Three’s company

Three recent developments have raised the bar for disclosures in corporate documents, writes Professor Pamela Hanrahan.

Litigation over climate disclosure remains a trickle, not a torrent... but the possibility of defective or self-serving disclosure being challenged is real and is a real litigation risk for companies and directors. Most boards now recognise that climate change presents both opportunities and material financial risks for their companies. Identifying and managing those risks is important across all sectors — including for public and private businesses, not-for-profits, and in the business of government. Climate related risks comprise physical risks, economic transition risks and litigation risk. The latter includes the possibility that the entity or its directors will be sued, either for failing to recognise and respond appropriately to physical or economic transition risks, or for misleading investors or other corporate stakeholders about that response.

Companies communicate with stakeholders about their response to climate change through corporate documents such as annual reports, fundraising documents, market announcements, formal and information shareholder communications, and voluntary ESG (environmental, social and governance) and sustainability reports. These corporate documents serve a different purpose and have a different audience from green marketing claims about the company’s products and services, which have been on the Australian Competition and Consumer Commission (ACCC) radar for more than a decade.

These corporate disclosures can be challenged by the Australian Securities and Investments Commission (ASIC) or investors if they create a misleading impression about the strength or speed of the company’s climate response.

Misleading disclosures

Companies that mislead investors and other stakeholders about their climate response (or anything else) have always been exposed to the risk of being sued for breach of the misleading conduct laws, whether under section 1041H of the Corporations Act 2001, section 12DA of the ASIC Act 2001, or section 18 of the Australian Consumer Law (ACL). These rules apply to a wide range of corporate communications, including annual reports. While the general rules do not apply to prospectuses and public disclosure statements (PDS), specific liability rules for those regimes can lead to civil liability if they include false claims. And if a financial product has an investment component, the law has always required that “the extent to which labour standards or environmental, social or ethical considerations are taken into account in the selection, retention or realisation of the investment” be disclosed in the PDS.

But three recent developments have raised the bar for reporting to stakeholders on climate response, including for individual directors and other corporate officers.

The first is the growing prevalence and sophistication of climate response reporting, including under the voluntary frameworks and standards promulgated by the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB). More — and more granular and specific — communication about climate response increases attention on these disclosures and the chance that something will be misrepresented or overstated.

The second, for public companies and their institutional investors, is ASIC’s heightened regulatory focus on the quality of corporate reporting about climate response. ASIC’s recently released corporate plan — its first under new chair Joe Longo — includes “climate risk governance and disclosure” as one of the two focus areas for 2021–22 in the corporations space. This signals its intention to re-engage with the issues identified in its Report 593 from 2018 on climate risk disclosure by listed companies.

The third, for directors, is the expansion of personal liability for misleading corporate documents that occurred in 2019 and 2020. Changes to sections 1308 and 1309 of the Corporations Act, made in the aftermath of the banking Royal Commission, created new civil penalties that can apply to individuals who fail to take reasonable steps to ensure corporate disclosures are not materially misleading.

Section 1308 applies to documents required under the Corporations Act or filed with ASIC, including anything attached to or included with the directors’ report provided under section 314 of the Corporations Act. The section applies to any person who makes, or authorises, a statement in or omission from the document, which includes “a person who votes in favour of a resolution approving, or who otherwise approves, a document”. ASIC can now apply for a declaration of contravention and a civil penalty if the person knew or was reckless as to whether the document was materially misleading, or “did not take all reasonable steps to ensure that the document was not” materially misleading as because of the statement or omission.

Section 1309 is also a civil penalty provision, which applies when a director provides misleading information — or authorises or permits its provision — to the company’s members, debenture holders, auditors or the ASX. The director contravenes the section if they do so “without having taken reasonable steps to ensure” that the disclosure was not defective.

A director can prove they took reasonable steps if they can show they made reasonable inquiries or reasonably relied on others.

These provisions operate alongside directors’ existing duties to exercise reasonable care and diligence to avoid corporate disclosure failures, established in cases like James Hardie and Vocation.

Climate litigation is already here

We are already seeing litigation being used to put pressure on companies and other entities to ensure what they say to investors and other stakeholders about their climate response is adequate and accurate.

In July 2020, in the Federal Court proceedings O’Donnell v Commonwealth, the applicant alleged the Commonwealth had failed to disclose climate change risks to investors in government bonds and had breached its disclosure duty and engaged in misleading conduct. The respondents to the action include the Secretary to the Department of Treasury and the CEO of the Australian Office of Financial Management, as the individuals with responsibilities under the Public Governance, Performance and Accountability (PGPA) Act 2013 that are akin to directors’ duties.

In August 2021, the Australasian Centre for Corporate Responsibility (ACCR) announced Federal Court proceedings against Santos, challenging statements in its 202O annual report that natural gas is “clean fuel” and that it has a credible pathway to net zero emissions by 2040. ACCR has signaled it will argue the statements contravene the misleading conduct laws in the Corporations Act and the ACL.

Although these two cases are important, litigation over climate disclosure remains a trickle, not a torrent. There are significant legal and financial constraints on applicants seeking to change corporate behaviour through the courts. But the possibility of defective or self-serving disclosure being challenged is real and presents a real litigation risk for companies and directors.

Less disclosure is no longer an option, so better-quality disclosure is needed. At a minimum, this involves being candid with investors and other stakeholders, and not overstating where the company is up to in its climate response.

The law of directors’ duties gives individual boards considerable leeway in deciding how to respond to the risks presented by climate change. The disclosure laws are much less forgiving. Whatever the company’s climate response will be, it is important that it is disclosed accurately.

Disclosure

Professor Pamela Hanrahan was an expert witness in the 2018 climate change-related case McVeigh v REST.

Resources

In collaboration with MinterEllison, the AICD has released a Directors’ guide to climate risk governance.