Address by ASIC Commissioners Sean Hughes (Canberra, 7 February 2019) and Cathie Armour (Sydney, 21 February 2019 and Adelaide, 4 March 2019)
Good afternoon. Thank you very much for the introduction and indeed for the invitation to speak here at ANU today as part of ANU’s 2019 Climate Update.
As some of you may be aware, ASIC has been actively engaged in the area of climate change risk, particularly so over the last 12 to 18 months and ASIC certainly welcomes the opportunity afforded by the invitation to speak to the topic today.
Climate change is an issue of increasing importance in our financial markets and of course in our community more generally. I look forward to sharing a number of ASIC’s views on the issue with you, both by way of my formal remarks and in the ensuing panel and audience discussion.
But perhaps firstly, it will be helpful for me to provide an overview to highlight the key topics that I hope to briefly canvas today. So, with that said:
- firstly, I will cover off on some key concepts and the baseline corporate legal and regulatory requirements in this area;
- following that, I will speak to the role of investors and offer some comments on a company’s 'social licence to operate'; and
- thirdly and finally, I will summarise some of the findings and recommendations contained in ASIC Report 593: Climate risk disclosure by Australia's listed companies.
So firstly, and for context, to address some key concepts such as ‘climate risk’ and ‘climate opportunity’, at least in so far as they are understood in the financial markets field. In this regard, I will defer to the definitions adopted by the Taskforce on Climate-Related Financial Disclosures – which are fairly widely accepted. The TCFD (as it is known) was an industry-led task force, (commissioned by the G20 Financial Stability Board) to help identify the information needed by investors to appropriately assess and price climate-related risks and opportunities. The TCFD’s final report was issued in 2017.
Relevantly, the TCFD divided climate-related risks into two main categories, risks that an organisation may face relating to the transition to a lower-carbon economy and risks relating to the physical impacts of climate change:
Firstly, in relation to transition risks – the shift to a lower-carbon economy may entail extensive policy, legal, technology and market changes to address mitigation and adaption requirements related to climate change; and secondly
In relation to physical risks – the physical impacts of climate change can be acute or chronic. Acute physical risks refer to those that are event-driven, including increased severity of extreme weather events, such as cyclones or floods. Chronic physical risks refer to longer-term shifts in climate patterns (e.g. sustained higher temperatures) that may cause sea level rises or chronic heat waves.
In relation to climate opportunity, the TCFD provides that 'efforts to mitigate and adapt to climate change also produce opportunities for organisations, for example, through resource efficiency and cost savings, the adoption of low-emission energy sources, the development of new products and services, access to new markets, and building resilience along the supply chain.'
Key legal issues
Now moving on to key legal issues and regulatory requirements in the corporate law area. As many of you would no doubt be aware, ASIC is Australia’s integrated corporate, markets, financial services and consumer credit regulator. Our vision is for a fair, strong and efficient financial system for all Australians.
Amongst other things, ASIC is tasked with administering the Corporations Act 2001 which sets out a number of fundamental legal requirements relevant to the consideration and disclosure of climate change risk and opportunity – these can apply to both companies and their directors. It is relevant to note here however that my comments will relate predominantly to listed public companies and their directors (i.e. those companies whose securities are quoted on a financial market, usually the Australian Securities Exchange).
The law in Australia requires company directors, amongst other things, to act with due care and diligence, in good faith and for a proper purpose and in the best interests of the company. These are generally referred to collectively as directors’ duties.
My fellow ASIC commissioner, John Price, touched on directors’ duties and climate risk in a speech he made last year where he cited a memorandum of opinion by Noel Hutley QC and Sebastian Hartford-Davis on climate change and directors’ duties. The authors of that legal opinion relevantly observed, and ASIC agrees in principle, that it is 'conceivable that directors who fail to consider climate change risks now could be found liable for breaching their duty of care and diligence in the future.'
While the business operations of Australian listed companies differ widely and will consequently be subject to risk in a myriad of different ways, as a general proposition, directors - and for that matter senior managers - of such listed companies need to ensure that they both understand and continually reassess material risks (both existing and emerging) that may be applicable to the company’s business. This extends to both physical and transitional climate risks.
ASIC has stressed to company directors, and I do so here again today, the importance of firstly, considering the impact of climate change on the company’s business and secondly, ensuring that strong and effective corporate governance practices are sustained in the company – which in our regulatory experience assists in the identification and management of emerging and complex issues.
Moreover, the need for company directors and senior managers to focus their attention on this area was again starkly highlighted only last month with the release of the World Economic Forum’s 2019 Global Risk Report. This year’s report places “extreme weather events” and “failure to mitigate or adapt to climate change” as two of the top three global risks in terms of both likelihood and impact.
The law requires that a directors’ report (included in a listed company’s annual report) must contain information that shareholders would reasonably require to make an informed assessment of the entity’s operations, financial position, business strategies, and prospects for future financial years – this section is generally referred to as the operating and financial review.
ASIC considers that it is likely to be misleading for directors to discuss the company’s prospects for future financial years without referring to the material business risks that could adversely affect the achievement of those prospects. Such ‘material business risks’ could include climate risk. On the other hand, where climate opportunity forms part of a business strategy, it may also need to be disclosed in an operating and financial review.
