The heat is on: directors facing increased expectations in relation to sustainability disclosures

• Published date: 19 September 2022
• Law Firm: Corrs Chambers Westgarth
• Author: Ms Abigail Gill, Sandy Mak, Phoebe Wynn-Pope, Lily Vadasz and Georgia Whitten

In a reflection of the growing influence of stakeholders including shareholders, investors, customers and employees, the management of environmental, social and governance (ESG) risks as part of an integrated approach to strategic decision-making and operations is now commonplace for corporate organisations.

Regulators globally are placing an increasing focus on the management of sustainability risks, reporting and disclosure. This is particularly the case for so-called 'greenwashing'- where inflated or misleading claims about sustainability credentials are made to attract or retain customers and investors.

Over the past five years, the conversation in boardrooms around the world has centred largely on the duties that corporations have in respect of climate change risks in the context of their ongoing operations and strategies. In the last two years, the focus for regulators has pivoted from issuing various notes and guidance to their regulated markets to enforcing prudent management of sustainability reporting and disclosure using existing legal frameworks.

A number of jurisdictions are also seeking to clarify and codify the obligations on companies to explain how ESG risks are factored into strategic and operational considerations through regulation. It therefore seems inevitable that a wave of enforcement activity will follow in the near future, targeting those entities that embellish their sustainability credentials and reporting and that ignore the clear signals from regulators at their peril.

Recent global developments

On 10 March 2021, the European Union (EU) Sustainable Finance Disclosure Regulation came into force, requiring asset managers, pension funds and insurers to disclose how they consider ESG risks in their investment decisions in order to prevent greenwashing of financial advice.

In February this year, the European Commission released its long-awaited draft regulation on corporate sustainability and due diligence, which appears to be the current high watermark in proposed ESG regulation. The draft regulation has been met with some opposition, with critics suggesting it is not risk-based and may pressure some businesses to simply withdraw from certain markets rather than address the more stringent regulatory expectations. As drafted, it would require businesses to assess the actual and potential environmental and human rights impacts of their operations and supply chains, take action to mitigate and remedy those impacts and communicate these matters publicly. A failure to comply could result in administrative penalties and civil liability.

In July 2022, the Monetary Authority of Singapore released new disclosure requirements for ESG funds, which come into effect from January 2023 and specifically seek to reduce greenwashing risks. This follows an observation by Reuters that there has been a sharp increase in money flowing into funds that promote misleading ESG credentials.

In 2021, following the creation of a Climate, Environmental, Social and Governance Task Force, the US Securities and Exchange Commission (SEC) proposed standardised climate-related disclosure rules...