Navigating Australia’s sustainability reporting landscape

The regulatory guidance, titled RG 280 Sustainability reporting (71-page / 811KB PDF), comes in the wake of a detailed consultation process on ASIC’s intended approach to administering and enforcing the recently introduced sustainability reporting regime under Chapter 2M of the Corporations Act 2001 (Cth) (Corporations Act).

According to RG 280, ASIC’s focus in administering the sustainability reporting regime is to foster “high-quality, consistent and comparable climate-related financial disclosures to enable users of that information to make informed decisions.”  

ASIC role isn’t, importantly, generally to assess the ambition or merit of a reporting entity's targets or strategies. RG 280’s scope is limited to providing guidance that will assist entities in determining whether reporting obligations apply, and, if they do, how to satisfy the legal reporting requirements.  

Despite submissions during the consultation process requesting that RG 280 provide a greater level of guidance in relation to the substantive requirements that must be addressed in sustainability reports, only limited guidance is provided on practical matters relating to the substance of sustainability reports. Mostly, RG 280 provides guidance in relation to ASIC’s approach to implementing the regime.

Australian companies with a foreign parent company

An Australian company with a foreign parent company is required to submit a sustainability report itself and cannot rely on a report prepared in respect of the foreign parent entity.

This is because a foreign parent is not a Chapter 2M entity and is not required under the accounting standards to prepare financial statements.

Australian entities that may typically feed sustainability data to a foreign holding company for the purpose of global sustainability reporting purposes will need to comply not only with internal group reporting obligations, but now also with the local legal sustainability reporting obligations, if they are subject to them.

Scope of immunity for protected statements

A modified liability regime exists so that no legal action other than criminal action, or action by ASIC, can be brought against a person in relation to ‘protected statements’ made in the sustainability report; or the auditor’s report on the sustainability report.

This modified liability regime will operate for the first three years of reporting under the sustainability reporting regime.  For example, investors can not bring a class action claim that a protected statement made in the first three years of sustainability reporting was misleading or deceptive.

The guidance confirms that the limited immunity will extend to statements made outside of the sustainability reporting regime, but only where the statement is required to be made under a Commonwealth law, for example under continuous disclosure or fundraising disclosure documents, and is the same as the protected statement made in the sustainability report or differs only in so far as it contain updates or corrections to the protected statement required to be made by law.

Voluntary statements, whether related to, or referred to in, sustainability reports, will not benefit from the modified liability regime. Examples of voluntary statements that are not covered by the immunity include summaries or expansions on sustainability reports, for example in investor presentations, references made in the sustainability reports to other information or reports and voluntary updates to the protected statements that were not required by law.

Greenwashing focus

It is clear that greenwashing remains a key ASIC enforcement priority, and greenwashing risks need to be front of mind when preparing sustainability reports and other green or ESG statements.

In March, the Federal Court imposed a fine of $10.5 million on LGSS Pty Ltd as trustee for Local Government Super, otherwise known as Active Super Fund. The fine followed earlier rulings by the Federal Court, where Active Super fund was found to have engaged in greenwashing, contrary to the provisions of sections 12DB(1)(a) and 12DF(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).

This decision was based on evidence that LGSS had made false and misleading representations to members and potential members of the Active Super fund about its “green” or “ESG” credentials, which included representations made on the fund’s website, in emails to members, in PDS Fact Sheets, and in an interview with the CEO in Investment Magazine.

Active Super fund had claimed that it eliminated investments into gambling, coal mining, oil tar sands, and, following the invasion of Ukraine, into Russia. ASIC established to the court that the Active Super fund was invested in companies excluded by the investment screen and the representations were false and misleading.

The judgment highlights the continued focus on prosecuting instances of greenwashing. As the sustainability disclosure regime requires disclosure of forward-looking statements, in particular, the risk of engaging in greenwashing will need to be carefully considered.

RG 280 provides some limited guidance on greenwashing risk in sustainability reporting: Where ASIC identifies that a statement in a sustainability report is incorrect, incomplete or misleading in any way, it will engage directly with reporting entities to understand the basis for the relevant disclosures. If concerns remain, ASIC may provide entities with the opportunity to make changes or otherwise direct changes to be made utilising its directions power; and ASIC is more likely to commence an enforcement investigation in relation to misconduct of a serious or reckless nature.

Reporting entities should ensure that sustainability reports are prepared and scrutinised not only from a financial accuracy perspective, but from a legal perspective to ensure compliance with the Corporations Act too. The ASIC Act and Australian Consumer Law should be noted as they prohibit the making of false and misleading representations and engaging in misleading conduct.

Co-written by Matthew Thornton-Dibb of Pinsent Masons