Recent developments in climate-related and ESG reporting requirements around the world highlight a growing momentum in favour of mandatory ESG disclosure.
Amidst increasing concern that current voluntary reporting regimes are inadequate, particularly in respect of climate-related risks and opportunities, it seems likely that mandatory ESG reporting will soon be a reality for Australian companies.
Mandatory climate reporting – recent global developments
Investors and stakeholders around the world are increasingly demanding transparency and accountability in relation to climate-related risks and opportunities. In the 2021 Global Policy Survey on Climate published by Institutional Shareholder Services (ISS) Governance, 88% of international investor respondents and 75% of international non-investor respondents indicated that they expect companies to provide clear and appropriately detailed disclosure of climate change governance, strategy, risk mitigation efforts and targets.
In October 2021, the UK Government introduced the draft Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2021 (with regulations relating to limited liability partnerships to follow). If passed, these regulations would require UK-registered companies and financial institutions to disclose climate-related financial information. The regulations would also encourage disclosure of emission reduction plans and sustainability credentials. They are expected to assist investors and businesses to better understand and price the financial risks of exposure to climate change, while also supporting the UK’s transition to net zero by 2050.
The mandatory disclosure regime would provide a set of uniform disclosure and assessment requirements and would apply to over 1,300 of the UK’s largest companies and financial institutions. If passed, the UK would become the first G20 country to enforce mandatory disclosure of climate-related financial information in line with recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The draft regulations were approved by the House of Lords on 6 December 2021 and are currently sitting with the House of Commons for debate.
In October 2021, the New Zealand parliament passed the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021 (FSAA). The FSAA will amend various existing acts to provide a uniform policy to broaden non-financial reporting. It will require approximately 200 reporting entities with a high level of public accountability (such as listed issuers, large banks, licensed insurers and managers of registered investment schemes) to make disclosures in relation to climate-related risks and opportunities in line with TCFD recommendations.
According to a New Zealand government announcement in April 2021, the passing of FSAA makes New Zealand ‘the first country in the world to introduce a law that requires the financial sector to disclose the impacts of climate change on their business and explain how they will manage climate-related risks and opportunities’. Disclosures under the FSAA will be required for financial years beginning in 2023.
At the Responsible Investment “Climate and Global Financial Markets” Webinar in July 2021, US Securities and Exchange Commission (SEC) Chair Gary Gensler confirmed that mandatory climate risk disclosure rules were imminent and that a proposal is expected by the end of 2021. The SEC will seek to ensure that climate-related disclosures are comparable, consistent and tailored to each issuer. Whilst indicating support for disclosures in line with TCFD recommendations, Mr Gensler indicated that the SEC will form its own rules.
Mr Gensler separately raised the issue of the lack of standardised sustainability-related marketing terms in a speech before the Asset Management Advisory Committee in July 2021. The SEC has launched a review into whether fund managers should disclose their criteria and underlying data when using such terms.
Mandatory ESG reporting – recent global developments
At the 2021 United National Climate Change Conference (COP26), the International Financial Reporting Standards Foundation Trustees announced the formation of a new International Sustainability Standards Board to develop a ‘comprehensive global baseline of high-quality sustainability disclosure standards’. The standards aim to provide investors and other capital market participants with transparent, reliable and comparable information about ESG-related risks and opportunities.
Since June 2016, companies listed on the Singapore Exchange (SGX) have been required to complete annual sustainability reporting on a ‘comply or explain’ basis. These reports address matters such as identifying material ESG issues, strategies to mitigate or enhance material ESG risks and opportunities and KPIs that best track performance against these mitigation or enhancement strategies. The SGX does not prescribe a particular sustainability reporting framework; according to the SGX Sustainability Reporting Guide, issuers should select a framework that is appropriate for, and suited to, their industry and business model.
