Sustainability Disclosures: New Standards to Litigate Greenwashing

10 January 2024

Climate risks arise for companies in two main forms: first, the exposure of assets and business to physical risks such as flooding or wildfires, which also disrupt the supply chain and transport links; and second, the exposure to climate transition when assets devalue or become ‘stranded’ in the low-carbon economy.


Financial accounts should provide a ‘true and fair’ picture of a company’s finances but they cannot fully reflect the impact of climate change. Climate risks are financially material, but often widely underestimated. Several jurisdictions have therefore revamped their standards on corporate disclosures (the information that firms release alongside their regular financial accounts).


On the basis of these new sustainability disclosures, investors are now set to get a better understanding of how climate change and other risks will affect the financial performance of companies, and of how these firms are transitioning to a low-carbon economy. This represents a key shift in capital markets transparency. In parallel, financial regulators have defined standards on financial product ESG labels. The Sustainable Financial Disclosure Regulation has been in effect in the EU since 2021, though it is now undergoing a further revision, and an equivalent UK regime will come into effect this May.


In an effort to appease concerns of investors and other stakeholders, firms have promoted their ‘climate credentials’ and there has been an explosion of corporate and financial sector ‘net zero’ targets. Investors, however, rarely had the information to assess the credibility of such claims, or to determine if the commitments were sufficiently ambitious. Many climate transition plans and net zero targets turn out in fact to be quite superficial.1


A new legal landscape


All key jurisdictions have now committed to regulatory sustainability disclosure standards, or have already adopted such standards:


  • The International Financial Reporting Standards (IFRS) Foundation initiated work on a new framework in 2021, building on the work of several earlier In record time, the International Sustainability Standards Board (ISSB), which operates under the accounting board that maintains the IFRS, released two sustainability disclosure standards in June 2023.2 The ISSB will represent a global baseline for how firms report on sustainability risks that are material to their financial performance. Apart from climate, natural risks from biodiversity and ecosystem degradation will also soon be covered.


  • In the UK, the Transition Plan Taskforce published detailed standards in October These are closely aligned with those of the ISSB and will be translated into regulation for both listed and large unlisted UK firms in the coming months.3


  • Some UK firms will in addition be subject to the EU’s Corporate Sustainability Reporting Directive (CSRD), which was also finalized last summer.4 The EU standards are more ambitious as they also include the impact of a firm on the environment.


  • Finally, the US Securities and Exchange Commission (SEC) proposed rules in March 2022 and is due to release its disclosure standard soon. California has already pressed ahead with comprehensive disclosure requirements, including the so-called ‘Scope 3’ emissions in the value chain.5


The simultaneous introduction of these multiple standards may seem confusing. The core requirements, however, will likely be quite similar across the key markets as they build on the standard that the G20 has helped define since 2016 through the Task Force on Climate-Related Financial Disclosures (TCFD). Under this earlier standard, a company (whether in the financial or ‘real’ sector) is required to report how it manages climate risks, what metrics and targets it uses in doing so, its strategy and financial planning to address climate risks, and how governance within the organisation supports this strategy. A number of studies already document that this greater transparency may well be in the very own interest of corporate boards and shareholders — what gets measured gets managed.


The path to climate neutrality


Central to the new disclosure regulations is the legal requirement for greater clarity on climate transition plans. Net zero targets on their own are not sufficient but need to be backed up with detailed information on how enterprises or financial institutions will align with a given climate scenario e.g., the collective commitment to limit global warming to 1.5°C.


Transition planning involves more than regulatory compliance and smart public relations. A world of zero net emissions is not just a policy choice but the inevitable outcome of ongoing planetary warming and climate breakdown. To the extent a company can show that it has a plan for its future in the low-carbon economy, investors, suppliers, and customers will be reassured and deepen business ties. This is particularly relevant in carbon-intensive sectors, such as construction or shipping, which need to attract finance for a lengthy transition.


Greenwashing: the scope for litigation


Corporate climate commitments, net zero targets, and risk disclosures will now be increasingly scrutinized by investors, consumers, and NGOs. The UK’s Financial Conduct Authority (FCA) has announced a strategy how it will vet claims by fund managers.


Greenwashing is an age-old malpractice of unsubstantiated, misleading, or selective claims of an entity’s environmental performance. Claims against enterprises are being brought under fraud, false advertising, or prospectus rules. There has already been an explosion of climate litigation cases in recent years.6


The direction of travel is clear – climate litigation will accelerate on the back of the new disclosure standards. A recent analysis by a central banking body argues that recent disclosure legislation could now help litigants bring cases on the basis of non-compliance with disclosure regulations. And importantly these cases could also target foreign enterprises listed in the capital market of another country with more demanding disclosure rules.7 The bottom line is that firms will have little time to lose in preparing much more comprehensive sustainability disclosures, and this will be a significant theme of 2024.


1 For example, the Climate Disclosure project showed earlier this year that few firms with published transition plans and net zero targets backed these up with the key elements to make them credible and effective. See:

2 See the IFRS sustainability disclosure standards: ifrs-s2/?utm_medium=social&utm_source=linkedin&utm_campaign=s1_s2.

3 See the UK Transition Plan Taskforce:

4 This will directly apply to about 50,000 listed or large firms beginning with the 2024 financial year. Non-EU firms with a substantial presence will also be covered. See the EU CSRD: markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en.

5 See the SEC proposal of April 2022:

6 The Centre for Climate Change Economics and Policy (CCCEP), Setzer and Higham (2023): Global trends in climate litigation: 2023 snapshot.

7 The Network for Greening the Financial System (NGFS) reports on climate-related litigation: risks.