Climate-related financial disclosure: what directors and officers need to know

New legislation requiring climate-related financial disclosure (CRFD) in annual reports commenced on 18 September 2024. A “sustainability report” will now be mandatory for very large, large and medium listed and unlisted entities that prepare and lodge annual reports, starting (for very large entities) from 2025 and phased in for other captured entities by 2028.

Estimates vary on how many entities will be directly affected by the new disclosure requirement, with the Australian Securities and Investments Commission (ASIC) estimating the number of captured entities at about 6,000. Many other businesses, including SMEs, will be indirectly affected as requests for climate and other sustainability data from lenders and other captured entities in their supply chains quickly ramp up.

The final CRFD legislation is as discussed in our Insight article from April, except for a late amendment relating to scenario analyses.

What must be disclosed?

The content requirements for the sustainability report are being drafted by the Australian Accounting Standards Board (AASB) and should be released in September. Following consultation, AASB has taken a “back to baseline” approach by which it seeks to align the Australian Sustainability Reporting Standards to the 2023 IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. Reporting on the standards derived from IFRS S2 will be mandatory; broader sustainability disclosure is voluntary for now although the Minister has power to extend the new framework in future.

Who is affected and when?

CRFD will apply directly to entities that lodge annual reports with ASIC, and that are either subject to the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER) or above a specified size. The size is either or both of:

• two out of three (on a consolidated basis) of: (1) revenue of $50 million or more; (2) gross assets of $25 million or more; (3) 100 or more employees; or
• $5 billion or more in consolidated assets (this test is intended to capture large superannuation funds and investment trusts).

Very large entities (known as Group 1) will be required to report from their first financial year that commences after 1 January 2025. Group 1 comprises NGER reporters above the relevant threshold, and other entities that have two out of three (on a consolidated basis) of: (1) revenue of $500 million or more; (2) gross assets of $1 billion or more; (3) 500 or more employees.

Corporate groups that prepare consolidated financial statements can choose to provide consolidated sustainability statements also.

What do directors and officers need to know?

The sustainability report will be part of the annual report, which has three important implications for officers’ personal duties and liabilities.

1. Directors must declare whether, in their opinion, the entity’s sustainability report meets the statutory requirements

CRFD requires an additional directors’ declaration (made by board resolution) similar to the one currently provided in relation to the financial report. In sustainability reports produced after 1 January 2028, directors must declare whether, in their opinion, the substantive provisions of the sustainability report are in accordance with the Act, including s 296C (which concerns compliance with the sustainability standards and any applicable Ministerial requirements) and s 296D (which concerns the completeness of disclosure about risks, opportunities, metrics, targets, governance, strategy, and risk-management).

In sustainability reports produced before 2028, the directors’ declaration is modified – it is whether, in the directors’ opinion, the entity has taken reasonable steps to ensure the substantive provisions of the sustainability report are in accordance with the Act.

As with any statement of opinion by directors, this declaration carries with it an implied representation that there is a reasonable basis for it. The practical challenge for directors will be in accessing resources, processes and assurance to establish reasonable basis, given Treasury’s earlier acknowledgement that the processes and systems for audit and review of sustainability information are still being developed. The CRFD legislation provides for audit of the sustainability report to be phased in between now and 2031.

2. Directors and others must exercise reasonable care in preparing and authorising the sustainability report, or face significant civil penalties

The Corporations Act 2001 (Cth) (Act) already includes four civil penalty provisions that will impose liability on directors, officers and others who fail to exercise reasonable care in preparing or authorising the sustainability report.

The first, which applies to directors, is s 344(1) of the Act – it requires that directors take “all reasonable steps to comply with, or to secure compliance with” Part 2M.3 of the Act, where the CRFD and other annual reporting requirements appear.

The second, which applies to directors and other officers, is the general duty of care in s 180(1) of the Act. It requires reasonable care in preparing and authorising corporate disclosures, decisions about which are not covered by the statutory business judgment rule. The Centro case (which dealt with directors’ and officers’ liability for an error in the financial statements) shows how ss 180(1) and 344(1) are applied to directors in the context of annual reporting.^[1]

The third is s 1308(5), which relates specifically to defects in documents required under the Act or lodged with ASIC. It applies to any person who makes or authorises a misleading statement or omission without taking “all reasonable steps to ensure that the document was not materially false or misleading because of the statement or omission”. For this section, “a person who votes in favour of a resolution approving, or who otherwise approves, a document is taken to have authorised” the making of any statement in the document, and the omission of any matter or thing from it.

The fourth is s 1309(2), which covers information provided to (among others) directors, auditors or ASX. It applies to any person who provides information without having taken reasonable steps to ensure it was not defective.

Contraventions of any of these provisions can attract a maximum civil penalty, for an individual, of $1,565,000.

3. The modified liability arrangements provide only limited protections

The legislation contains a very limited immunity from legal claims for certain “protected statements” made in the early years of CRFD. The immunity protects a person (including the entity or a director or other officer) from legal action in relation to a protected statement, other than proceeding that is criminal in nature or, importantly, brought by ASIC.

Protected statements are statements about scope 3 greenhouse gas emissions (including financed emissions), scenario analysis, or a transition plan that are made in sustainability reports for financial years commencing in 2025 – 2027. In sustainability reports for financial years commencing in 2025, the immunity also covers forward-looking statements relating to climate. This is significant because, in some circumstances, a representation with respect to any future matter is taken to be misleading if the person making it does not have reasonable grounds for doing so.

The immunity precludes claims by private plaintiffs under, for example, the misleading and deceptive conduct laws in ch 7 of the Act or pt 2, div 2 of the Australian Securities and Investments Commission Act 2001 (Cth). The immunity does not prevent ASIC bringing civil penalty proceedings against entities or individuals for defective disclosure, although ASIC has said that it will take a “pragmatic and proportionate approach to supervision and enforcement as industry adjusts to the new requirements”.

Next steps

CRFD will require a significant investment in sustainability record-keeping, reporting and assurance, even for entities that have previously reported against the voluntary Taskforce on Climate-related Financial Disclosure (TCFD) framework.

For directors and other officers, the key is to understand what measures (including data collection and internal and external assurance) they can reasonably take as individuals to ensure the disclosure in the sustainability report is compliant.

Our Board Advisory & Governance team and expert ESG lawyers are available to take you through the CRFD legislation and its practical implications, and to assist directors and officers in satisfying their personal duties to take reasonable care in connection with this complex form of disclosure.

^[1] ASIC v Healey (2011) 196 FCR 291.