ASIC report on climate risk disclosure

In the first review of its kind in Australia, ASIC has recently released the results of their examination of climate risk disclosure by listed companies [Report 593].

ASIC highlights the Corporations Act 2001 Cth requirement for listed companies to disclose material business risks and indicates that, in their opinion, climate change is a foreseeable risk facing many listed companies in a range of different industries. This applies to those entities in the process of listing and issuing a prospectus as well as those that are already listed.

The key ASIC findings are:

• 7 per cent of listed entities in the sample (sample size of 60 drawn from the ASX 300) identified climate risk as a material risk in the operating and financial review (OFR)
• Many disclosures were too general and not comprehensive enough to be useful for investors
• Fragmented climate risk disclosure practices (relevant disclosures were included in the OFR or annual report or separate ESG report of climate change policy or part of a submission to the Carbon Disclosure Project) make comparisons difficult
• The majority of the ASX 100 companies in the sample had, to some extent, considered climate risk in the company’s business
• The review of climate risk disclosure in all listed company annual reports between 2011 and 2017 revealed that very little disclosure existed outside of the ASX 300 and more disclosure in the ASX 100 than ASX 101 – 300.
• A number of companies in the sample intended to adopt the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) for future annual reports.

AICD recognises that climate change risk is a relevant and significant risk for directors for many Australian organisations. We consider that boards have a critical role in overseeing the assessment, managing and reporting on all material business risks, of which climate change may be one, depending on the business and sector. We note the TCFD framework may be useful to guide the board and officers in considering appropriate disclosures.

ASIC notes that disclosure practices in this area are still evolving, not just in Australia but also globally. They set out recommendations in the report to assist directors in developing their climate change disclosure practices, including:

• Strong and effective corporate governance will help in identifying, assessing and managing material risk.
  
• Directors and officers of listed companies should adopt a probative and proactive approach to emerging risks, including climate risk. In assessing climate risk, ASIC recommends consideration of the TCFD final report as a reference guide.
• Awareness of the relevant areas of the Corporations Act, which includes section 299A(1)(c) that requires disclosure of material business risks affecting future prospects in an OFR and s710 requiring a prospectus to contain all information reasonably required by investors to make an informed assessment of the prospects of the company that is to issue the securities.
• Listed companies with material exposure to climate risk should consider reporting under the TCFD framework.

These findings follow the Australian Council of Superannuation Investors report , Corporate Sustainability Reporting in Australia, issued in June 2018, which included an assessment of how many companies are incorporating the TCFD framework into their thinking and reporting.

The increased focus on climate change by ASIC reflects the importance of companies building climate change considerations into their risk assessments, as part of the increasing regulator and investor expectations of greater disclosure. The latest review of the ASX Corporate Governance Principles and Recommendations also references climate change risks and the TCFD report in the commentary in relation to Principle 7: Recognise and manage risk. The AICD has supported the proposed changes, noting that it will ultimately be a matter for companies to determine whether they are materially exposed to climate risk. Further guidance on this topic can be accessed through the AICD website or through the TCFD knowledge hub.