In his keynote address at a recent Centre for Policy Development: Financing a Sustainable Economy Event, Australian Securities and Investments Commission (ASIC) Commissioner John Price, has confirmed climate risk as a key priority for the regulator, both from a governance and a disclosure perspective, and has called on Australian companies to do the same. A high level overview of the key points of Mr Price's address is below.

In a recent speech at the Centre for Policy Development: Financing a Sustainable Economy Event, Australian Securities and Investments Commission (ASIC) Commissioner John Price, has reconfirmed climate risk as a key priority for the regulator, both from a governance (risk management) and a disclosure perspective and called on Australian companies to regard it as such.

Among other things, Mr Price called to consider going beyond strict legal requirements and to consider adopting the voluntary Task Force on Climate-related Financial Disclosures (TFCD) recommendations as a framework for reporting. He also cautioned of the potential risks for directors in ignoring and failing to manage climate risk suggesting that, dependent on circumstances, 'it may be difficult for directors who have not even considered the issue to later seek to invoke the business judgement rule into account, to undertake formal modelling of the risks posed by climate change to their businesses and cautioned that directors may be unable to rely on the business judgement rule if they fail to assess it'.

A social licence to operate: climate risk in the context of corporate governance

Mr Price commented that there has been a fundamental shift in the way companies are evaluated ie a move away from a primary focus on financial returns, to a focus on delivery of community benefit, including increased focus on, and expectations around, climate change and management of climate risk. This change in expectation represents he said, both opportunities and risks for companies. 'For some company stakeholders, the social and environmental impact of corporate activity is an increasingly acute criterion considered in deciding which company to invest in or transact with. A salient question for boards and directors to ask now is therefore: "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?" For our part, we [ASIC] will continue to encourage boards and directors to ask these questions of themselves and shine the light on their own culture and corporate governance practices, two drivers which we believe are critical in answering them' he said.

Two key priorities on climate risk

Mr Price confirmed climate risk is a key priority for ASIC, both from a governance (risk management) and a disclosure perspective. He identified ASIC's two key priorities on climate risk as follows:

  1. ASIC is focused on the promotion of sound corporate governance (including prudent risk management): Mr Price said that ASIC considers that 'the prudent and appropriate management of issues such as climate change (be it climate risk or opportunity) begins with the core fundamentals of corporate governance - integrity, transparency, accountability and acting for a proper purpose. This must be led by directors and senior management'.

  2. ASIC is focused on disclosure: 'Where the law requires disclosure of climate risk, we are strongly focussed on ensuring that the law is complied with in a way that is useful and relevant to the market' Mr Price said.

ASIC initiatives on climate change and climate risk

  • Focus on impairment testing and asset values in 30 June 2018 financial reporting: 'We are continuing our focus on impairment testing and asset values in our upcoming review of 30 June 2018 financial reports. As we have noted elsewhere, in some cases climate change may affect asset values' Mr Price said.

  • Review of current regulatory guidance: Mr Price said that in line with the government's response to the senate report, ASIC has commenced a review of relevant regulatory guidance 'to ensure that it continues to provide appropriate principles and high-level guidance that stakeholders can apply in meeting their disclosure obligations under the Corporations Act 2001 (Cth) insofar as climate risk is concerned'. Mr Price said that ASIC is aiming to finalise the review and respond to the government 'before the year is out'.

[Note: The senate report referenced by Mr Price appears to be the Senate Economics Committee of Inquiry into Carbon Risk Disclosure. On 2 February 2016, the Senate referred an inquiry into carbon risk disclosure to the Senate Economics References Committee. The committee report, released on 21 April 2017, recommended among other things that ASIC review its guidance to directors on meeting their disclosure obligations in the context of climate risk and that the ASX Corporate Governance Council review guidance material regarding the circumstances in which a listed entity's exposure to carbon risk requires disclosure under Recommendation 7.4 of the Australian Stock Exchange Corporate Governance Principles. The Government response to the report, released on 7 March, expressed 'agreement in principle' with both of these recommendations. See: Governance News 12/03/2018. The draft ASX Principles and Recommendations, also reflect the report recommendations. See: Governance News 04/05/2018]

  • Review of climate related disclosures across ASX 300: Mr Price said that ASIC is undertaking a review of climate change related disclosures across the ASX 300 to 'better understand current market practices. Our current intention is to publish our findings later this year'.
  • Establishment of a climate risk working group: ASIC, with APRA, the RBA and Treasury are part of a climate risk working group the aim of which is to 'help ensure there is a coordinated response to climate risk and its impact on our financial system and markets'.

  • Monitoring of, participation in, international developments: Mr Price said that ASIC continues to participate in international discussions about reporting of environmental and sustainability risks and that ASIC is 'monitoring international developments' eg the recent release of the European Commission’s Action Plan on Financing Sustainable Growth. Mr Price said.

