The Australian Stock Exchange Corporate Governance Council (ASX Council) has recommended that entities listed on the Australian Stock Exchange (ASX) disclose environmental and social sustainability risks to investors. This legal update examines the proposal which is currently the subject of public consultation.

Background

The ASX Council announced in December 2012 that it intended to update its Corporate Governance Principles and Recommendations (Principles and Recommendations). These Principles and Recommendations last underwent review in 2007, and the current revision is intended to incorporate the lessons learned from the global financial crisis and other local and international developments in corporate governance.

A consultation draft of the 3rd edition of Corporate Governance Principles and Recommendations Consultation Draft (Consultation Draft) was released in August 2013, together with a consultation paper which provides additional context and commentary (Consultation Paper).

What are the Principles and Recommendations?

The Principles and Recommendations comprise 8 broad Corporate Governance Principles, and 30 Recommendations intended to give effect to them. In the ASX Council’s view, these are likely to achieve good governance outcomes and “meet the reasonable expectations of most investors in most situations”.

The Principles and Recommendations apply to all ASX listed entities and are incorporated into the practices of listed entities though ASX Listing Rule 4.10.3, which requires a listed entity to include a statement in its annual report as to the extent to which it has followed the Recommendations.

The Consultation Draft notes that, ultimately, an entity’s corporate governance practices are a matter for the entity’s board of directors, which is charged with the legal responsibility for managing its business with due care and diligence. If a board chooses to depart from a Recommendation, it must include a statement in its annual report which explains its reasons for departure, known as the “if not, why not” approach.

What is the recommendation regarding disclosure of environmental risks?

The proposed amendments to include environmental risk disclosure are embodied in the revision of Principle 7.

Principle 7, titled “Recognise and manage risk”, recommends that “a listed entity should establish a sound risk management framework and periodically review the effectiveness of that framework”.

Recommendation 7.4 states that “a listed entity should disclose whether, and if so how, it has regard to economic, environmental and social sustainability risks”. The commentary in the Consultation Paper states that this Recommendation is intended to address “the increasing attention being given by the investment community to environmental and social issues and the investment risks they raise”. At present, there is no proposal to mandate this reporting, and the ASX Council considers that it would be premature to expect listed entities in Australia to adopt mandatory integrated reporting until the international framework for such reporting is better developed than it currently is. The consultation paper notes that, amongst other things, the framework needs to adequately address issues such as relevance, materiality, timeframe, exclusion of commercially sensitive information and the compliance burden, before listed entities across the board can be reasonably expected to adopt integrated reporting.

The Consultation Draft is available for comment until November 15 2013.