liability can arise not only for any misleading disclosure, but for a breach of the duty of due care and diligence where a director has failed to apply adequate diligence to their oversight of the organisation’s systems for financial reporting.
Under the Corporations Act 2021, ASIC Regulatory Guide 247, ASX listing rules, even if an entity is not covered by mandatory climate reporting the entity may still be required to disclose a climate-related risk, if it is considered to be material, in its financial statements and notes, directors’ report, the corporate governance statement, and has continuous disclosure obligations. Failure to do so may render the financial statements and notes misleading or deceptive and put the directors at risk.
Modified liability settings will apply to sustainability reports prepared for financial years commencing between 1 January 2025 and 31 December 2027, in relation to statements made about Scope 3 greenhouse gas emissions, scenario analysis and transition plans. However, this will not apply where ASIC considers the disclosures to be greenwashing.
Additionally, the ACCC has been active in taking greenwashing cases. Mercer Superannuation was penalised $11.3 million for misleading statements regarding its ‘Sustainable Plus’ investment options, and Clorox received an $8.25 million penalty for misleading ‘ocean plastic’ claims about certain GLAD products.
Mandatory climate reporting represents a pivotal change in corporate governance requirements. In order to meet these requirements, preparation will be the key as the requirements cover governance and strategy. Directors who embrace this responsibility will not only safeguard their organisation but also play a crucial role in shaping a sustainable future.
Contact your HLB Mann Judd adviser should you wish to learn more.