With fellow regulators, the Australian Prudential Regulation Authority and the Reserve Bank of Australia, showing their support in the audience, ASIC highlighted the increasing market interest in Environmental, Social and Governance (ESG) issues, and then specifically the focus on climate risk.
Governance of climate risk
Commissioner Price squarely put the leadership of the issue on the shoulders of directors and senior management, indicating that this is a risk issue and should be considered like any other risk issue by applying the core fundamentals of corporate governance – integrity, transparency, accountability and acting for a proper purpose.
He asked directors to carefully consider the 2016 memorandum of opinion by Noel Hutley QC and Sebastian Hartford-Davis on climate change and directors’ duties. He added that in ASIC’s view the Hutley opinion appears “legally sound and reflective of our understanding of the position under prevailing case law in Australia in so far as directors’ duties are concerned”. He stressed that the Hutley opinion highlights and reinforces the need for directors to adopt a “probative and proactive” approach in order to inform their decision making and carefully consider the general information needs of investors.
AICD reported on the Hutley opinion in November and December 2016.
The Hutley opinion states that:
- ‘Climate change risks’ represent, or are capable of representing, risks of harm to the interests of, and opportunities for, Australian companies and their business models, which would be regarded by a court as being foreseeable at the present time;
- Such risks are relevant to a director’s duty of due care and diligence, and directors can, and in many cases should, be considering the impacts on their business;
- Conversely, the law does not prohibit directors from taking climate change and related economic, environmental and social sustainability risks into accounting where those risks are, or may be, material to the company’s interests; and critically
- It is conceivable that directors who fail to consider the impacts of climate change risk for their business now could be found liable for breaching their statutory duty of due care and diligence going forwards.
Disclosure of climate risk
Commissioner Price then highlighted that ASIC is strongly focused on ensuring that, where the law requires it, companies disclose material climate change risks. He referred to various guidance documents that already exist and cover climate change risks – Regulatory Guide 247 and Regulatory Guide 228 – and the existing laws relating to continuous disclosure.
ASIC indicated that it had commenced a review of their relevant regulatory guidance to ensure it remains appropriate, with the work expected to be completed by the end of this year.
Commissioner Price also noted that the voluntary framework developed by the Financial Stability Board’s Taskforce of Climate-related Financial Disclosures (TCFD) may assist companies and advisers in considering what types of information to disclose.
Significantly, Commissioner Price made clear that ASIC does not consider that director liability concerns around forward-looking statements should be major impediments to reporting under the TCFD recommendations, provided that the modelling adopts reasonable assumptions and inputs and discloses them in full.
ASIC is also engaged with climate change risk issues through a number of other avenues including:
- Discussions with IOSCO (the global forum of corporate regulators) and international peers on international developments;
- Focus on asset values and impairment testing as part of their surveillance of financial reports, in cases where climate change may affect asset values;
- Review of climate change-related disclosures across the ASX 300 to better understand current market practices with findings published later this year; and
- Participation in a climate risk working group with APRA, RBA and Treasury to help ensure a coordinated response to climate risk and the impact on financial systems and markets.
In concluding remarks, and noting that for some company stakeholders the social and environmental impact of corporate activity is an “increasingly acute criterion” used to decide which company to invest in or transact with, Commissioner Price suggested that boards should be asking, “how do we identify the risks and opportunities presented by this new environment and respond in a manner that is both consistent with the social contract under which we operate and nurturing of long-term business success?”
Implications for Directors
Regulator interest in climate change issues is clearly increasing, with both APRA and ASIC publicly speaking on climate change considerations and related disclosures over the last eighteen months. The proposed fourth edition of the ‘ASX Corporate Governance Council Principles and Recommendations’ also includes specific reference to climate change being a source of environmental risk. This reference sits within the commentary on the revised Recommendation 7.4: “A listed entity should disclose whether it has a material exposure to environmental or social risks and, if it does, how it manages or intends to manage those risks.” It encourages those entities that have a material exposure to climate change risk to consider implementation of the TCFD recommendations, while stating that “entities that believe they do not have any material exposure to environmental or social risks should consider carefully their basis for that belief and benchmark their disclosures in this regard against those made by their peers”.
Therefore, it is clear that there are growing expectations for boards to consider the exposure of their organisation to climate change risk. Material risks should be adequately disclosed to the market, and guidance has been provided internationally, through the TCFD recommendations, to help entities do this. It will be interesting to observe to what degree, and how quickly, TCFD reporting practice is picked up in the Australian market.