Corporate governance update: climate change risk and disclosure

Speech by ASIC Commissioner Sean Hughes at the Governance Institute of Australia Fellows Roundtable, Thursday 14 October 2021.

Check against delivery

I’d like to acknowledge the Traditional Custodians of the land I’m on today, the Wadawurrung people of the Kulin Nation, and pay my respects to Elders past, present and emerging.

Today I’m pleased to be able to provide an update on ASIC’s priorities for 2022. I’ll start by noting my perspective on the main challenges currently facing company directors. And that is the volume of change you’re managing. Not just changes brought about by the COVID-19 pandemic. Or those relating to climate change risk and the race to net-zero. There’s also the October 2021 reforms, the majority of which started last week after almost two years’ lead-time following on from the Hayne report.

And I would also like to flag the work ASIC has done in its role as administrator of the newly expanded whistleblower reforms.

It’s a lot to get through in 20 minutes. But as promised, I will spend most of this time providing you with an update on ASIC’s work as it relates to governance of climate change risk and disclosure.

Corporate Plan overview

ASIC has four priorities for this financial year:

  1. Promoting economic recovery – including through better and more efficient regulation, facilitating innovation, and targeting regulatory and enforcement action to areas of greatest harm.
  2. Reducing risk of harm to consumers exposed to poor product governance and design, and increased investment scam activity in a low-yield environment.
  3. Supporting enhanced cyber resilience and cyber security among ASIC’s regulated population, in line with the whole-of-government commitment to mitigating cyber security risks.
  4. Driving industry readiness and compliance with standards set by law reform initiatives (including the Financial Accountability Regime, reforms in superannuation and insurance, breach reporting, and the design and distribution obligations).

Delivering on these four priorities is how we’re supporting Australia’s post‑COVID economic recovery. ‘Recovery’ is our byword for 2022. Parliament has given ASIC the regulatory tools we need to continue taking a targeted, outcomes-based and less prescriptive approach to regulation.

We are using the tools we already had, as well as the new tools at our disposal. These include the design and distribution obligations, which came into force last week on 5 October, and our product intervention power, which has been in place for over two years. These new tools exemplify outcomes–based regulation and afford ASIC the opportunity for regulatory calibration, firmly focused on consumer outcomes.

We are better placed to address harm arising from evolving products and practices without compromising the potential for competitive disruption and innovation. This means we can limit or avoid the need for more intervention and more regulation.

Where possible, we have limited the regulatory activity to which industry has to respond. And we are working with industry to identify areas where we can provide support.

ASIC is also participating in the Government’s Deregulation Taskforce, which is exploring solutions to lower the costs of regulation while retaining the benefits of our regulatory system.

Business modernisation is another priority. We will engage with Treasury on measures that the Government may wish to adopt, such as:

  • electronic signatures
  • electronic lodgment of forms
  • virtual meetings
  • increased use of digital channels for reporting.

Much of ASIC’s business as usual is designed to help reduce regulatory burden, including our ongoing program of regulatory relief. We are also implementing the Government’s expanded regulatory sandbox, to encourage new innovative fintech providers.

Whistleblower policy reminder

Next, I’d like to flag ASIC’s work as the administrator of the newly expanded whistleblower reforms.

On Wednesday 13 October, we wrote to CEOs to remind everyone of their obligations under the strengthened whistleblower protection regime. In the letter we set out three things firms can do to address some of the shortcomings we found in our 2020 review of whistleblower policies:

  1. Clearly articulate how a person can make a disclosure that qualifies for the legal protections for whistleblowers, including to whom.
  2. Carefully update their whistleblower policy to reflect the whistleblower protection regime, which started on 1 July 2019.
  3. Accurately describe the legal rights and remedies whistleblowers can rely on if they make a qualifying disclosure, which are identity protection (confidentiality), protection from detriment, compensation and remedies, and civil, criminal and administrative liability protection.

Climate change disclosure and governance

Moving on to climate change–related disclosure and governance.

This is an area that I, and a number of other ASIC commissioners, have spoken about before and I am certainly pleased to be able to provide this update this morning.

This is particularly so given today’s event is for Fellows of the Governance Institute of Australia, which has very been active in raising awareness and standards among its members on this issue. Most notably through the publication of the February 2020 Practical Guide on Climate Change Risk Disclosure and reporting against the ASX Corporate Governance Principles.

