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How Climate Change is Increasing Expectations of Directors Duties and Risks of Greenwashing: Part I

Directors duties are changing as the expectation for companies to mitigate climate change continues to rise.

Although companies are encouraged to make “net zero” commitments, they must have “reasonable grounds” to support such cause to prevent being found of misleading and deceptive conduct, or “greenwashing” (i.e. the embellishment in environmental credentials to entice investors). In Part I of this two-part article, we look at how directors duties have changed.

Australia’s Financial Regulators Tightening Guidance on Climate Risks

The APRA (Australian Prudential Regulation Authority) has released a new draft document relating to climate-related financial risk management. This document aims to educate banks, insurers and superannuation trustees. The APRA is also reviewing the current climate risk governance framework and stress testing the toughness of Australia’s financial institutions and system against climate risks.

In addition, ASIC (Australian Securities and Investments Commission) has declared “a crackdown on the practice of ‘greenwashing’, where companies embellish their environmental credentials to gain favour with investors focused on the transition to net-zero carbon emissions” (R Gluyas, ‘ASIC “greenwashing” crackdown on dubious ESG claims’, The Australian, 4 June 2021).

Climate Risk Disclosure a Requirement

In April 2019, the Australian Accounting Standards Board together with the Auditing and Assurance Standards Board issued a joint statement on the disclosure of climate change risks. The statement suggests that climate change risks are relevant to financial performance, including asset impairment and managing the lives and valuation of assets. The consensus on climate risk disclosure is supported by the Task Force on Climate-related Financial Disclosures, which labels its recommendations as industry standard. The recommendations are backed by ARPA, ASIC and the ASX Corporate Governance Council.

Other disclosure frameworks have also been established by industry-based initiatives, including the Climate Measurements Standards Initiative, the Australian Sustainable Finance Initiative, Climate League 2030, and the Australian Industry Energy Transitions Initiative.