Key Points on climate-related disclosures

• Climate disclosure obligations have become increasingly common in recent years, and are now required on at least a ‘comply or explain’ basis in many jurisdictions. 
• Companies and directors could face legal risks if they were to make misleading disclosures or omissions relating to climate or sustainability issues.
• Financial entities are often subject to additional requirements to report on the risks and impacts of financial products and services, in particular those marketed as ‘green’. 
• Directors should ensure that their climate and/or sustainability disclosures are well-supported and, importantly, reflected in the company’s financial statements, as directors are responsible for signing-off on company accounts.
• Directors should ensure that they consider material climate and sustainability risks when deciding on courses of action for the company, in particular actions which may seem to impact or be affected by those risks. 

Why do climate and sustainability disclosure requirements matter for directors? 

Following the publication of the Taskforce on Climate-related Financial Disclosure’s recommendations in 2017, national governments and financial and securities regulators have increased their expectations and requirements for companies to disclose sustainability- and/or climate-related information to the market.

These include narrative disclosures on material information to be included in regulatory filings, such as the front end of annual reports, prospectus, initial listing disclosures, and the notes to financial statements. In jurisdictions where information disclosed to the market outside regulatory filings is subject to legal rules, climate-related information may be required in such disclosures. 

Some jurisdictions have introduced specific regulations requiring the disclosure of climate- and/or sustainability-related disclosures. In other jurisdictions, regulators have demonstrated an increasing understanding that climate- and/or sustainability-related risks can be financially material, and therefore fall within existing reporting obligations or accounting standards. 

These developments are relevant for directors because of: (i) their primary role in assuring annual reports and financial statements; and (ii) their role in ensuring that their company has systems in place to meet disclosure requirements and are not misleading.

Overview of disclosure obligations by jurisdiction

Different jurisdictions have advanced their disclosure requirements on these issues to different extents. Some jurisdictions (such as New Zealand and the UK) have passed statutory regulations requiring all listed, and certain non-listed, companies to disclose climate-related risks. Others (such as India, Malaysia, and Japan) have issued regulatory requirements for listed companies to disclose such climate and/or sustainability risks on a ‘comply or explain’ basis. 

In many jurisdictions, regulators have published guidance stating that they perceive climate risks to be potentially financially material, and setting their expectations that companies disclose such risks where necessary. Financial institutions, in particular those offering ESG-focused products, are a particular focus of disclosure requirements. 

The content of these disclosures varies between jurisdictions. However, commonly required disclosures include, for example: 

• Material climate- or sustainability-related risks and opportunities;
• The governance and strategy regarding those risks, including the process for identifying, managing and monitoring such risks and opportunities;
• Scope 1 (those produced by the company), scope 2 (those associated with energy purchased by the company) and (generally, where material) scope 3 (those for which the company is indirectly responsible in its value chain) greenhouse gas (GHG) emissions; and 
• Sustainability and climate targets and metrics.

Financial entities are generally subject to increased disclosure requirements with respect to climate or sustainability issues. For example, in the EU, asset managers are required to disclose sustainability information, including their policies on integrating sustainability factors into their investment decisions, and the impacts of financial products on environmental issues. 

Many of the requirements issued to date have used international guidelines, such as the TCFD recommendations or SASB standards, to benchmark their requirements. Developments in international reporting requirements may help to address differences between reporting requirements: in particular, the publication of the IFRS’ International Sustainability Standards Board (ISSB) standards.

The disclosures in the ISSB standards are generally aligned with the recommendations of the TCFD, including narrative disclosures on governance, strategy, risk management, and metrics and targets, but also cover sustainability risks more broadly. The ISSB standards therefore expand on the TCFD recommendations in several ways. Importantly for boards, the ISSB standards require the disclosure of the identity of the body or individual responsible for oversight of climate-related risks and opportunities; how that body’s responsibilities are reflected in the company’s policies; how the body ensures that the appropriate skills and competencies are available to oversee strategies designed to respond to climate-related risks and opportunities; and whether dedicated controls and procedures are applied to management of climate-related risks and opportunities. The draft standards thus include requirements relating to governance and financial statements which may, if brought into effect, impact directors’ duties to their company and to sign off on company accounts. These draft standards form part of the ISSB’s actions to deliver a global baseline of standards, which have been welcomed by the G7, G20, IOSCO and the FSB. 

Potential legal risks for companies and board members

The specific legal risks which a company faces via its climate and/or sustainability disclosures will vary between jurisdictions. This section summarises these common legal risks for many jurisdictions at a high level. 

Misleading disclosures: companies can be liable for misleading disclosures or omissions in prospectuses or as part of their continuing disclosure obligations, either under statutory regimes (either under specific statutes relating to corporate disclosures, or under more general regimes relating to fraud or misrepresentation) or under common law (in applicable jurisdictions). 

When investors’ judgment in deciding whether to invest in the company was impacted by a particular statement or set of statements, they may be able to claim damages from the company if the statement was false, the company’s directors (and in some cases senior executives) knew or ought to have known that the statement was false, and the investors suffer losses as a result. 

Companies should therefore be careful not to disclose or fail to disclose climate- or sustainability-related risks without a reasonable belief in the truth of the statement; in particular in light of investors’ contemporary interest in climate and sustainability issues. 

