At King & Wood Mallesons, we’re telling our clients and their boards to keep in mind two key considerations: first, work out what you are going to disclose in relation to climate targets and transition plans; and, second, understand the risks of disclosure.

Who says what?

Climate change disclosure is a particularly complex and rapidly evolving area. There are a range of voluntary reporting frameworks and standards.

Certain regulators publicly support the framework developed by the Task Force on Climate-related Financial Disclosures (TCFD). However, none of the frameworks or standards have been definitively adopted by governments or regulators in Australia, leaving listed companies and boards to navigate the thicket.

Our own King & Wood Mallesons analysis of climate disclosures by the top 50 ASX companies in 2020 identified that over 80 per cent reported against TCFD, with a majority also reporting against other voluntary frameworks or standards including the Global Reporting Initiative (GRI) sustainability standards and the CDP (formerly the Carbon Disclosure Project).

Grappling with various voluntary benchmarks against which to make disclosure is only part of the problem. Other issues for listed companies include how to undertake scenario analysis and how individual scenarios should be applied in particular industries, locations and circumstances.

More work is needed to simplify and conform the reporting frameworks and standards to reduce the reporting burden for listed companies and increase the consistency of climate-related disclosures.

The International Financial Reporting Standards Foundation recently announced plans to establish an International Sustainability Standards Board. This complements the publication of a prototype climate-related financial disclosure standard by a group of standard setters, including the GRI, CDP and International Integrated Reporting Council.

More disclosure for directors

As listed companies and boards move to report voluntarily on climate change targets, they expose themselves to a real threat of litigation.

It is no secret that Australia’s securities and disclosure laws impose liability without regard to fault. Liability can be imposed for honest, inadvertent mistakes in ASX releases. Moreover, liability for directors is unnecessarily and anomalously duplicated so that directors can be held liable for breaching their statutory duty of care, despite being found innocent of disclosure breaches.

In this context, it is no surprise that two barristers recently published an opinion confirming that, in their view, companies and boards who make disclosure on climate targets face potential liability for misleading and deceptive conduct (and other breaches of law) if they do not have reasonable grounds to support the express and implied representations contained in disclosures on climate change commitments.

This risk of litigation is no longer a matter of opinion.

We have been reporting on climate change litigation in Australia, which is now seen as the second most active jurisdiction for such litigation after the United States. While this may be a badge of pride for plaintiff lawyers, it should ring alarm bells for listed companies and boards.

To date, most climate litigation in Australia has been commenced by groups wanting to bring about behavioural change rather than to extract damages. However, lawsuits in the United States illustrate that claims for compensation are in the climate activist’s playbook.

Finally, when it comes to directors’ duties, Australian law outdoes the United States. The courts of Delaware – where many major US-listed companies are incorporated – recognise a business judgment rule that essentially protects directors who act rationally and in good faith in the company’s interests.

In contrast, Australian law and courts do not appear to defer to directors’ commercial judgments in relation to compliance risk management and disclosures. In particular, recent Australian court decisions have held that company directors cannot rely on the business judgment rule defence in relation to ASX disclosures and other compliance matters.

Until there is a rebalancing of disclosure and governance rules and reform on litigation funding, we think litigation on climate-related disclosures will continue to heat up.

The authors work at King & Wood Mallesons.