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The heat is on: directors facing increased expectations in relation to sustainability disclosures – Climate Change

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In a reflection of the growing influence of stakeholders
including shareholders, investors, customers and employees, the
management of environmental, social and governance (ESG) risks as
part of an integrated approach to strategic decision-making and
operations is now commonplace for corporate

Regulators globally are placing an increasing focus on the
management of sustainability risks, reporting and disclosure. This
is particularly the case for so-called
‘greenwashing’– where inflated or misleading claims
about sustainability credentials are made to attract or retain
customers and investors.

Over the past five years, the conversation in boardrooms around
the world has centred largely on the duties that corporations have
in respect of climate change risks in the context of their ongoing
operations and strategies. In the last two years, the focus for
regulators has pivoted from issuing various notes and guidance to
their regulated markets to enforcing prudent management of
sustainability reporting and disclosure using existing legal

A number of jurisdictions are also seeking to clarify and codify
the obligations on companies to explain how ESG risks are factored
into strategic and operational considerations through regulation.
It therefore seems inevitable that a wave of enforcement activity
will follow in the near future, targeting those entities that
embellish their sustainability credentials and reporting and that
ignore the clear signals from regulators at their peril.

Recent global developments

On 10 March 2021, the European Union (EU)
Sustainable Finance Disclosure Regulation came into force,
requiring asset managers, pension funds and insurers to disclose
how they consider ESG risks in their investment decisions in order
to prevent greenwashing of financial advice.

In February this year, the European Commission released its
long-awaited draft regulation on corporate sustainability and due
diligence, which appears to be the current high watermark in
proposed ESG regulation. The draft regulation has been met with
some opposition, with critics suggesting it is not risk-based and
may pressure some businesses to simply withdraw from certain
markets rather than address the more stringent regulatory
expectations. As drafted, it would require businesses to assess the
actual and potential environmental and human rights impacts of
their operations and supply chains, take action to mitigate and
remedy those impacts and communicate these matters publicly. A
failure to comply could result in administrative penalties and
civil liability.

In July 2022, the Monetary Authority of Singapore released new
disclosure requirements for ESG funds, which come into effect from
January 2023 and specifically seek to reduce greenwashing risks.
This follows an observation by Reuters that there has been a sharp
increase in money flowing into funds that promote misleading ESG

In 2021, following the creation of a Climate, Environmental,
Social and Governance Task Force, the US Securities and Exchange
Commission (SEC) proposed standardised
climate-related disclosure rules for public issuers. The SEC may
also require domestic and foreign private issuers to include
climate-related disclosures in registration statements and periodic

The UK Competition and Markets Authority published its Green
Claims Code in 2021, and has commenced a review of environmental
claims in the fashion retail sector. It has signalled a plan to
evaluate other sectors in due course, warning that where there is
evidence of breaches of consumer law, it may take enforcement

Authorities in Germany and the United States have announced
investigations into alleged greenwashing claims connected to the
promotion of ESG financial products by a large global bank. In May
2022, an investment adviser firm agreed to pay a fine to the US SEC
that was associated with allegations that the firm had incorrectly
stated all investments in a fund had undergone an ESG quality
review when that was not always so.

What does this mean for Australia?

The influence of a stricter global ESG regulatory regime and
increasing enforcement activity overseas is likely to flow through
to Australian companies, particularly those operating
internationally or trading offshore. It also makes the prospect
that a similar regulatory framework will be introduced here more
likely. There are early indications that the Federal Government may
be considering legislation about ESG definitions for investment
products in the new year. The Australian Securities and Investments
Commission (ASIC) has also suggested that some
form of mandatory ESG regulation appears to be inevitable.

In the absence of regulation (or while it is under development),
Australian boards can look to the standards being mandated overseas
for the kind of sustainability measures they should consider
incorporating into their decision-making, risk processes and
approach to disclosure. At the very least, organisations should
adopt the recommendations of the Taskforce on Climate-related
Financial Disclosures (TCFD) as the primary
framework for voluntary climate change-related disclosures.

