ISSB standards ‘consistent with existing requirements’ for company directors, legal opinion confirms

Incoming international reporting standards will provide a helpful blueprint for directors as they discharge their duties, with a new legal opinion confirming that Australian company directors should already be focussing on financially material issues such as climate risk and other sustainability matters.

The opinion comes from one of Australia’s leading legal experts on financial climate risks, Sebastian Hartford-Davis, and Kellie Dyon of counsel.  It builds on the landmark ‘Hutley Opinions’ by Mr Hartford-Davis and Noel Hutley SC, which confirmed that directors have a duty to consider and manage climate risk. MinterEllison acted as instructing solicitors on both the Hutley Opinions and the current brief.

The International Sustainability Standards Board (ISSB) draft standards, set to be finalised later this year, would require disclosure of material information about sustainability risks. 

The legal advice, sought by a group on institutional investors – the Australian Council of Superannuation Investors (ACSI), Investor Group of Climate Change (IGCC) and the Responsible Investment Association Australasia (RIAA) – highlights that directors should not face increased liability risks under ISSB standards and should not need any kind of ‘safe harbour’.

The legal advice is clear that, while the ISSB standards may require an evolution of processes and disclosures across industries, ‘in practice [it] simply reflects the need for directors to adapt and respond to climate risk issues facing their companies.’  Furthermore, as the Standards would require disclosures of risks material to each company, it is expected that directors would already be considering and measuring those risks.

ACSI CEO Louise Davidson

 “The ISSB standards represent an evolution of corporate reporting and will provide investors with the detail they need to make decisions – as the advice clearly states – this shouldn’t mean increased exposure for diligent directors who are supported by competent management,” Louise Davidson, ACSI CEO said.

“At present, the quality of climate reporting by Australian companies varies considerably.  Adoption of the ISSB standards would provide investors with much-needed reliable and comparable information about the climate change and other sustainability risks in their portfolios – information that is often lacking now.”

RIAA CEO Simon O’Connor

“It is simply no longer feasible for companies to brush away climate and other sustainability risks. Investors are demanding a better understanding of companies’ risks and how they’re managing them. Mandatory sustainability reporting will boost confidence for Australian investors.  Not only that, it is good business strategy.” said Simon O’Connor, RIAA CEO.

“Many Australian companies are already reporting on their climate risks under the Corporations law right now. Mandatory reporting on all sustainability risks will help investors and even the playing field. This legal advice shows climate-related financial disclosures are clearly within the mandate of company directors, who need to also consider which other sustainability risks are material to their organisation.” 

IGCC CEO – Rebecca Mikula-Wright

“This legal opinion will help investors just as much as it helps company directors,” said IGCC’s CEO Rebecca Mikula-Wright.

“The opinion shows that when companies publish their plans it’s valuable and appropriate for those statements to have a reasonable basis. That level of clarity must be protected, because it’s a crucial part of giving investors confidence so they can allocate capital in support of credible and robust business strategies.” she said.

“Australia’s institutional investors will help fund the country’s transition to net zero, but to do so they will require greater and ultimately mandatory disclosure of materially useful climate and sustainability information. The ISSB standards will provide a level of comparability that investors globally have been asking for and will help accelerate the transition.”

This authoritative legal opinion provides directors with the clarity they seek, in particular in relation to any forward-looking disclosures. Directors must make genuine assessments of a forward-looking disclosure when it is made, but ‘will not face liability merely because their assessment later turns out to be incorrect’, the advice affirms.  In other words, the legal requirement to have a reasonable basis for a forward-looking disclosure does not require the introduction of certainty where the subject-matter makes that impossible.

With climate risk one of the most urgent issues facing Australia, a global baseline set by the ISSB standards will help investors and company directors on the path to a low-carbon economy. Consistent and verifiable reporting of climate risks, and other sustainability-related measurements will be key to supporting an orderly transition, without the shocks, surprises and pitfalls that would accompany a disorderly transition.

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