In July 2020, the Hong Kong Stock Exchange (HKEX) introduced new ESG reporting requirements for listed companies, with both mandatory disclosure requirements and ‘comply or explain’ provisions. HKEX-listed companies must provide a statement setting out the board’s consideration of ESG matters, an explanation of the application of various ESG reporting principles and the reporting boundaries of their ESG report. The ‘comply or explain’ provisions require disclosure of significant climate-related issues which have or may impact the company and disclosure of practices used to identify environmental and social risks in the entity’s supply chain.
In May 2021, the Securities and Exchange Board of India announced that it would require the top 1000 listed companies to report on their ESG parameters. From FY23, these companies will be required to submit a Business Responsibility and Sustainability Report. Disclosure under the Report is divided into essential (mandatory) and leadership (voluntary) reporting requirements.
ESG reporting in Australia – the current state of play
Broad-based ESG reporting remains voluntary in Australia currently, although certain entities have mandatory reporting obligations under various ESG-related acts (for example the Modern Slavery Act 2018 (Cth)).
Listed entities must comply with continuous disclosure regimes and the overriding prohibition against misleading and deceptive conduct, both of which provide companies with an added incentive to meet their disclosed ESG targets. In a memorandum of opinion to the Centre for Policy Development, Noel Hutley SC and Sebastian Hartford Davis stated that a company and its directors face a risk of being found liable for misleading and deceptive conduct ‘by not having had reasonable grounds to support the express and implied representations contained within its net zero commitment’.
In relation to climate-related disclosure, ASIC recommends that listed companies with material exposure to climate risk follow the TCFD recommendations. Other voluntary guides include APRA’s Prudential Practice Guide on Climate Change Financial Risks and the Governance Institute of Australia’s Climate Change Risk Disclosure Guide. These guides provide an indication of how regulators may expect organisations to consider, manage and report climate-related risks in the future.
ESG reporting in Australia – anticipated future developments
There is ongoing concern that some companies are failing to adequately report ESG issues, particularly climate-related financial risks.
At a CFA Australia Investment Conference in October 2021, RBA Deputy Governor Guy Debelle discussed the tension between existing Australian disclosure laws and the recent global momentum for bespoke climate reporting requirements. Mr Debelle concluded that this debate is already being answered by investors, who are increasingly demanding climate-related disclosures by proposing ‘say on climate’ resolutions. As of October 2021, 80 companies in the ASX200 were voluntarily making disclosures under the TCFD guidelines.
In November 2021, at an address to the ACTU Virtual Super Trustees Forum, Shadow Treasurer Jim Chalmers labelled the existing climate reporting framework ‘insufficient, inconsistent and inadequate’, and called for regulators and government to provide better guidance on the climate risk reporting framework. Mr Chalmers echoed Mr Debelle’s call for ‘usable, credible and comparable’ climate-related disclosures.
A report published by the International Monetary Fund on 6 December 2021 suggested that ASIC could improve standardised climate-related disclosures by large public companies. In a speech given on 6 December 2021, ASIC Commissioner Cathie Armour indicated that climate change disclosures will be one of the most significant governance issues of 2022. ASIC will focus on ensuring disclosures comply with the law and match activities actually undertaken by organisations, and may consider enforcement action for misleading and deceptive conduct.
Despite growing concern about the adequacy of climate-related disclosures, the Australian Government and regulators appear to maintain a strong preference for the current reporting framework. In a speech presented to the Australian Industry Group in September 2021, Treasurer Josh Frydenberg reinforced the Government’s objective of enabling organisations to voluntarily assess and disclose climate-related risks rather than proscribing certain approaches or blacklisting certain investments.
In its Prudential Practice Guide CPG 229 published 26 November 2021, APRA also reinforced its preference for voluntary disclosures in accordance with TCFD recommendations (in addition to existing statutory or regulatory requirements). An ASIC media release dated 9 December 2021 states that ‘climate change risk could have a material impact on the future prospects of entities’ and that directors may consider whether to disclose information that would be relevant under the TCFD recommendations.
Despite the ESG reporting regime currently being voluntary in Australia, it is clear that mandatory reporting requirements are on the horizon. Companies who do not rise to meet demands for ESG accountability and transparency with adequate reporting face a risk of shareholder and employee activism, investor divestment and future regulatory action.