ASIC embeds climate risk disclosure in its rule book

Author Marina Lou

Date August 2019

In 2016 Noel Hutley SC provided a ground-breaking legal opinion arguing that the duty of care and diligence imposed upon company directors by section 180(1) of the Corporations Act 2001 required Australian company directors to respond to climate change risks to the extent they intersect with the interests of the firm. In an updated opinion issued in March 2019, Hutley found that directors’ liabilities are increasing, “probably exponentially”.  

In August 2019, the Australian Securities and Investments Commission (ASIC) has reinforced the Hutley view with updates to its regulatory guides. In this article we provide an overview of the changes and discuss their significance to business.

Climate risk is systemic

ASIC’s Regulatory Guide 228 Prospectuses: effective disclosure for retail investors and Regulatory Guide 247 Effective disclosure in an operating and financial review, which provides Australian corporates with ASIC’s interpretation of law and practical guidance on how to meet obligations under the Corporations Act, have been updated. Specific guidance has been provided on incorporating climate risk as developed by the Task Force on Climate-related Financial Disclosure into the list of examples of common risk which may need to be disclosed.

“RG 247.66

Climate change is a systemic risk that could have a material impact on the future financial position, performance or prospects of entities. Examples of other risks that could have a material impact for particular entities may include digital disruption, new technologies, geopolitical risks and cyber security. Directors may also consider whether it would be worthwhile to disclose additional information that would be relevant under integrated reporting, sustainability reporting or the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), where that information is not already required for the OFR.

Note: Climate-change-related risk disclosures in the OFR and in any voluntary disclosures (such as those recommended by the TCFD) should not be inconsistent. See also Report 593 Climate risk disclosure by Australia’s listed companies (REP 593).”

ASIC’s recognition that climate change is a systemic risk that could impact an entity’s financial prospects for future years puts greater pressure on companies to demonstrate the management of climate risks through its operational and financial reports. It implicitly shifts the onus onto listed entities to demonstrate why something as systemic as climate risk is not regarded as a material consideration for their business.

Further, as outlined in Energetics’ article, Climate risk and the emerging regulatory imperatives, ASIC’s latest announcement builds on a series of positions taken recently by regulators and financial institutions, and in legal judgements. Perhaps the most notable is the December 2018 announcement by Australia’s accounting and audit standard-setters (Australian Accounting Standards Board and the Auditing and Assurance Standards Board) advising corporates to consider climate-related risks in materiality assessments, and within the scope of external financial audit scrutiny.

Quality of disclosure expected to increase

In September 2018, ASIC announced the findings of a high-level review of 60 listed companies in the ASX300, 25 recent initial public offering prospectuses, and across 15,000 annual reports. They identified the need for improvement noting, “many listed companies provide climate risk disclosure that is too fragmented, general or not comprehensive enough to be useful for investors. In the case of companies outside the ASX 200, we found that relatively few companies provide any climate risk disclosure at all.”[1]

For those companies still considering whether to adopt TCFD recommendations in their financial disclosures, the decision is now much ‘easier’ to make. ASIC’s latest update of its rulebooks confirms the legal requirement that directors and officers must consider, manage and disclose climate related risks and opportunities. 

No time to delay

The process begins with a robust understanding of climate-related risks. As described under the TCFD, climate change can create business impacts both from the manifestation of erratic weather patterns, and the transition to a lower carbon economy. The management challenges are complex and a whole-of-business strategy is required, built on a comprehensive assessment of risks using climate science, scenario analysis and the application of adaptation frameworks. Yet pathways to build resilience to the changing climate and initiatives to reduce greenhouse gas emissions in step with the transition to the low carbon economy will also see companies identify new opportunities and innovate.

Businesses that don’t act now will not only face an increasingly hostile environment with regulatory risk and investor scrutiny; they may also fall behind their competitors and miss out on first mover advantages in this dynamic space.

 

 

References

[1] Australian Securities and Investments Commission (ASIC): “Disclosing climate risk”, https://www.asic.gov.au/media/4871341/rep593-published-20-september-2018.pdf, September 2018.