Directors’ Duties and Sustainability Disclosure Obligations

Introduction to narrative and financial sustainability disclosures

Public companies in most jurisdictions have obligations under national laws to assess, manage, and report on financially-material climate risks. In certain jurisdictions, these mandatory disclosure obligations have also been rolled out to large private companies and financial institutions. At the same time, many companies choose to voluntarily report in accordance with international standards like those produced by the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD), the IFRS Foundation’s International Sustainability Standards Board (ISSB), the Global Reporting Initiative (GRI) Standards, Carbon Disclosure Project (CDP), and more.

Currently, most sustainability reporting disclosure obligations for companies are narrative and qualitative in nature. This reflects a general hesitation and lack of knowledge amongst boards on how to quantify and account for climate-related risks and opportunities. Yet an unintended consequence of this is that there are often discrepancies between how climate risks, opportunities and impacts are described in narrative reports and the quantitative data  presented in their financial statements. Aside from this discrepancy potentially giving rise to liability for greenwashing, securities lawsuits and/or other national penalties, the non-disclosure of climate-related information in financial statements means that often investors are not presented with a complete picture. As such, there are movements, predominantly driven by UK-based organisations, seeking regulatory guidance on how companies should account for climate risks, and a January 2024 UK legal opinion focussed on directors’ duties in this respect. Reflecting these trends, we have included a new section in the 2024 Navigator addressing ‘Climate-related disclosures in financial statements’ and directors’ duties and potential liability arising therefrom.

Finally, while there is also growing momentum behind the need for companies to report on nature-related risks (for example, in line with the Taskforce on Nature-related Financial Disclosures (TNFD) recommendations), and a recent acknowledgement of the need to report on social issues (see, for example, the new Taskforce on Inequality and Social-related financial disclosures (TISFD)) these topics are currently beyond the scope of this Directors’ Duties Navigator. See the CGI’s Disclosure Navigator for more information on nature-related reporting.

Narrative sustainability disclosure requirements

Mandatory climate-related narrative disclosures have been and continue to be introduced in jurisdictions around the world. In June 2021, the G7 issued a communique announcing its support for moving towards mandatory disclosures aligned with the recommendations of the TCFD, and regulators and governments around the world have begun to introduce rules requiring certain companies to make TCFD-aligned disclosures since then. The scope and applicability of these regulations differ between jurisdictions, but most are intended to capture listed and large private corporations and financial institutions. The specific reporting requirements also differ, but, since many are based on the TCFD recommendations, common themes include reporting on climate-related risks and opportunities, the mechanisms for identifying and managing these risks and opportunities, and metrics and targets for GHG emissions. For example, the Hong Kong and Singapore stock exchanges have introduced requirements in the listing rules for issuers to disclose climate-related financial risks on a ‘comply or explain’ basis; the UK and New Zealand governments have passed regulations requiring financial institutions (and, in the case of the UK, all large companies) to disclose climate-related risks; in the US, the Securities and Exchange Commission (SEC’s) March 2024 climate disclosure rules aim to enhance and standardise climate-related disclosures (although these have currently been stayed pending ongoing legal challenges – see the US section for more information). 

In January 2023, the EU’s Corporate Sustainability Reporting Directive (CSRD) entered into force and in July 2023, the European Financial Reporting Advisory Group (EFRAG) published a set of European sustainability reporting standards (ESRS) to support its implementation. Unlike traditional financial reporting and climate-related reporting under TCFD and ISSB standards, the CSRD and ESRS require companies to report on the basis of double materiality. ‘Double materiality’ requires companies to assess and report not only on how external environmental and social factors affect their financial performance (known as ‘financial materiality’) but also how their activities impact the environment and society around them (known as ‘impact materiality’). In so doing, the CSRD and ESRS require companies to recognise that materiality extends beyond their own financial performance and includes its impact on the wider world. This ambitious approach represents a new global gold standard, but efforts calling on ISSB and TCFD to adopt double materiality have so far been unsuccessful. 

Investors are calling for climate-related risk disclosures

Investors are increasingly calling for specific climate-related financial disclosures in the financial filings, in line with the TCFD, and increasingly, ISSB, recommendations. 

In 2021, BlackRock, an investor with USD 8.67 trillion assets under management, called on investee companies to disclose a plan for how their business model will be compatible with a net-zero economy, to state how this plan is incorporated into the company’s long-term strategy, and to confirm that it has been reviewed by the board of directors. These disclosure requests are in addition to BlackRock’s 2020 policies that ask its investee companies to report in alignment with the TCFD recommendations and the Sustainability Accounting Standards Board (SASB). In January 2022, Larry Fink, BlackRock’s CEO, restated the importance of climate risk to its investments and its request for investee companies to issue TCFD-aligned reports.

Investors are also requesting that their investee companies produce financial statements which show how the climate risks and impacts which the company has identified will affect its finances, including by making adjustments to critical assumptions, including sensitivity analysis, and the implications on the company’s dividend-paying capacity. The extent to which companies’ CAPEX is aligned with their stated transition plans and net-zero goals is also under scrutiny from investors.

Disclosure of climate-risks in financial statements 

As mentioned above, there is momentum growing behind the disclosure of climate-related risks in financial statements. While jurisdictional specificities exist, corporate reporting and securities law frameworks generally require listed companies to disclose information that is materially relevant to their financial performance and prospects in narrative reports and financial statements.

A materiality requirement also covers disclosures in the financial statements. In November 2019, IASB member Nick Anderson explained how climate risks fall within the existing principles-based requirements under IFRS:

Climate-related risks and other emerging risks are predominantly discussed outside the financial statements. However, as set out in [IFRS Practice Statement 2] Making Materiality Judgements, qualitative external factors, such as the industry in which the company operates, and investor expectations may make some risks ‘material’ and may warrant disclosures in financial statements, regardless of their numerical impact.

