The Australian government is currently consulting (summarised) on how and when a new mandatory sustainability reporting regime will be introduced. The new regime is proposed to be aligned with the requirements in draft global standards currently under development by the International Sustainability Standards Board – [Draft] IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (General Requirements Exposure Draft) and [Draft] IFRS S2 Climate-related Disclosures.
Among other things, the consultation paper seeks views on whether/how the Australian Securities and Investment Commission's (ASIC’s) existing advice for forward-looking statements – ie that they must be made on ‘reasonable grounds’ (with reference to s769C and s728(2) of the Corporations Act) – should be applied in the context of sustainability disclosures.
In particular, the consultation paper seeks feedback on 'whether other mechanisms' such as a safe harbour for Scope 3 emissions (as is being contemplated in the US) should be considered.
Ahead of the close of the consultation on 17 February 2023, the Australian Council of Superannuation Investors (ACSI), the Responsible Investment Association of Australasia (RIAA) and the Investor Group on Climate Change (IGCC) released a new legal opinion from Sebastian Hartford-Davis and Kellie Dyon addressing the following three questions.
- Whether the introduction of the requirements in the ISSB's draft climate standard in relation to forward-looking statements, would expose directors of publicly listed companies to 'heightened liability risks'
- Whether a safe-harbour regime attaching to forward-looking sustainability disclosures is desirable/warranted in the Australian context; and
- What general principles boards should follow in order to minimise liability concerns in this context.
The opinion builds on the landmark 'Hutley Opinions' by Mr Hartford-Davis and Noel Hutley SC, which confirmed that directors have a duty to consider and manage climate risk. MinterEllison acted as instructing solicitors on both the Hutley Opinions and the current brief. Our key takeaways are below.
The introduction of ISSB-aligned disclosure requirements would not expose directors to heightened risk
The authors opine that as directors of listed companies in Australia are already legally required to disclose material sustainability-related risks, the proposed requirements in the ISSB draft standards merely require 'disclosure of things which in our opinion company directors should already be considering in the proper discharge of their duties as directors'.
The authors state:
'although the ISSB Draft Standards increase the number and kinds of forward-facing matters that directors are required to disclose, for diligent company directors properly supported by competent management, the ISSB Draft Standards should not increase directors’ exposure'.
The authors actually suggest that the draft standards may be of practical assistance to directors by providing clarity around (largely) existing expectations. The authors state:
'…the ISSB Draft Standards have a significant capacity to assist company directors by identifying with clarity and particularity the things that s 180(1) probably already requires them to be doing and Part 2M.3 requires the company to disclose, where those things are otherwise perhaps currently not very well appreciated. Further, the ISSB Draft Standards will assist company directors to make sure that management is already carrying out the kinds of functions which will minimise liability risk to the greatest extent possible'.
A likely uptick in companies being found to have made misleading statements
Importantly, the authors draw a distinction between the likely increase in the number of companies being found to have breached their disclosure obligations when ISSB-aligned standards are implemented, and an increase in liability risk for directors (who are already acting in line with their existing legal obligations).
The authors state:
'…in our opinion, at a practical level, the ISSB Draft Standards (if implemented) are likely to expose existing bad practice to a greater degree than is presently visible. To the extent that the ISSB Draft Standards increase the number and kinds of things required to be disclosed, there is probably a statistical increase in the probability of companies being found to have made misleading statements. In that sense, there may be a numerical increase in claims / investigations, and a corresponding increase in the exposure of directors. But that is not to say there will be an increase in the scope or magnitude of risk for directors acting with due diligence and properly supported by competent management'.
A safe harbour regime is neither 'necessary nor desirable'
Given that the authors do not consider that the introduction of ISSB-aligned standards would expose directors to heightened liability risk, they consider the introduction of a safe harbour for forward looking statements to be both 'unnecessary and undesirable'.
Broadly, this is because the authors consider that:
'The legal requirement to have a “reasonable basis” for the making of forward-looking statements is capable of being sensitive to the inherent uncertainties in the scope, distribution, impacts and timing of the impacts of climate change. Directors must make a genuine assessment as to the appropriateness of the forward-looking disclosure at the time it is made, but they will not face liability merely because their assessment later turns out to be incorrect'.
Uncertainty created by evolving scientific understanding/methodologies is no justification
The authors reject any argument that the introduction of a safe harbour is justified on the basis that our scientific understanding and methodologies for the measurement/quantification of risk are still evolving. This is because, in the authors' view:
'under existing law, a forward-looking statement is not misleading merely because it later turns out to be wrong or based on science or methods that were later overtaken. A forward-looking statement which later turns out to be wrong might be found to have been made on a reasonable basis at the time, if for example it was consistent with the best available science at the time. Investors and courts do not expect companies to predict the unpredictable, but instead to make sensible disclosures on a reasonable basis, and to update earlier disclosures if they become misleading by reason of later events.'
Safe harbour for Scope 3 emissions is not warranted
While acknowledging and 'sharing' the concerns around disclosure of Scope 3 emissions, the authors ultimately conclude that a safe harbour for Scope 3 disclosures is not 'truly required'. This is because in the authors' view:
'Generally speaking, the company is permitted to rely on disclosures by others, and on the best available information. To use a supplier’s reported Scope 1 and 2 emissions as a basis for reporting a company’s own Scope 3 emissions likely would furnish a reasonable basis, provided that there was not some reason to mistrust the reporting of emissions by others, and provided that it is accompanied by adequate disclosures regarding the reliability of the data or necessary proxies on which that information has been based'.
Eight principles to minimise director liability
The opinion concludes by setting out the following eight principles for boards looking to minimise liability concerns associated with forward-looking climate-related disclosures.
- 'individuals and committees within the organisation and at board-level should be specifically tasked with governance responsibilities, and with assembling information to provide directors with assurance that there is a reasonable basis for forward-looking statements';
- 'processes should be put in place to assess, measure and report on climate-related risks and opportunities on a continuous basis';
- 'ongoing monitoring systems should be put in place to identify if updates are required to climate-related disclosures over time'
- 'expert input should be obtained and expressly referenced in disclosures';
- 'forward-looking disclosures may be the subject of specialist independent assurance';
- 'disclosures of forward-looking climate-related information and scenario analysis of physical and transitional risks should be accompanied by a description of the assumptions and methodologies used to develop the information, as well as the time periods covered and the risks that the predictions will not materialise…Assumptions should be as specific as possible';
- 'warnings and cautionary language should also be used' noting the guidance in ASIC RG 170 Prospective financial information at RG 170.94
- 'consideration should be given to the requirements of ASIC guidance in relation to forward-looking financial information. For example, adopting the approach set out in ASIC RG 170.59, investors should be given enough information to enable them to: (i) assess whether the forward-looking climate-related disclosure is relevant and reliable (i.e. to form their own view about how reasonable the grounds are for making the statement); and (ii) identify with certainty the facts and circumstances that support prospective climate-related information, as well as being able to demonstrate that the information is reasonable'.
What does this mean for boards?
As is underlined by this latest opinion, Australian listed companies and financial institutions are already legally obliged to report on material risks to their business, including sustainability reporting risks.
In light of this, even in the absence of the proposed mandatory, standardised and internationally aligned disclosure regime foreshadowed in the government's consultation, it would be imprudent for entities to assume that they currently have no obligation to consider and disclose material climate and sustainability-related risks and the impact of these risks on their financial prospects, position and performance. This has been emphasised by both ASIC and the AASB for a number of years.
It would also be imprudent for directors not to lean into questions of how they can improve their existing oversight of their organisations' reporting practices and capability to ensure they are meeting their existing legal obligations.