Sustainability and climate disclosures: can the ISSB standards mitigate litigation risks?

June 2022  |  SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION

Financier Worldwide Magazine

June 2022 Issue

As the global focus on environmental, social and governance (ESG) issues continues to intensify, companies face increasing pressure from investors, capital market participants and the community at large to operate sustainably and in line with global climate goals (such as those of the Paris Agreement) and make sufficient climate and sustainability-related disclosures.

This article will outline recent cases showcasing the litigation risks associated with such disclosures and then address the International Sustainability Standards Board’s (ISSB’s) recently published draft disclosure standards as a potential means of mitigating those risks.

The litigation risks associated with companies’ sustainability and climate-related disclosures are increasingly evident on the international stage, as private actors continue to face claims on the basis of insufficient, inaccurate or misleading disclosures (commonly referred to as greenwashing), especially in relation to companies’ plans to reduce greenhouse gas (GHG) emissions in line with international climate goals.

Recent decisions and claims, summarised below, highlight the growing expectation that companies achieve climate and sustainability commitments and suggest that corporate ESG plans and disclosures are key to determining whether those commitments are being met.

Milieudefensie v Shell

In its May 2021 decision, the Hague District Court ordered Royal Dutch Shell (RDS), directly and via the Shell group, to reduce its overall CO2 emissions, including scope 1 (direct emissions from operations), scope 2 (from energy use) and scope 3 (from their broader value chain), by 45 percent by 2030 relative to 2019 levels.

The court also noted that RDS’s (then current) policy, policy intentions and ambitions for the Shell group were “rather intangible, undefined and non-binding plans for the long-term (2050)” and required RDS to “actively effectuate its reduction obligation through the Shell group’s corporate policy”. In making its decision, the court determined that while not binding on RDS, the goals of the Paris Agreement were relevant to determining the scope of RDS’s reduction obligations.

Notre Affaire à Tous and Others v Total

In January 2020, a group of French non-governmental organisations (NGOs) brought a complaint against French oil company Total, alleging that Total violated the French Commercial Code by failing to adequately report its activity-related climate risks and failing to actively mitigate the same in accordance with the goals of the Paris Agreement. The claimants seek a court order requiring Total to issue a corporate strategy that: (i) identifies GHG emissions risks resulting from Total’s goods and services; (ii) identifies the risks of serious climate-related harms; and (iii) takes action to ensure Total’s operations align with the climate goals of the Paris Agreement.

Australasian Centre for Corporate Responsibility v Santos

On 25 August 2021, an Australian shareholder advocacy NGO filed a claim against natural gas supplier Santos in relation to claims of ‘greenwashing’ in the company’s annual report, in violation of Australia’s consumer protection and corporation laws. The NGO alleges that Santos has made misleading representations, including that natural gas is “clean” energy and that Santos has a credible plan to achieve “net zero” scope 1 and scope 2 GHG emissions by 2040. With respect to GHG emissions, the NGO specifically disputes Santos’ failure to disclose plans to develop new liquefied natural gas (LNG) commitments and the company’s reliance on undisclosed qualifications and assumptions regarding carbon capture and storage (CCS) processes.

As companies try to meet their ESG obligations, the question often, then, becomes: how much, when and where to disclose? These questions are made more difficult given the current global patchwork of sustainability and climate related disclosure requirements, which may vary significantly across jurisdictions. The current lack of any global baseline standard for such disclosures may complicate a company’s disclosure obligations, both voluntary and legislated, and lead to increased litigation risk – particularly for companies with cross-border or international operations.

Recently, the international community has sought to address issues of sustainability and climate related disclosures through the creation of the ISSB, an entity established by the International Financial Reporting Standards (IFRS) Foundation at the 26th United Nations Climate Change Conference of Parties (COP26) in November 2021.

The ISSB’s mandate, to develop “a comprehensive global baseline of sustainability-related disclosure standards”, has received support from G20 countries, which may choose to incorporate the ISSB standards into their respective national legislation. As such, the ISSB standards could replace the existing variegation of sustainability and climate disclosure requirements with uniform global disclosure standards, potentially mitigating litigation risks stemming from the existing variance in disclosure requirements across jurisdictions.

On 31 March 2022, the ISSB published draft standards for general sustainability-related disclosures and climate-related disclosures, which are open for comment until 29 July 2022. Significant aspects of the ISSB proposed disclosure standards are briefly described below.

