ASIC

The review follows the recommendations of a Senate Economics References Committee report on Carbon Risk and the Government’s response which encouraged ASIC to consider whether its high-level guidance on disclosure remained appropriate.

The release of the updates is set against a broader backdrop of increasing focus on sustainable development and climate action (see here for a discussion of the pressure on boards to take action to manage climate risk).

Key takeaways for directors

The updates serve as another reminder that climate change risks, like other substantial risks, should be considered carefully by boards.

Boards will need to satisfy themselves that their company’s approach to identifying and assessing climate change risks (and opportunities) is robust, and that the organisation has access to the right skills, expertise and systems to support strong risk management and disclosure processes in this area.

The updated guidance reflects an ongoing focus by regulators on climate change risk disclosures, and support for the use of appropriate disclosure frameworks, such as that developed by the Financial Stability Boards Taskforce on Climate-related Financial Disclosures (TCFD).

In ASIC’s media release, ASIC Commissioner John Price emphasised that:

‘While disclosure is critical, it is but one aspect of prudent corporate governance practices in connection with the mitigation of legal risks. Directors should be able to demonstrate that they have met their legal obligations in considering, managing and disclosing all material risks that may affect their companies. This includes any risks arising from climate change, be they physical or transitional risks.’

Summary of updates

The updates are contained in:

  • Regulatory Guide 228 Prospectuses: Effective disclosure for retail investors (accessible here); and
  • Regulatory Guide 247 Effective disclosure in an operating and financial review (accessible here).

Key updates include :

  • incorporating types of climate change risk into the list of examples of common risks that may need to be disclosed in a prospectus – suggested examples provided in the regulatory guide include references to both transitional risks associated with transition to a lower-carbon economy, and physical risks driven by acute or longer term shifts in climate patterns:
  • highlighting climate change as a systemic risk that could have a material impact on the future financial position, performance or prospects of entities, and that may therefore need to be disclosed in an operating and financial review (OFR) (a key part of annual reporting by listed entities); and
  • reinforcing that disclosures made outside the OFR (such as under the voluntary TCFD framework or in a sustainability report) should not be inconsistent with disclosures made in the OFR.

Regulatory Guide 247 now also provides that 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 TCFD, where that information is not already required for the OFR.

Previous ASIC recommendations on consideration and disclosure of climate risk

Last year, ASIC released a report on Climate Risk Disclosure by Australia’s Listed Companies, in which it acknowledged that disclosure practices in this area are still evolving (not just in Australia but also globally). The report set out recommendations to assist directors in developing their climate change disclosure practices, including that:

  • 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.

An earlier AICD article on the ASIC report can be accessed here.

Going forward

ASIC has made it clear that climate change is an area of ongoing focus, and has indicated that over the next year it will conduct surveillances of climate change related disclosure practices by selected listed companies.

ASIC will also be an ongoing participant in the Council of Financial Regulators’ working group on climate risk and participate in discussions with industry and other stakeholders on these issues.

The AICD will continue to keep members updated on relevant developments.