Moreover, and as everyone will be aware, we are only a couple of weeks out from the COP26 conference in Glasgow. So, climate-related issues are clearly front of mind for many. 

It is here, in the international context, that I thought I would start today, offering some reflections on:

  • First, ASIC’s involvement in the sustainable finance taskforce of the International Organisation of Securities Commissions (IOSCO), and international developments more generally in relation to climate and sustainability reporting.
  • I will then shift the focus to matters domestic and talk to ASIC’s forward‑agenda in this area, with reference to our recently released Corporate Plan.
  • Finally, I will touch on ASIC’s key recommendations for listed companies and their directors and officers, before taking questions.

International agenda: climate-change risk governance

Now to our involvement in IOSCO’s sustainable finance taskforce.

Securities regulators globally share an interest in protecting investors and promoting fair and efficient capital markets. Indeed, these priorities are reflected in ASIC’s own statutory mandate.

In 2018, against a backdrop of an increasing degree of intersection between these regulatory priorities and broader market developments in relation to sustainability (including climate change-related matters), IOSCO established a sustainable finance network. This was a forum to facilitate peer regulators to hold discussions, exchange experiences and gain a better understanding on these emerging trends.

This sustainable finance network, as it was known then, undertook a program of work which led to the publication of a report in April last year, identifying three core issues for regulators:

  1. Comparability and useability of disclosures produced under the multiple and diverse sustainability frameworks and standards in use in global markets.
  2. Greenwashing and other challenges to investor protection.
  3. A lack of common definitions of sustainable activities.

Subsequently, IOSCO established a sustainable finance taskforce to work towards addressing these challenges. The Taskforce established a number of workstreams culminating in the publication over the last few months of three reports:

  • First, in June, a final report on sustainability-related issuer disclosures, which includes climate change-related disclosures.
  • Second, and also in June, a consultation report on sustainability-related practices, policies, procedures and disclosure in asset management; and
  • Third, in July, a consultation report on ESG ratings and data providers.

ASIC, through its membership of the taskforce, was involved in the work on the first two of those three reports. Taken together, these reports serve to comprehensively highlight the key issues, challenges and pressure points in the rapidly changing global landscape in this area. The reports also set out a range of recommendations detailing how these challenges can be met.

I won’t seek to unpack their findings in any detail here, but I would certainly encourage those present today to consider them as broad, and useful, ‘stocktake’ type documents laying out the current state of play.

Furthermore, these reports provide context for ASIC’s own forward workplan in this area, which I will talk to shortly.

Before that, I will speak briefly to another important international development with potential implications for reporting practices in Australia. This is the proposed International Sustainability Standards Board.

In September 2020, the Trustees of the IFRS Foundation published a consultation paper to determine:

  • whether there is a need for global sustainability standards
  • whether the IFRS Foundation should play a role in developing such standards; and
  • what the scope of that role could be.

As you will be aware, the International Financial Reporting Standards Foundation is a not-for-profit, public interest organisation. The IFRS Foundation was established to develop a single set of high-quality, understandable, enforceable and globally accepted accounting standards – IFRS Standards – and to promote and facilitate adoption of those standards.

Feedback to this IFRS consultation confirmed that many stakeholders and market participants identified an urgent need for global sustainability reporting standards. It highlighted broad support for the IFRS Foundation to play a role in developing the standards. To that end, the IFRS Trustees have a proposal on-foot to establish an International Sustainability Standards Board within the structure of the existing IFRS Foundation.

A decision on whether this proposal proceeds is expected imminently. If it does proceed, it has been proposed that any new International Sustainability Standards Board take a ‘climate change–first’ approach.

In the furtherance of these proposals, the IFRS Foundation has already established a Technical Readiness Working Group. The Group comprises representatives from various existing standard setting bodies, including the Task Force on Climate-related Financial Disclosures (TCFD), and would provide any new board with a running start, should the proposals proceed.

It is expected that any new climate reporting standard will build off existing frameworks such as TCFD and others.

The IOSCO taskforce’s work on sustainability disclosures concluded with a recommendation for a global baseline reporting standard and IOSCO has expressed support for these IFRS proposals in this regard.