Claims by shareholders testing the veracity of companies’ statements in their annual reports and other regulated communications have already been brought. In Australia, shareholders have brought claims against an oil and gas company (ACCR v Santos: alleging that the net-zero strategy set out in the company’s 2020 annual report, investor briefings and climate reports was likely to mislead investors) and a bank (Abrahams v Commonwealth Bank of Australia: obtaining disclosure of board minutes and other internal documents to assess how investments in oil and gas projects were compatible with the bank’s stated environmental policies). 

Regulatory enforcement: Securities regulators are becoming increasingly active in relation to climate and sustainability disclosures. The Australian Securities and Information Commission (ASIC) has announced that it will focus on climate disclosures by listed companies, and has intervened regarding a mining company’s disclosures on its net-zero targets. The US Securities and Exchange Commission (SEC) has announced a Climate and ESG Task Force which will examine misstatements in disclosures. The Securities Commission Malaysia has similarly indicated that it will focus on sustainability disclosures in the coming years. 

Enforcement authorities in the US have already investigated and fined oil and gas companies for misleading shareholders as to climate risks. Notable examples include the New York Attorney General’s investigation of Peabody Energy in relation to ‘cherry picking’ of the International Energy Agency (IEA) projections to support disclosures, and their investigation of ExxonMobil (which was dismissed, but similar subject matter is the subject of ongoing shareholder litigation: Ramirez v ExxonMobil). In Australia, the Australian Securities and Information Commission (ASIC) has intervened regarding a mining company’s disclosures on its net-zero targets and 

Financial institutions, in particular asset managers, appear to have become a particular focus of ESG-related regulatory investigations. In May 2021, the SEC charged BNY Mellon Investment Adviser for misstatements and omissions about ESG considerations for which the company paid $1.5 million, has announced an investigation into Deutsche Bank’s asset management arm DWS regarding its use of sustainable investment criteria (the German Federal Financial Supervisory Authority has raided DWS’ offices in a related investigation), and is also undertaking a similar investigation into Goldman Sachs. ASIC has launched its first court action against alleged greenwashing conduct, commencing civil penalty proceedings in the Federal Court against Mercer Superannuation (Australia) Limited for allegedly making misleading statements about the sustainable nature and characteristics of some of its superannuation investment options.

NGO’s have also made complaints to regulators regarding alleged greenwashing. In the UK, the NGO ClientEarth has brought a claim against the FCA alleging that it has failed in its role as regulator by allowing an oil and gas company to issue a prospectus which, ClientEarth argues, does not adequately describe the climate risks facing the company. While this claim has been brought against a regulator, rather than a private entity, its outcome could affect the regulator’s attitude towards climate risk. In the US, NGO Global Witness has lodged a complaint with the SEC regarding Shell’s investment in renewable energy, which it alleges mostly comprises investment in gas, which it is alleged is misleading. 

Claims against directors: In some jurisdictions, board members and executive officers may be held liable for misleading disclosures; claims in this regard can variously be brought by regulators, the company, and in some cases shareholders. Directors could also be directly exposed to civil liability for misrepresentation.

In many jurisdictions, directors are responsible for signing-off on the company’s accounts, stating that they give a ‘true and fair’ view of the company’s financial position, which reflects the requirements of IFRS, as well as many jurisdictions’ generally accepted accounting principles (GAAP). Directors should therefore ensure that, where necessary, company accounts reflect material climate and sustainability risks. 

Various regulatory bodies and standard setters, including the International Financial Reporting Standards (IFRS), and the UK Financial Reporting Council (FRC), have indicated that narrative disclosures, including those on climate, should be reflected in the financial statements where material. Similar requirements are contained in the International Sustainability Standards Boards (ISSB) draft standards, and the US SEC has proposed that climate disclosures should specifically be included in financial statements. In some jurisdictions, courts have ruled that, despite being permitted to consult external experts, the contents of the company’s financial statements remain the ultimate responsibility of the directors.

In cases of dishonesty or recklessness, directors may find themselves exposed to criminal liability; for example for fraud, making false statements, or for creating false accounts. 

In some cases, where the company has suffered loss as a result of a misleading disclosure, the company may seek to bring a claim against a director alleging that the director has breached their fiduciary duty to the company in allowing the disclosure to be made.

Concerns and protections: Boards may be comforted that there are generally high bars to liability for misleading disclosures (generally, an intention to deceive, or recklessness as to whether an investor would be deceived, on the part of the director is required). 

If directors are careful and considered in their company’s disclosures, they should minimise this risk. Directors should therefore ensure that their disclosures accurately represent a robust, good-faith process of assessment that applies the best evidence reasonably available at the relevant time: and where those disclosures are appropriately caveated or qualified.

While boards may be concerned about the difficulties in identifying climate risks and the uncertainty in doing so, they should be aware that statutory regimes often contain ‘safe harbour’ provisions in many jurisdictions which limit liability for forward-looking statements (which will commonly include climate- and sustainability-related targets). For example, the US SEC’s proposed climate rules, propose a specific ‘safe harbour’ provision in respect of Scope 3 emissions disclosures in recognition of the difficulties in measuring these.