Australia: Environmental, social and sustainability risks to be highlighted in corporate reporting

Key Points:

Updated ASX Corporate Governance Principles and Recommendations are set to include a recommendation for listed companies to report on economic, environmental and social sustainability risks.

Markets and, in turn, regulators are requiring increasing openness and accountability from listed companies. Good environmental, social and sustainability practices are rewarded by both investors and consumers. Some jurisdictions internationally have already moved to regulate corporate governance in this area. In Australia, the Draft third edition ASX Corporate Governance Principles and Recommendations proposes that listed companies specifically report on environmental, social and sustainability risks.

In reality, market-driven environmental and sustainability reporting is already an established practice amongst the big ASX performers. Now, with the developing international regulatory environment, the operator of Australia's stock exchange is following suit and more detailed environmental reporting will be expected more broadly.

The proposed reporting requirement

Proposed Recommendation 7.4 of the draft Principles and Regulations is that:

"A listed entity should disclose whether, and if so how, it has regard to economic, environmental and social sustainability risks."

The Principles and Recommendations apply to all ASX listed entities. They are not mandatory, however companies who do not follow the recommendations are required to explain why not.

The commentary suggests that, in part, the purpose of more detailed economic, environmental and social sustainability disclosures is to allow investors to properly assess investment risk and encourages companies to disclose the benchmarks they use to measure performance and their achievement against those benchmarks.

Existing environmental and sustainability reporting requirements apply to ASX listed entities

The proposed Recommendation would not be the first environmental reporting requirement for Australian companies, and given its broad nature, compared with existing disclosure requirements, for some companies it will not significantly change their reporting practices. However, it may encourage companies to report more widely on how they manage economic, environmental and social sustainability risk.

For entities subject to any particular and significant environmental regulation, the Corporations Act 2001 requires the annual directors' report to disclose details of an entity's performance in relation to environmental regulation. This requirement, contained in section 299(1)(f), generally applies where a reporting entity holds an environmental licence or is otherwise subject to licence or approval conditions for the purposes of environmental regulation. Reporting for the purpose of the directors' report is expected to be more general and less technical than required for compliance reports to the environmental regulator.

A separate requirement in the Corporations Act, contained in section 1013D(1)(d)(l), is that institutions offering financial products with an investment component disclose, in the relevant Product Disclosure Statement, "the extent to which labour standards or environmental, social or ethical considerations are taken into account in the selection, retention or realisation of the investment".

ASX listing rules also require disclosure of information that would have a material effect on the price or value of an entity's securities. This generally applies to information that would influence an investor's decision to acquire or dispose of securities. In some circumstances, this may extend to environmental, social and sustainability performance information.

Examples of environmental or social factors that impact on a company's reputation (if not its financial bottom line), and consequently how its securities are treated by the market and to which disclosure requirements may apply, include:

• significant environmental incidents and how they have been dealt with;
• environmental risks (eg. risks of pollution incidents) and the measures in place to mitigate those risks;
• the use of sustainably and ethically sourced products; or
• litigation by environmental regulators or community groups.

Generally, the more emphasis that is placed on environmental, social or sustainability performance of a company (eg. in the company's marketing), the more rigorous the standard of expected disclosure will be. The commentary supporting Recommendation 7.4 suggests that entities with institutional investors should make more detailed disclosures.

In practice, the big players in Australia's energy and resources market already report on environmental performance from a legal risk perspective. However, investors are calling for even greater disclosure so that they can assess investment risk.

In 2012 the Australian Council of Superannuation Investors (ACSI) reviewed the sustainability reporting practices of the S&P/ASX 200 companies. ACSI reported a significant variation between the practices of ASX 50 companies and ASX 200 companies. While 49% of ASX 200 companies were not reporting or only reporting at a basic level, in the ASX 50, all companies provided some level of reporting on environmental risk and 26 companies (52%) were found to have best practice reporting. ACSI has published a guide, "ESG Reporting Guide for Australian Companies", aimed at promoting consistency in environmental disclosures.

Changing international regulatory environment

Triple bottom line reporting and corporate social responsibility have been gaining attention globally and locally over the last decade or more.

The proposal to introduce Recommendation 7.4 follows international reforms around increased environmental and sustainability reporting in a manner that is integrated with other corporate reporting requirements.

In 2007, legislation was introduced in the UK providing for a concept of "enlightened shareholder value". This requires directors to have regard to the longer term and to various corporate social responsibility factors including the interests of employees, suppliers, consumers and the environment. South Africa, Hong Kong, Singapore and Brazil have also already made reforms.

Next steps

Submissions on the draft Principles and Recommendations are open until 15 November 2013.

The amended (third edition) Principles and Recommendations will replace the existing second edition Principles and Recommendations in the first full reporting year after 1 July 2014.

When reporting, companies should bear in mind that investors and consumers are increasingly rewarding good corporate environmental, social and sustainable practices. Ultimately, the level of detail for any environment or social sustainability disclosure is not prescribed so the decision currently resides with the individual company.

It will be interesting to see whether Recommendation 7.4, if implemented, combined with the changing international regulatory environment, will lead to a change in market practice and more detailed environment and social sustainability reporting by a greater cross-section of companies.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.