Climate reporting leading to 'complex responsibilities' for directors
Directors must ensure they apply adequate diligence and oversight to their organisation’s systems for financial reporting, cautions HLB Mann Judd.
Director responsibilities are becoming increasingly complex as a result of mandatory climate reporting, with the reporting changes representing a major shift in corporate governance requirements, according to HLB Mann Judd.
The reporting regime is aimed at providing stakeholders with a comprehensive view of how companies are managing their environmental impact and the associated risks.
HLB Mann partner David Healy said it is critical directors ensure that this report presents "a true and fair view of the organisation’s financial performance, position and prospects, ensuring it is not misleading or deceptive.
"In making their declaration, directors must exercise due care and diligence in overseeing the robustness of corporate reporting systems and processes, and in assessing the materiality of climate-related risks and opportunities to their organisation," said Healy.
Climate reporting requires entities to make a range of forward looking disclosures such as significant climate-related risks and opportunities, anticipated changes to their organisations's business model and the entity's transition plan and climate targets.
It also includes an assessment of how resilient the entity's strategy and business model are with a scenario analysis at 1.5oC and 2oC warming.
Healey said materiality must consider qualitative as well as quantitative factors such as the industry that the entity operates in and investor expectations of what constitutes a climate-related risk.
"Liability can arise not only for any misleading disclosure, but for a breach of the duty of due care and diligence where a director has failed to apply adequate diligence to their oversight of the organisation’s systems for financial reporting," he said.
Under the Corporations Act 2021, ASIC Regulatory Guide 247, ASX listing rules, even if an entity is not covered by mandatory climate reporting, the entity may still be required to disclose a climate-related risk, if it is considered to be material, in its financial statements and notes, directors’ report, the corporate governance statement, and has continuous disclosure obligations, the firm cautioned.
"Failure to do so may render the financial statements and notes misleading or deceptive and put the directors at risk," Healey cautioned.
Healey reminded organisations that modified liability setting will apply to sustainability reports prepared for financial years commencing between 1 January 2025 and 31 December 2027, in relation to statements made about Scope 3 greenhouse gas emissions, scenario analysis and transition plans.
"However, this will not apply where ASIC considers the disclosures to be greenwashing," he said.
"Additionally, the ACCC has been active in taking greenwashing cases."
Mercer Superannuation was recently penalised $11.3 million for misleading statements regarding its ‘Sustainable Plus’ investment options, while Clorox received an $8.25 million penalty for misleading ‘ocean plastic’ claims about certain GLAD products.
With the climate reporting requirements strongly focused around governance and strategy, Healey said preparation will be key for directors and their organisations.
"Directors who embrace this responsibility will not only safeguard their organisation but also play a crucial role in shaping a sustainable future," he said.
