Understanding the directors’ liability gap in climate reporting

Mandatory climate reporting has increased transparency around how organisations assess and disclose climate-related risks and opportunities. However, in the first year of reporting, another dynamic has emerged—one that’s less obvious, but increasingly important for boards.

A directors’ liability gap is beginning to take shape.

In the first year of reporting, directors are required to declare that the entity has taken reasonable steps to comply with the requirements of the Corporations Act 2001 and AASB S2 Climate-related Disclosures, and, in doing so, sign off on the full report. They carry personal liability for its content. However, assurance coverage—in the first year—is limited and phased. The result is a structural mismatch: in several key areas of the report, directors assume responsibility without any assurance from the auditor. In effect, they are being asked to sign off on the report’s most subjective, least standardised, and least independently assured sections.

Where the gap sits

The gap is not universal; it arises where directors’ liability extends beyond the scope of assurance coverage, and it does not apply evenly across disclosures. It is most evident in areas that combine high judgement and forward-looking assumptions.

From first-year reporting, these include:

1. Strategy disclosures, particularly where organisations explain:
   • Impacts on the business model and value chain
   • Implications for decision-making
   • Financial position, performance and cash flows.

2. Risk management, including how climate risks are identified, assessed and managed
3. Climate-related metrics and targets, particularly those extending beyond emissions into broader measures of transition and performance.

The first year of reporting reveals a structural mismatch in how the framework operates. This can be seen across three distinct categories of disclosure:

• Disclosures that are both assured and subject to director liability (such as Scope 1 and 2 emissions). No gap exists.
• Disclosures with modified liability settings or protection for directors (for example, scenario analysis and transition plans). These are either treated as protected statements or subject to different liability settings, which reduces directors’ exposure.
• Disclosures that remain fully within directors’ responsibility but are not yet subject to assurance (for example, detailed strategy, risk management and broader performance metrics).

It is in this final category that the liability gap is most pronounced.

The interaction between the directors’ personal liability and assurance by the auditors can be summarised below:

In these areas, disclosures are mandatory and often material. Directors remain accountable for accuracy and completeness, while assurance is either limited or not yet in place.

Why the gap exists

The liability gap is not a flaw in the framework; it’s a consequence of the regime's intentional phasing.

First-year reporting has been characterised by:

• Transitional reliefs, allowing organisations to defer certain disclosures (i.e. measurement of Scope 3 emissions)
• Heavy reliance on estimates and forward-looking assumptions
• A compliance-led approach, with many organisations focused on meeting minimum requirements rather than embedding climate into strategy.

This reflects the phased assurance model, where limited assurance initially applies to a narrower set of disclosures and expands over time.

At the same time, regulators are already signalling expectations. ASIC has highlighted concerns around insufficient explanation of assumptions, estimates and uncertainties underpinning disclosures.

Taken together, these factors mean that directors are often signing off on disclosures that:

• Are still evolving in maturity,
• Rely on developing methodologies, and
• Are not fully assured.

For more on directors’ obligations under the new regime, see our article on ASIC’s guidance on directors’ duties in sustainability reporting.

Why it matters for directors

For boards, the liability gap is not just a technical issue; it has direct implications for governance, risk and oversight.

Boards are being asked to approve disclosures that:

• Extend beyond historical reporting into forward-looking strategy and performance
• Rely on internal models and assumptions, and
• Are subject to increasing regulatory and investor scrutiny.

In this environment, responsibility sits firmly with the board, even where assurance does not.

The risk is not limited to formal enforcement. It also encompasses:

• Challenge from regulators on the robustness of disclosures
• Investor scrutiny on the credibility of strategy and targets, and
• Reputational risk where disclosures are perceived as incomplete or inconsistent.

This shifts the board's role from overseeing reporting to actively challenging how climate risks and assumptions are developed and disclosed.

Closing the gap: What boards should focus on

As reporting matures, the focus for boards shifts from compliance to confidence. Addressing the liability gap is less about adding processes and more about strengthening decision-making and oversight where assurance is not yet in place. This includes:

• Understanding where assurance applies, and where it does not
• Ensuring assumptions and methodologies are robust and defensible
• Testing how climate disclosures link to strategy and financial outcomes
• Being explicit about areas of uncertainty and data limitations, rather than avoiding them.

Looking ahead

Mandatory climate reporting has raised the bar for both transparency and accountability, but not at the same pace.

Until assurance frameworks fully catch up, directors will remain accountable for areas where assurance is still evolving. In that environment, robust challenge and oversight are not just good governance; they are a critical line of defence.

How BDO supports board oversight

As assurance frameworks evolve, the focus for boards will increasingly shift to judgement, challenge and oversight.

To support this, BDO has developed a checklist to help directors challenge key assumptions, understand areas of uncertainty, and strengthen governance over mandatory climate reporting.