‘Safe harbour’ would undermine benefits of ISSB, says Aussie legal opinion

Australian investors publish legal opinion on corporate climate disclosures and director duties.

Introducing legal protections for directors when it comes to forward-looking climate-related disclosure requirements would undermine incentives to meet them, according to a legal opinion sought by Australian investors.

The opinion, which was released on Monday, considered the impact of the International Sustainability Standards Board’s draft standards (ISSB) on corporate directors. It concluded that the introduction of a so-called safe harbour is “not necessary or desirable”. 

The lawyers said the ISSB drafts “will likely assist in exposing existing bad practice” by “providing a consistent framework against which sub-standard practice can be improved”.

But, they added, such “beneficial effects” would only by undermined by a safe harbour, which would remove the “effective incentive (liability risk) which will actuate them”. 

The legal opinion was sought by the Australian Council of Superannuation Investors (ACSI), the ESG-focused body representing 26 super funds, along with the Investor Group on Climate Change (IGCC) and the Responsible Investment Association Australasia (RIAA). It was delivered by barrister Sebastian Hartford-Davis and counsel Kellie Dyon.

Hartford-Davis previously teamed up with Noel Hutley on a landmark 2016 opinion, which confirmed that directors have a duty to consider and manage climate risk.

One argument for safe harbours is the evolving nature of climate science and associated methodologies. But the lawyers argued that such reasoning is not secure: “[U]nder existing law, a forward-looking statement is not misleading merely because it later turns out to be wrong or based on science or methods that were later overtaken.”   

They added: “Investors and courts do not expect companies to predict the unpredictable, but instead to make sensible disclosures on a reasonable basis, and to update earlier disclosures if they become misleading by reason of later events.”  

ISSB, which was launched in November 2021 by the IFRS Foundation, published its draft standards in March 2022, with one on general requirements and the other on disclosures of climate-related risks and opportunities. A finalised version of the climate standards is expected in June. 

Hartford-Davis and Dyon also examined whether forward-looking requirements in the draft ISSB climate standards pose heightened liability risk to company directors, concluding that they did not.  

“[A]lthough the ISSB draft standards increase the number and kinds of forward-facing matters that directors are required to disclose, for diligent company directors properly supported by competent management, the ISSB Draft Standards should not increase directors’ exposure,” they wrote.

Under Australia’s Corporations Act 2001, corporate directors are already exposed if they are found to have negligently prepared climate-related disclosures.

The lawyers acknowledged that the introduction of the ISSB standards might result in more action against directors but said this does not mean the risk profile itself has shifted.

“In that sense, there may be a numerical increase in claims/investigations, and a corresponding increase in the exposure of directors,” the opinion stated. “But that is not to say there will be an increase in the scope or magnitude of risk for directors acting with due diligence and properly supported by competent management. 

“While comprehensive, the ISSB draft standards are directed only to that which is material for the entity in question, and thus to that which the directors should already be considering.”

Australia has recently seen an increased focus on directors. In November, a historic vote at Aussie energy giant AGL saw four dissident “climate competent” directors elected to its board, following a rebellion led by Grok Ventures, the activist fund owned by tech billionaire Mike Cannon-Brookes.