Depending on the circumstances, climate risk and opportunity may also be relevant for the purposes of complying with other statutory disclosure requirements such as fund-raising or prospectus disclosure, continuous disclosure for listed companies to the ASX and others.
In practice, these statutory disclosures to which I have just referred are necessarily brief and relatively high-level. In light of this, many entities choose to supplement them with additional, more detailed, climate related information on a voluntary basis, in most but not all cases in a separate environmental, social and governance (or ESG) report.
A number of voluntary climate disclosure frameworks have emerged over recent years. The TCFD’s reporting framework appears to be emerging from the pack as the framework of choice in this regard and ASIC encourages listed companies with material exposure to climate risk to strongly consider reporting under TCFD on a voluntary basis.
As we understand it, at least 30 of the top 100 listed companies in Australia have indicated that they intend to report under the TCFD framework or are considering doing so.
Listed companies choosing to report under TCFD will obviously require a period of time to develop the capabilities and expertise (or seek out appropriate external advice) to undertake the work required to disclose information that is meaningful and useful to users and does not mislead or deceive. ASIC is monitoring developments in this area as market practice evolves.
Role of investors
It is increasingly clear to ASIC that investors, both here in Australia and internationally, are playing a leading role in the push for the provision of meaningful and useful climate risk disclosure.
The evidence for that proposition is obvious:
The Australian Shareholders Association, in a recent public submission to the Australian Stock Exchange, stated that listed companies with material exposure to climate risk should be encouraged to report under the TCFD framework;
The Australian Council of Superannuation Investors or ACSI has for some time been publicly calling for greater levels of climate risk disclosure (see for example see ACSI’s Corporate Sustainability Reporting 2018 Report). Climate risk is a particularly salient risk for ACSI’s members given their long-term investment requirements.
Internationally, one of the world’s largest asset managers, Blackrock Inc, has called for companies to report climate risk in line with the TCFD’s recommendations;
The International Organisation of Securities Regulators (or IOSCO), of which ASIC is a member, only last month released a Statement on disclosure of ESG matters by issuers, citing that 'investors’ interest in ESG disclosure is growing and some investors already significantly value ESG matters in their investment strategy.'
We also continue to see activist investors making their voices heard on climate change related issues, particularly in relation to the annual general meetings held by listed companies over recent years. ASIC representatives attended a number of AGMs over the recent public company meeting season and observed strong levels of shareholder interest in this topic, particularly in questions from the floor of the relevant meetings.
We expect that investors will continue to increase their focus on climate-related matters including in particular the climate risk exposure of the companies in which they are invested, including the company’s approach to and strategies for management of those risks.
Social licence to operate
It is also relevant to note the broader issue of 'social licence to operate' and indeed, Commissioner Price, in the speech I referred to earlier alluded to this.
I think his comments are worth repeating here:
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?'
It is certainly a salient point to highlight and there is a range of literature around the broader role that corporations play in society and how that may ultimately impact on the bottom line. We encourage directors to, and certainly contend that they should be, cognisant of these issues – particularly so when evaluating complex and wide-ranging issues such as climate change.
ASIC Report 593: Climate risk disclosure by Australia’s listed companies
Next and to wrap up, I would like to talk briefly about the findings of some recent surveillance work undertaken by ASIC in relation to the climate risk disclosure practices of Australia’s listed companies.
In 2018 we conducted a desktop review of climate risk disclosures:
- by 60 listed companies in the ASX 300;
- in 25 recent initial public offering (IPO) prospectuses; and
- across 15,000 annual reports lodged by listed companies.
Some of our key findings included:
The majority of the ASX 100 companies in our sample had, to some extent, considered climate risk to the company’s business.
40% of those ASX 100 companies called out climate risk specifically as a material risk in their operating and financial review, but when looking at the total ASX 300 sample, only 17% of listed companies in that cohort cited the risk as material.
Overall, we found disclosure practices to be fragmented and inconsistent.
Our review also indicated that may disclosures were far too general and not comprehensive enough to be useful to investors (and that is the lens through which we look as regulators); and
We found very limited climate risk-related disclosures outside of the top 200 ASX companies.
Our key recommendations in that report are largely reflective of the matters that I have canvassed here today. ASIC encourages listed companies and their directors and advisors to:
- One, consider climate risk - directors and officers of listed companies should adopt a probative and proactive approach to emerging risks, including climate risk;
- Two, develop and maintain strong and effective corporate governance - strong and effective corporate governance helps in identifying, assessing and managing material risks;
- Three, comply with the law which requires disclosure of material business risks affecting future prospects in an operating and financial review;
- And four, disclose useful information to investors – we recommend that listed companies with material exposure to climate risk consider reporting under the TCFD framework.
In closing, I would like once again to thank ANU for the opportunity to speak here today about ASIC’s work in this important area.
I suspect, and I am sure many of you will agree, that we are likely to see a continued focus on climate change risk and opportunity over coming months and years. ASIC intends to remain actively engaged in this area.