Starting in January, large financial institutions, including insurers, will be required to prepare an annual sustainability report. At this stage, climate-related financial disclosures are the only component. However, the regulator says parliament “may introduce” other areas.
The new reporting standards could have significant implications for directors and officers (D&O) insurers.
Barrister Tomo Boston KC (pictured above) has described them as “a game changer”. The standards add further responsibilities to the duties of board directors.
“The reason I say it’s a game changer is that it brings out from the board its complete discretion to make decisions in respect of climate,” said Boston, a specialist in climate change law based in Melbourne.
“Previously, the position has always been that where directors on boards exercise their powers in good faith and in the best interest of the company, the courts are reluctant to intervene,” said Boston.
He gave the example of environmental law charity ClientEarth’s legal action against Shell’s board of directors in the High Court of England and Wales last year. The charity argued that Shell’s directors had breached legal duties towards the company by failing to adequately address climate risks in their sustainability strategy.
“That was dismissed on the basis that the Court said that they are ill equipped to make that decision,” said Boston.
However, in Australia, on January 1 2025, that’s all set to change.
“But now that we have a sustainability standard there is an external objective measure by which decisions of boards can be measured by a court and to determine whether the directors have, in fact, discharged their duty,” he said. “I think that puts directors of boards at risk where their sustainability reports are inaccurate or misleading in some way.”
The climate change law specialist also discussed who is likely to sue the directors of companies under the new standards.
“The obvious ones are shareholders,” he said.
Boston said derivative actions would be their likely pathway of action.
The online dictionary says these lawsuits are brought by a shareholder on behalf of a corporation against a third party who is often a company insider, like a director.
“The really important thing to note about this is that we're no longer talking about mums and dads,” said Boston. “We're talking about large institutional shareholders who have the sophistication and the funds on which they can pursue a climate agenda.”
He said that was demonstrated at Woodside Energy’s annual general meeting early this year.
“It wasn't litigious,” said Boston. “But it was the subject of a dispute between the Future Fund, which is a large institutional shareholder, and Woodside, where they claimed that their climate action plan was not sufficiently rigorous.”
The second source of potential plaintiffs, he said, is the Australian Securities and Investments Commission (ASIC). However, he said the regulator is allowing for a period of transition. According to an ASIC media release, the reporting requirements are being rolled out in a phased manner to different companies over the next three years.
Boston also mentioned what he called “one interesting angle of litigation” that he thought wouldn’t be widely known: legal claims brought by a firm’s competitor.
“Your competitor might sue you for misleading or deceptive conduct in respect of your sustainable report,” he said.
Special Council Kenneth Lee was also on the WTW webinar panel. The climate change and sustainability expert from HWL Ebsworth summarised why insurers and other businesses should make compliance with these new regulations a priority.
Christopher Au said the operating landscape for companies has changed. Au is WTW’s climate practice and alternative risk transfer lead for Asia-Pacific.
Are you an industry stakeholder? What’s your view of the new sustainability reporting standards and their possible D&O impact? Please tell us below.