In November 2020, the IFRS Foundation published guidance titled the Effects of climate-related matters on financial statements, which states that material climate-related financial information should be reported under IAS 1 Presentation of Financial Statements, IAS 2 Inventories, IAS 12 Income Taxes, IAS 16 Property, Plant and Equipment, IAS 38 Intangible Assets, IAS 36 Impairment of Assets, IAS 37 Provisions, Contingent Liabilities and Contingent Assets, IFRS 7 Financial Instruments: Disclosures, IFRS 9 Financial Instruments, and IFRS 13 Fair Value Measurement; and, in addition to this specific disclosure, that companies whose financial position or financial performance is particularly affected by climate-related matters must provide overarching disclosure.

In June 2023, the ISSB issued the finalised versions of its international sustainability standards IFRS S1 and S2. IFRS S1 addresses sustainability-related financial disclosures and IFRS S2 addresses narrative climate-related disclosures, although the two are designed to be applied together. The objective of IFRS S1 is to require entities to disclose investor-useful information about sustainability-related risks and opportunities that could influence the entity’s cash flows, access to finance or cost of capital over the short, medium or long-term in general purpose financial reports. IFRS S1 prescribes how entities should prepare and report sustainability-related information in financial disclosures, setting out general requirements for the content and presentation of those disclosures, including: 

1. the governance processes, controls and procedures the entity uses to monitor, manage and oversee sustainability-related risks and opportunities;
2. the entity’s strategy for managing sustainability-related risks and opportunities;
3. the processes the entity uses to identify, assess, prioritise and monitor sustainability-related risks and opportunities; and
4. the entity’s performance in relation to sustainability-related risks and opportunities, including progress towards any targets the entity has set or is required to meet by law or regulation.

The G7 and leading financial centres like the UK have indicated their intention to adopt ISSB-aligned reporting requirements. 

In March 2024, the US SEC’s introduced new climate disclosure rules that required in-scope entities to disclose certain climate-related information in notes to their financial statements (although, as mentioned above, these rules are currently stayed pending legal challenges). In April 2024 the IFRS Interpretation Committee provided (limited) guidance on the circumstances in which companies could reflect emissions reduction and emissions offset targets as a provision in the financial statements under IAS 37, and on 31 July 2024, the IASB published a consultation document outlining eight illustrative examples of how and in what circumstances companies should report on climate-related and other uncertainties in their financial statements. 

Therefore, although companies are not yet obliged to disclose climate-related information in their financial statements, the trend toward this is undeniable. Forward-thinking directors would be well advised to familiarise themselves with the resources listed above and in the sections of this Navigator and consider how to start disclosing climate-related information in quantitative form alongside narrative disclosures. 

Directors’ duties and obligations in relation to sustainability disclosures 

All climate-related disclosures – both narrative and financial – have significant consequences for boards, and it is important that directors stay abreast of and oversee compliance with their companies’ climate- and sustainability-related disclosure obligations. This is for several reasons. 

First, directors in most jurisdictions owe their companies duties of care. Discharging this duty necessarily requires directors to, amongst other things, stay informed of and understand the company’s general legal and regulatory obligations, as well as climate-related risks, opportunities and exposures. It also requires directors to ensure that annual reports are prepared with appropriate care, skill and diligence (i.e. that they are not misleading). If directors do not feel competent or comfortable in this regard, they may be required to take expert advice in order to satisfy their duty of care. A failure to do so exposes directors to liability for breach of duty, which carries risk of significant penalties and personal liability (depending on the nature of the breach). 

Second, in most jurisdictions, directors have statutory obligations to approve or attest to the accuracy and completeness of disclosures made in financial filings. This often (but not always) involves a statutory duty to ensure that the accounts provide a ‘true and fair’ and accurate view of the company’s financial position.  Directors on audit committees will likewise have additional responsibilities to engage in testing and overseeing the robustness of the climate scenario assumptions underpinning key aspects of the audit process. If companies produce inaccurate, false or misleading annual reports with respect to climate-risk, and fail to comply with their statutory requirements, they may be exposed to regulatory sanctions, criminal and/or civil liability. 

Third, directors that sign off on misleading and/or untrue sustainability disclosures may be held liable in civil claims by investors (through securities lawsuits claiming, for example, that, by misrepresenting its exposure to climate risk, the company misled by the company and caused the investor to purchase shares at an over-inflated price, causing it financial loss when the risk was exposed), or by consumers (under consumer protection legislation – see Climate Litigation section below). These claims are currently few in number but are expected to grow as companies make more sustainability-related data available for public scrutiny in their sustainability reports. 

Prudent directors can take steps to minimise these risks of liability arising from sustainability-related disclosures. For example, directors would be well-advised to: understand the requirements of the sustainability disclosure regimes their organisation is subject to (and take expert advice if necessary); conduct, or oversee the conduct of, thorough materiality assessments to identify their organisations’ unique climate-related risks, opportunities and impacts; disclose these findings in a transparent way in narrative reports (and, where possible, reflect them also in financial statements); and avoid making sweeping or unsubstantiated statements in any publications. Disclosing forward-looking risks associated with climate change – with adequate specificity and relevance, and with appropriate cautionary language around associated limitations or uncertainties – is a prudent way to minimise liability exposure for misleading disclosure. Whilst appropriate analysis and disclosure will be company-specific, the TCFD recommendations are a helpful resource explaining the processes required to robustly assess climate risks (and opportunities), and to communicate them to the market in a true and fair manner.