Date posted: 06/05/2021

Directors liable for climate disclosures: new legal opinion

CA ANZ contributes to expert roundtable

In brief

  • Updated legal opinion by Noel Hutley SC and Sebastian Hartford Davis covering directors' duties and climate change has been published
  • There is an increasing standard of care expected of directors in managing climate-related risks and opportunities
  • CA ANZ was part of a discussion roundtable that informed the legal opinion

The Centre for Policy Development (CPD) has released a new supplementary legal opinion by Noel Hutley SC and Sebastian Hartford Davison directors' duties and climate change. This third opinion builds on their 2016 opinion that found directors could be liable for failing to understand and disclose climate risks and their 2019 opinion that found directors could be liable if they failed to act on those risks once they were identified.

The updated opinion focuses on the rising standard of care on climate for directors and the quality of disclosure: the gap between what is required or being promised and what is being done. In particular the risks associated with "greenwashing" – inaccurate climate-related statements and disclosures, including flawed climate scenario analysis and "net zero" commitments that are misleading or made without a reasonable basis. Its key conclusions are that companies must have reasonable grounds to support the representations made and should take practical steps to reduce associated liability risks.

This emerged from a special roundtable convened by the CPD in December 2020 which bought together a group of senior leaders from the Australian legal profession, business sector and superannuation industry including AustralianSuper boss Ian Silk, Woolworths chairman Gordon Cairns, Rio Tinto director Simon McKeon and AGL director Patricia McKenzie. Amir Ghandar FCA, Chartered Accountants Australia and New Zealand's Reporting and Assurance Leader, represented CA ANZ at the roundtable to provide an expert accounting view. The roundtable focused on a range of legal and practical challenges pertaining to directors' duties and climate risk.

“It is essential that Chartered Accountants are there at the table as the broader business, legal and financial communities come together on these issues” Amir Ghandar FCA, Reporting and Assurance Leader, CA ANZ 

Several recent developments mean there is now clear guidance on assessing and reporting climate risk materiality. In April 2019, the Australian Accounting Standards Board (AASB) and the Auditing and Assurance Standards Board (AUASB) issued an updated joint guidance paper on disclosure and materiality of climate change risks. This guidance, echoed by the International Accounting Standards Board (IASB) in its In Brief; "IFRS Standards and climate-related disclosures", explains that climate risks may be material to financial statements, including insofar as they impact asset impairment, the useful lives of assets and fair valuation.

ASIC has reiterated this view in its updated guidance on impairment of non-financial assets. Similarly, the International Financial Reporting Standards (IFRS) Foundation published a guide demonstrating that IFRS standards already require companies to consider climate risks which are material to financial statements. The Task Force on Climate-related Financial Disclosures (TCFD) recommendations have been endorsed by APRA, ASIC and the ASX Corporate Governance Council and TCFD-aligned disclosures will soon be made mandatory for some entities in New Zealand.

Supplementary legal opinion

Directors’ duties and climate change

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AASB and AUASB guide

Climate-related and other emerging risks disclosures: assessing financial statement materiality using AASB/IASB Practice Statement 2

Download now

Managing climate risk for directors

This article sets out ASIC’s expectations and recent oversight activities

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