Review of ASX’s Corporate Governance Principles and Recommendations through an environmental risk lens

An analysis of Principle 7: Recognise and Manage Risk and the associated Recommendation 7.4

The ASX Corporate Governance Council (the “Council”) released the fourth edition of its “Corporate Governance Principles and Recommendations” on 27 February 2019. It encompasses the Council’s eight principles of corporate governance. For the purpose of this review we will focus on Principle 7 and associated Recommendation 7.4 in particular due to its relevance to CDSB’s expertise and work. 

The publication of the fourth edition comes at a time when environmental risk is high on the Australian agenda and companies face increasing pressure from stakeholders to disclose their climate-related financial risks and opportunities. 

In October last year, 40 per cent of Whitehaven Coal's investors supported a resolution demanding the company reveal the financial risks it faces as a result of climate change. Most recently, Bloomberg reported in February that Glencore, Australia’s largest coal miner, yielded to investors demands to limit coal production to align with Paris targets. 

Principle 7: Recognise and Manage Risk

Recommendation 7.4 of the Corporate Governance Principles and Recommendations states that “how an entity manages environmental and social risks can affect its ability to create long-term value for security holders. Accordingly, investors increasingly are calling for greater transparency on the environmental and social risks faced by listed entities, so that they in turn can properly assess the risk of investing in those entities.”

According to the publication, a listed entity does not need to publish an integrated or sustainability report to make the disclosures called for under Recommendation 7.4,hey can exist within the annual report alongside risks, strategy and financials. If an entity does publish an integrated or a sustainability report in accordance with a recognised international standard, such as the CDSB Framework as referenced in the publication, the entity may meet Recommendation 7.4 by cross-referring to that report. 

While a welcome step in the right direction, CDSB caution against disclosure outside of the mainstream report or cross-referencing, and instead encourages companies to report material environmental information with the same rigour and value as financial. 

Fundamental to the Principles and Recommendations is the “if not, why not” approach. Entities can choose not to adopt a Recommendation if they deem it not appropriate, however they must explain the reason behind this decision. Indeed, the Corporate Governance Principles and Recommendations encourages those companies who do not believe they are materially exposed to any environmental or social risks to review their conclusions and benchmark themselves against their peers. 

In the case of risk related to climate change specifically, the Council encourages entities to disclosure their material risk in line with the Task Force on Climate-related Financial Disclosures (“TCFD”) recommendations. This is particularly significant for the Australian market where companies with public debt or equity have a legal obligation to disclose material information in their financial filings. Climate-related issues are, or could be, material for many organisations. 

The vulnerabilities highlighted by the Senate Economics Reference Committee report of the Australian economy to climate-related risks, coupled with the Australian Securities and Investments Commission’s findings that just 17 per cent of 60 listed companies in a sample of the ASX 300 identified climate risk as a material risk to their business, demonstrates the need for thorough disclosure and better-quality data for investors. 

Given the Council’s commendable support for the adoption of the TCFD recommendations, we believe that mandatory reporting of all material environmental risks, not solely limited to climate, would be the most optimal course of action. 

Mandatory disclosure in mainstream reports would take Australia’s listed companies to the next level in understanding and acting on environmental and climate risks and opportunities and protecting investors in the long-term. 

Additional Information:

CDSB advised on the 2018 consultation draft. Our team’s consultation response can be found on the CDSB website. 

The TCFD Knowledge Hub offers resources to companies to implement the TCFD recommendations.