However, the adoption of elevated levels of
sustainability-related disclosures comes with increasing
expectations on Australian directors to take responsibility for
ensuring sustainability-related statements made publicly are
truthful, supported by evidence and take into account the material
impacts the organisation has on society and the environment.

The duties imposed on directors under section 180 and 181 of the
Corporations Act 2001 (Cth) (Corporations
) require the exercise of care and diligence of a
reasonable person in their position and that decisions be made in
good faith, for a proper purpose and in the best interests of the

Applied to non-financial risk, a director’s duty is to take
reasonable steps to prevent foreseeable risk of all harm to the
company’s interests, including its reputation. 2
Sustainability reporting can be a powerful tool in this respect,
holding organisations accountable for actions taken to ensure the
company fulfils its ESG commitments and ambitions. However,
over-statement of sustainability credentials may expose directors
to action from regulators, shareholders and activists. Directors
must also be alive to the risk of being found to be personally
liable under the Corporations Act or Australian Consumer Law
(ACL) for disclosures that are false or

While Australian regulation is not developing at the same pace
as overseas, there are signs that this is changing. To illustrate

  • in November 2021, APRA issued its ‘Prudential Practice
    Guide: CPG 229 Climate Change Financial Risks’;

  • in March 2022, ASIC Chair Joe Longo confirmed that
    “greenwashing is very much in our

  • in June 2022, ASIC’s information sheet ‘INFO 271: How
    to avoid greenwashing when offering or promoting
    sustainability-related products’ was released, outlining the
    existing prohibitions on greenwashing and the regulator’s
    expectations about how managed funds should avoid it; and

  • in August 2022, the Financial Services Council released its
    ‘Guidance Note 44: Climate Risk Disclosure in Investment
    Management’, which similarly targets fund managers and how they
    can avoid greenwashing.

Enforcement action against directors

Holding directors responsible for false or misleading
sustainability disclosures signals an attempt to incentivise
decision-makers within companies to tackle climate-related issues
in a truthful and transparent way.

A 2022 policy report by the Grantham Research Institute on
Climate Change and the Environment and the Centre for Climate
Change Economics and Policy into global trends in climate change
litigation confirms that cases involving personal responsibility
will be on the agenda in the coming year. One notable example of
this trend is litigation commenced by activist shareholders
overseas who are pursuing allegations that organisations are not
doing enough to address climate change, that this is putting the
company’s long-term value and commercial viability at risk and
that directors are therefore acting in breach of their duties.
While these claims are unresolved, they suggest that there is an
increasing appetite among stakeholders to hold directors liable
where they believe the directors are not providing adequate
oversight to ensure climate risks are being addressed.

In Australia, while actions have in the past been taken by the
Australian Competition and Consumer Commission
(ACCC) under the ACL for false representations in
respect of sustainability related claims,4 in a recent
development, proceedings raising allegations of greenwashing have
been commenced by a shareholder advocacy organisation under the
ACL. The proceedings challenge the accuracy of the company’s
net zero emissions target and statements about its proposed actions
as part of the energy transition and seek injunctive relief and
public declarations to clarify these matters and restrain further
publications. The case, the first of its kind in Australia,
suggests that shareholder activists may increasingly start to make
greenwashing claims themselves, rather than rely on regulatory
intervention to test the accuracy and validity of climate-related

Shareholders have also sought to rely on section 247A of the
Corporations Act to seek access to books that concern the
commitments a bank has made in connection with the future funding
of thermal coal projects.5 The shareholders are likely
to be using this process, which has historically been deployed to
scrutinise the propriety of board action, to seek evidence about
the extent of board oversight in relation to climate related public
commitments. Indeed, in their 2021 Opinion on Climate Change
and Directors’ Duties
for The Centre For Policy
Development, prominent Australian barristers Noel Hutley SC and
Sebastian Hartford Davis posited that regulators may rely on
‘stepping stone’ liability to hold directors personally
liable for exposing the entity to a risk of contravention which was
foreseeable and for facilitating or failing to prevent that