Existing ASIC guidance on climate risk disclosure

Referencing ASIC report 567 (see: Governance News 02/03/2018) Mr Price outlined the guidance ASIC has given already on its expectations in relation to climate risk disclosure. Including for example: Regulatory Guide 247: Effective disclosure in an operating and financial review (see: Governance News 28/04/2018) and Regulatory Guide 228: Prospectuses: effective disclosure for retail investors. Mr Price added that 'Of course, in addition to these, the law may require climate risk to be disclosed in other contexts such as by way of continuous disclosure announcement or elsewhere and we have a range of guidance to assist our regulated populations in complying with their statutory obligations'.

Adoption of the voluntary Task Force on Climate-related Financial Disclosures (TFCD) reporting framework should be considered

Mr Price called on directors to go beyond meeting strict legal disclosure requirements, and instead to 'carefully consider the general information needs of investors'.

He went on to suggest that the 'voluntary framework developed by the TCFD may help companies and advisors in considering how to disclose climate change related risks and opportunities and what type of information to disclose, both when there is an obligation under law and in circumstances where a company voluntarily discloses additional information, for example in a sustainability report'. He added that a number of Australian companies have already indicated they intend to report, or commence reporting over time under the TCFD framework.

Responding to feedback from some stakeholders concerned about the implications of the TCFD recommendations for director liability for forward looking statements, Mr Price said that while concerns are 'understandable given the uncertainties surrounding future climate risk impacts…we [ASIC] do not think that director liability should be a major impediment to reporting under TCFD Recommendations provided that the modelling adopts reasonable assumptions and inputs and discloses them in full. This can be achieved by making sure the disclosure is the product of a robust assessment of the best evidence available at the time'.

Commenting on the TCFD recommendations more generally Mr Price said that ASIC encouraged 'companies and directors to carefully consider the TCFD’s report, not just in the disclosure context, but as a key resource to assist in understanding, identifying and managing climate risk and opportunity'.

[Note: MinterEllison Special Counsel (Climate Risk Governance) Sarah Barker has commented previously, that there is growing support for, and use of, the TCFD Recommendations as a guide for reporting, and that though the TCFD Recommendations are yet to integrated into mandatory reporting requirements in Australia, there have been strong ‘suggestions’ from regulatory authorities that corporations should have regard to them. See: Governance News 12/06/2018.]

ASIC expects directors to take lead

Mr Price called on directors, as end of financial year approaches, 'to take a proactive approach to strategy and risk management. Directors need to understand and continually reassess existing and emerging risks that may be applicable to their business and ask the relevant questions of management. This should extend to both short-term and long-term risks and opportunities'.

Directors cannot afford to ignore climate risk given the potential consequences

Mr Price said that directors 'would do well to carefully consider' the memorandum of opinion by Noel Hutley QC and Sebastian Hartford-Davis on climate change and directors duties commissioned by the Centre for Policy Development in 2016 (see: Governance News 07/11/2016). Mr Price added that ASIC views the opinion as 'reinforc[ing] the need for directors to adopt a probative and proactive approach in assembling the information reasonably required to inform their decision making in this area'. Mr Price went on to say that ASIC considers that the opinion 'legally sound and is reflective of our [ASIC's] understanding of the position under the prevailing case law in Australia in so far as directors’ duties are concerned… Depending on the circumstances, it may be difficult for directors who have not even considered the issue to later seek to invoke the business judgement rule.'

Australia's first report on progress towards meeting the SDGs released; new Australian SDG website launched

On 15 June, Minister for Foreign Affairs Julie Bishop launched Australia's first Voluntary National Review (report) on progress towards the implementation of the Sustainable Development Goals (SDGs). The report, sets out Australia’s progress towards achieving each of the 17 goals ahead of delivering it formally to the UN forum on sustainable development in July. In launching the report, Ms Bishop reaffirmed Australia's commitment to the achievement of the SDGs and commented that though the 2030 timeframe is ambitious it 'doable if all nations, all people work together to achieve the goals'. Commenting specifically on Australia's progress towards implementing the goals, Ms Bishop said that 'While we have achieved much here in Australia and we are a prosperous, stable, peaceful country, there is still so much more for us to do'.

Ms Bishop also announced the launch of an Australian SDG website to raise awareness of the SDGs, enable entities to share their own projects, and provide information about the SDGs. Australian Council for International Development (ACFID) CEO Marc Purcell issued a statement welcoming the release of the progress report and the government's commitment to achievement of the goals within the 2030 timeframe. However, commenting specifically on progress towards meeting environmental goals and targets, he expressed concern about Australia's rate of progress and has urged immediate action. 'Economic growth cannot continue to be tied to environmental degradation…We urgently need intervention to protect our environment and create affordable, reliable and clean energy for the future' he said in a statement. Referencing the ACFID recommendations to accelerate progress towards Australia's implementation of the goals put forward in its submission to the senate inquiry, he called on the federal government to implement actions to speed progress.