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

In our previous article, we look at how directors duties have changed following the increased expectations to minimise climate change risks. In Part II, we will explore the ways in which directors can reduce liability risk of “greenwashing”, which refers to the embellishment in environmental credentials to entice investors.

With every Australian State and Territory now committed to achieving “net zero” emissions by 2050, Australian companies are faced with rising pressure to join the effort by responding to climate change risks. However, the promise by company boards to reach a certain carbon emissions target by a said date can create liability for misleading and deceptive conduct.

Misleading and deceptive conduct is provided in the Australian Consumer Law Section 18, Corporations Act Section 1041H and ASIC Act Section 12DA. As net zero commitment constitutes a representation about the future, it can be misleading unless the representor has reasonable grounds for making such representation.

In an article by Noel Hutley SC and Sebastian Hartford Davis, the barristers discuss some practical strategies which directors can take to reduce liability risk of misleading and deceptive conduct.

1. “Net Zero” Commitment to be Part of Company Policy

By incorporating net zero commitment into company policy, it encourages public disclosure about a company’s strategy to mitigate climate change risks. Public disclosure should “identify and justify the key assumptions underpinning the company’s transition to net zero emissions and document the drivers of the company’s decarbonization”, wrote Hutley and Davis. External advisors may also be employed to assist with creating a net zero strategy.

2. Communicating “Net Zero” Strategies and Progress

A net zero strategy should include the types of emissions (e.g. Scopes 1, 2 and 3) and clearly state the timeframes in which particularly targets are anticipated to be achieved. Be sure to include any disclaimer where appropriate.

Should a company’s net zero strategy be amended, or become unattainable, this should be disclosed to stakeholders as soon as possible.

Similar to other operational strategies, it is not a surprise that appropriate disclosure and reporting are encouraged. Although this does not absolve directors’ duties relating to net zero commitment, it can prevent a director from engaging in greenwashing.

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