ISSB draft standard for general sustainability-related disclosures

The ISSB’s standard for general sustainability-related disclosures would require companies to disclose material information about their significant sustainability-related risks and opportunities, with “materiality” to be assessed in the context of the information necessary for users of general purpose financial reporting to assess enterprise value (i.e., the total value of a reporting entity’s equity and net debt, reflecting the amount, timing, and uncertainty of future cash flows over the short, medium and long term).

Under the ISSB general standard, companies are required to provide a complete, neutral and accurate depiction of their sustainability-related financial information in their general purpose financial reporting. Sustainability-related financial information is defined as “broader than information in the financial statements” and could include information about: (i) governance of sustainability-related risks and opportunities and strategies to address them; (ii) decisions that could result in future inflows and outflows that do not meet the criteria for recognition in financial statements; (iii) “an entity’s reputation, performance and prospects as a consequence of its actions, including its relationships with people, the planet and the economy, and its impacts and dependencies on them”; and (iv) development of knowledge-based assets.

The ISSB general standard proposes that the core content of a company’s sustainability-related disclosures should focus on the following four areas: governance, strategy, risk management, and metrics and targets. It would specifically require companies to disclose material information about significant sustainability-related risks across a company’s entire value chain, which is defined as the “full range of activities, resources and relationships related to a company’s business model and the external environmental in which it operates”.

ISSB draft standard for climate-related disclosures

The ISSB standard for climate-related disclosures would require companies to disclose information about their exposure to significant climate-related risks and opportunities, including physical risks from climate change and transition risks associated with moving to a lower-carbon economy.

The disclosures should allow users of a company’s general purpose financial reporting to: (i) assess the effects of significant climate-related risks and opportunities on enterprise value; (ii) to understand how a company’s use of resources and corresponding inputs, outputs and outcomes supports its response to and strategy for managing climate-related risks and opportunities; and (iii) evaluate a company’s ability to adapt its planning, business model and operations to significant climate-related risks and opportunities.

The ISSB climate standard follows the Task Force on Climate-Related Financial Disclosures’ (TCFD) recommendations along the four key areas of governance, strategy, risk management and targets and metrics. However, it proposes several additional disclosure requirements, as follows.

In addition to disclosure of board oversight of climate-related risks and opportunities and disclosure of management’s role in assessing and managing the same, the climate standard would require disclosure of the identity of the body responsible for climate-related oversight, how that body’s responsibilities are reflected in company mandates and policies, how it ensures appropriate competencies and skills in oversight of climate-related strategies, and whether and how dedicated controls and procedures are applied to climate-related management.

Companies would have to disclose the metrics and targets used to manage and monitor performance in relation to climate-related risks and opportunities, including disclosure of how any emissions-reduction target has been calculated, how the target compares with the latest international agreement on climate change (the Paris Agreement), and whether it has been verified by an external third party.

Significantly, companies would be required to disclose their absolute scope 1, 2 and 3 GHG emissions and the intensity of their GHG emissions. The ISSB climate standard proposes that GHG emissions be calculated in line with the Global GHG Accounting and Reporting Standards. Scope 1 and 2 emissions are to be calculated separately for the consolidated accounting group (parent and subsidiaries) and for associates, joint ventures or unconsolidated subsidiaries and affiliates.

Further, the ISSB climate standard proposes specific industry-based disclosure requirements derived from the Sustainability Accounting Standards Board Standards (SASB), with targeted amendments to improve their international applicability. It proposes to add additional disclosure topics and metrics for four industries – commercial banks, investment banks, insurance and asset management – relating to lending or underwriting activities that finance or facilitate GHG emissions.

The ISSB standards have the potential to harmonise global sustainability and climate related reporting across jurisdictions, helping companies to manage litigation risks, including those resulting from varying jurisdictional disclosure standards. While the ISSB general and climate standards are not expected to be finalised until the end of 2022, and will only be binding to the extent that they are adopted by (or inform) national legislation, the ISSB draft standards are nevertheless a helpful tool that may inform companies’ current voluntary disclosures, ensuring a minimum benchmark disclosure standard that may reduce litigation risks associated with insufficient or misleading corporate disclosures. To further mitigate litigation risks, companies are encouraged to stay apprised of developing ISSB standards and any changes to national legislation to avoid non-compliance in ESG and financial reporting.

 

Timothy St. John Ellam, QC is a litigation partner and Nicole Fitz-Simon is an associate at McCarthy Tétrault. Mr Ellam can be contacted on +1 (403) 260 3533 or by email: tellam@mccarthy.ca. Ms Fitz-Simon can be contacted on +1 (403) 260 3713 or by email: nfitzsimon@mccarthy.ca.

© Financier Worldwide

BY

Timothy St. John Ellam and Nicole Fitz-Simon

McCarthy Tétrault

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