Navigating new sustainability reporting rules

Directors will now need to have an understanding of how climate-related financial disclosures in annual reports are arrived at and verified.

Each year, about 30,000 entities prepare annual reports under chapter 2M of the Corporations Act 2001 (Cth) and Australian Accounting Standards Board (AASB) accounting standards. These include a financial report and a directors’ report, and are lodged with the Australian Securities and Investments Commission (ASIC). Others, including government-owned entities and medium and large charities, also provide public financial reporting under similar laws. All involve some level of sign-off by the entity’s directors.

From 2026, the annual reports of very large or very carbon-intensive entities that are covered by chapter 2M will start to include mandatory climate-related financial disclosure in a “sustainability report” that is prepared in accordance with AASB standards. Sustainability reports have a similar director sign-off mechanism to financial reports.

Directors’ declarations

Every director is required to confirm whether, in their opinion, the entity’s reports comply with the law. A financial report prepared under chapter 2M must include a declaration, made in accordance with a resolution of the directors, that covers matters including whether, in the directors’ opinion, the financial statements and notes comply with the accounting standards and give a true and fair view of the financial position and performance of the entity.

Medium and large charities that report to the Australian Charities and Not-for-profits Commission rather than to ASIC provide a similar declaration by the entity’s responsible people.

The sustainability report also requires a directors’ declaration that covers whether, in the directors’ opinion, the substantive provisions of the report comply with the sustainability standards and contain the prescribed disclosures.

The prescribed disclosures cover material climate-related financial risks and opportunities, metrics and targets relating to scope 1, 2 and 3 greenhouse gas emissions, and the entity’s approach to governance, strategy and risk management in relation to climate.

Transitional provisions that apply until 2028 modify the form of the declaration slightly, requiring the directors to declare whether, in their opinion, the entity has taken reasonable steps to ensure this is the case.

The directors’ declarations are statements of opinion that carry an implied representation that the opinion is genuinely held by each director. An opinion only reflects a belief in the statement, not that the matter stated is necessarily true. But a statement of opinion can also convey an implied representation that the person making it had reasonable grounds for doing so.

Reasonable steps

The addition of sustainability reporting to the annual reporting cycle will focus some stakeholders’ attention on director sign-offs and the liability rules that apply. This includes the extent to which directors can rely on work done by others, including management and third-party assurance providers.

Directors who deliberately falsify or withhold information in annual reports commit a criminal offence. But the reporting laws go further and impose personal obligations on directors to take all reasonable steps to ensure the entity’s reporting is accurate and complete. These obligations cannot be delegated. While cases against individual directors for mistakes in, or omissions from, annual reports are rare, they can arise.

The best-known is ASIC v Healey [2011] FCA 717, in which ASIC obtained civil penalties against all seven members of the board of the Centro property group for a significant error in the group’s 2007 accounts.

For entities that report under the Corporations Act, the basic rule provides that a director contravenes the section if they fail to take all reasonable steps to comply with, or ensure compliance with, the financial and sustainability reporting laws. This rule is supplemented by three other important provisions.

The first contains the directors’ general duty of care including an obligation to take reasonable care to protect the entity from the foreseeable harm to its interests that could come from a breach of the reporting laws.

The second imposes a duty to take all reasonable steps to ensure documents required under the Act or lodged with ASIC are not materially misleading.

The third imposes a similar duty in relation to information provided to directors, auditors, members and the market operator. All carry maximum civil penalties of $1.65m for individuals.

Directors necessarily rely on the work of others — including board committees, management and external assurance providers — in forming their opinion. Since 2004, the directors of listed companies have the benefit of formal sign-offs on the financial statements provided by the CEO and CFO.

If problems emerge, an important question for liability is whether it was reasonable for individual directors to rely on others in the way they did. Section 189 of the Corporations Act says reliance on others is taken to be reasonable if certain conditions are met. The reliance must be in good faith, made after making an independent assessment of the information or advice provided. If directors rely on an employee, they must believe on reasonable grounds that the employee was reliable and competent. If they are looking to a professional adviser or expert, they must believe the matter was within the person’s professional or expert competence.

Informed and engaged

All this requires directors to take an active and informed approach to reviewing the different reports provided to them. In the Centro case, the judge emphasised that each director is “required to apply their own minds” to the reports and carefully review them to determine whether what is disclosed is consistent with what they know (or ought to know) about the entity and does not omit anything material.

A director need not be an expert in financial or sustainability reporting, but they must have a basic understanding of the concepts involved and how disclosures are arrived at and verified. In Centro, this required “the financial literacy to understand basic accounting conventions and proper diligence in reading the financial statements”.

This year, ASIC will continue to focus on disclosures in financial reports requiring significant judgement, including revenue recognition, asset valuation and provisions. As annual reporting expands to include more climate-related disclosures, that focus will shift to sustainability reporting and affected directors will also need to be climate-literate.

This article first appeared under the headline 'Signing off on sustainability' in the July 2025 issue of Company Director magazine.