While each company will have a different risk framework to
consider, we are strongly of the view that companies (and their
directors) should not resile from their duties to consider the
impact of sustainability risks on their businesses, as the failure
to take proactive steps to identify and mitigate such risks could
expose them to significant liability. The focus should now be on
ensuring that the related disclosures are fulsome and not
misleading – to falter at this juncture would lead to an
unfortunate erosion of stakeholder trust and set back the
company’s sustainability journey.

Key takeaways for Australian directors

Ensuring sustainability reporting and disclosures are accurate,
holistic and transparent is not a simple task, and increasing
scrutiny in this area will be a challenge that Australian boards
must be prepared for.

Attaching climate and sustainability disclosures to future
enterprise value poses its own set of challenges in Australia.
Boards must exercise caution when making these forward-looking
statements. Recent cases illustrate the importance of having a
clear, implementable plan to achieve climate-related commitments in
particular, in order to demonstrate there is a reasonable basis for
the view taken. Similarly, ongoing monitoring of adherence to
targets or predictions is essential to avoid a need for corrective
statements. Where a departure from the target is identified,
negative disclosures should be addressed promptly and directly.

While this will inevitably be challenging, there is a consensus
among regulators and industry professionals that transparency is
what matters most.

Managing greenwashing risks – DOs and DON’Ts

  • When evaluating a public statement for greenwashing risk,
    DO familiarise yourself with ASIC’s ‘How
    To’ guidance in Information Sheet 271, which has broader
    application than sustainability-related products issued by

  • Prior to signing off on sustainability targets (i.e.
    forward-looking statements) DO ensure:

    1. It is clear the matters in the statements are based on
      information available at the time and that information is accurate
      and can be substantiated.

    2. There is a reasonable basis for the target (including
      statements about the plan to achieve the target) and all relevant
      assumptions are disclosed.

    3. There are processes in place to ensure ongoing compliance with
      continuous disclosure obligations (i.e. monitoring of the plan and
      target to identify material deviations).

  • DON’T think of sustainability reporting as
    a marketing document. It needs to paint a clear and accurate
    picture of efforts to address sustainability risks (including any
    limitations or challenges).

  • For directors and those advising them, DO think about
    allocating more time and resources to sustainability management and


1 See, for example, Joseph Longo,
‘Reflections from the ASIC Chair’ (Speech, ASIC, 4 June
2022). Longo alludes to the possibility that Australia may
implement mandatory climate disclosures, in light of the steps
taken in other jurisdictions, where climate disclosures have been
mandated. See also, Karen Chester, ‘ASIC update at the
Financial Services Council member webinar’ (Speech, 16 June
2022). Chester remarks that several jurisdictions ‘have already
taken steps to mandate climate disclosure’, and that ASIC wants
‘to make sure Australian companies keep up with international
standards for climate disclosure’.

2 See Cassimatis v Australian Securities
and Investments Commission
[2020] FCAFC 52 at [483]. See also
the written opinion of Bret Walker AO SC and Gerald Ng on the
current interpretation of the ‘best interests’ duty by the
Australian Courts – The Australian Institute of Company
Directors, The content of Directors’ “Best
Interest” Duty’
, 24 February 2022.

3 Joseph Longo, ‘ASIC’s corporate
governance priorities and the year ahead’ (Speech, AICD
Governance Summit, 3 March 2022).

4 See for example Australian Competition
and Consumer Commission v Volkswagen Aktiengesellschaft
FCA 2166.

5 Guy Abrahams & Kim Abrahams v
Commonwealth Bank of Australia ACN 123123124
(Federal Court,
NSD864/2021, commenced 26 August 2021).

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

    Lawyers Weekly
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