New ASIC guidance on sustainability reporting

If an entity determines that there are no material financial risks or opportunities relating to climate for a financial year, they may lodge a statement to that effect along with a statement explaining how the entity came to this conclusion.

Entities may also wish to disclose voluntary sustainability-related information to meet the information needs of users in accordance with the Australian Sustainability Reporting Standard AASB S1 General Requirements for Disclosure of Sustainability-related Financial Information.

Forward looking statements

Entities may disclose information in the climate statements that may include, or constitute, forward-looking information including climate-related risks and opportunities, climate-related scenario analysis and any planned use of carbon credits to offset greenhouse gas emissions.

Under the Corporations Act and the Australian Securities and Investments Commission Act 2001, some representations about future matters will be taken to be misleading unless there are reasonable grounds for making the representations at the time they are made. Notwithstanding that representations about the future are often inherently uncertain, RG 280 acknowledges that forward-looking information is nevertheless useful for existing and potential investors, lenders, other creditors, and other users and also supports regulators in considering the future financial stability implications of climate change.

Records and verification

Entities required to prepare a sustainability report for a financial year must keep written sustainability records for 7 years after the report is lodged that explain the methods, assumptions and evidence from which the sustainability report (apart from the directors’ declaration) is made up. Records need to substantiate the governance, strategy, risk management and metrics and target disclosures made and could include:

(a) minutes of board or committee meetings;

(b) internal reports or analysis;

(c) reports commissioned by third parties, such as consultants or experts;

(d) greenhouse gas emissions inventories;

(e) source documentation and extracts from the general ledger evidencing climate-related impacts on the reporting entity’s financial position, performance and cash flows for the reporting period; and

(f) working papers or documents evidencing inputs for, and assumptions used in, the sustainability report.

Directors’ duties

RG 280 considers how the sustainability reporting requirements broadly intersect with the directors’ duties under the Corporations Act. Directors have a duty to exercise their powers with the care and diligence that a reasonable person would exercise in the circumstances and also have a duty to act in good faith in the best interests of the corporation.

According to RG 280, directors of reporting entities should:

• have an understanding about the reporting entity's sustainability reporting obligations;

• have an understanding about climate-related risks or opportunities that could reasonably be expected to affect the reporting entity's prospects including its access to cash flows, its access to finance and cost of capital over the short, medium and long term;

• require the establishing of systems that identify, assess and monitor any material financial risks and opportunities relating to climate;

• require the establishing of controls, policies and procedures for overseeing, managing and preparing the sustainability report and keeping sustainability records; and

• apply a critical lens to the disclosures proposed in the sustainability report.

Directors may engage qualified experts, advisers and other suitably qualified persons to assist in the preparation of a sustainability report. However, importantly:

• directors but must still exercise their own skill and judgment, and rely on the information provided at the time in good faith;

• directors provide an accompanying declaration - passed by resolution, dated and signed – certifying that, in their opinion, reasonable steps have been taken to ensure the sustainability report is in accordance with the Corporations Act and AASB S2; and

• for financial years commencing on or after 1 January 2028, directors will be required to declare that the sustainability report is in accordance with the Corporations Act.

ASIC’s role

ASIC is responsible for administering and, where appropriate, enforcing the sustainability reporting requirements under the Corporations Act and any other laws that ASIC administers.

RG280 confirms that ASIC may review sustainability reports and audit files to monitor compliance proactively by way of thematic surveillance, reactively as part of an investigation or in response to reports of misconduct, or on any other basis they determine necessary.

ASIC recognises there will be a period of transition as reporting entities adjust to the new reporting requirements. RG280 explains that ASIC will take a “proportionate and pragmatic approach to supervision and enforcement as the requirements are being phased in” and "engage directly with reporting entities where they identify incorrect, incomplete or misleading statements". If concerns remain ASIC will either provide the entity with the opportunity to make changes or issue it with a direction to do so.

Enforcement investigations are more likely where serious or reckless misconduct is identified or a reporting entity fails to prepare a sustainability report for the relevant financial year. ASIC has also separately reiterated that it will continue to take action against misleading and deceptive conduct (greenwashing) in whatever form such representations are made. This includes in the guise of sustainability reporting.

Importantly, RG280 provides further clarity around the modified liability settings. It advises that no action other than criminal action or action by ASIC can be brought in respect of "protected statements" made within a sustainability report, or any auditor’s report on a sustainability report.

Finally, RG 280 clarifies that the modified liability settings do not extend to statements made outside of a sustainability report. Accordingly, greenwashing risks should be carefully considered when making all external statements, including in separate public statement which seek to align messaging from sustainability reporting.