Separately, we note that the SEC in the US has recently closed a wide-ranging consultation process on, among other things, climate-related disclosures for US listed companies.

While it remains to be seen where these initiatives will ultimately land, they are important developments and ASIC is following them very closely, particularly with reference to their potential relevance to listed companies in Australia.

Domestic agenda: climate-change risk governance

Circling back to the domestic agenda, our recently published Corporate Plan sets out our priorities in this area. First, our work on climate change-related disclosure and governance continues. This item has been on our workplan for a number of years now and we will continue to undertake targeted surveillance and engagement work on this important issue to:

  1. Foster continued improvement in the standard of climate change governance practices in our market.
  2. Promote the provision by listed companies of reliable and decision useful climate-related disclosures that will enable investors to make fully informed decisions.

These outcomes directly intersect with ASIC’s statutory objectives of fair and efficient capital markets and confident and informed investors.

Our surveillance activity will focus on monitoring the continued evolution of TCFD reporting standards in our market and of course statutory disclosure requirements such as those that apply to operating and financial reviews and disclosure documents.

We intend to continue to engage formally on climate change disclosure-related issues through established mechanisms including:

  • The Council of Financial Regulators working group on climate risk, along with our colleagues from the RBA, Treasury and APRA. For those interested in the broader work of the CFR working group, an update paper has recently been published on the CFR website.
  • Secondly, we will continue with the ongoing work of the IOSCO Sustainable Finance Taskforce as previously mentioned; and
  • Furthermore, we will engage with potential new sustainability reporting frameworks under the proposed International Sustainability Standards Board through participation in an IOSCO Technical Experts Group.

In addition, we will continue to seek to engage widely and regularly with our stakeholders and other interested parties, for example at events like today.

We also have a separate, but interrelated, program of work examining the area of potential greenwashing of financial products. In this space, we will be conducting targeted surveillance of financial products to identify misleading statements relating to environmental, social and governance claims, particularly across social media.

Further, we will seek opportunities to improve consumer outcomes by changing industry practices to mitigate the risk of greenwashing and contribute to the international work of IOSCO in this area, as previously alluded to.

Four core messages on climate change risk

Our core messages on climate change-related matters remain unchanged from those we set out in 2018 under ASIC Report 593:

  1. Consider climate risk

Directors and officers of listed companies need to understand and continually reassess existing and emerging risks that may be applicable to the company’s business, including both physical and transitional climate risk.

  1. Develop and maintain strong and effective corporate governance

Strong governance facilitates better information flows within a company and supports active and informed engagement and oversight by the board in identifying and managing risk.

Boards should consider if they are comfortable with the level of oversight they maintain over climate risks and opportunities and the governance structures in place to assess, manage and disclose these risks and opportunities.

  1. Comply with the law

Directors of listed companies should carefully consider the statutory requirements relating to the operating and financial review for listed companies and other requirements for prospectuses or continuous disclosure announcements.

Boards should ask if material climate-related disclosures have been made and updated where necessary and appropriate.

  1. Disclose useful information to investors

The voluntary disclosure recommendations issued by the TCFD are specifically designed to help companies produce information useful for investors. ASIC recommends listed companies with material exposure to climate risk consider reporting under the TCFD framework.

Surveillance findings

Our most recent round of surveillance found that voluntary adoption of TCFD reporting by some larger listed companies has materially improved standards of climate-related governance and disclosure in our market.

Among larger listed companies, ASIC has clearly observed a significant and meaningful increase in the level of engagement, and disclosure, on climate-related matters.

However, there remains a way to go, and challenges remain for both users and preparers of TCFD disclosure. This is particularly the case with certain elements of the TCFD framework, including scenario analysis and physical risk disclosures.

Conclusion

Perhaps, in closing, it is apt to bring the discussion back to governance. You will note that ASIC has, from the beginning of its engagement on this issue, coupled its work on disclosure with governance. This is not an accident.

As others have observed, climate change poses systemic risks. These risks are dynamic, not static. They are evolving.

It is certainly not unforeseeable that both physical and transitional risks escalate materially over the years ahead, perhaps faster than expected.

This is why governance is so important. It embeds the organisational structure and culture necessary to respond to and operate in such an environment.

It precipitates both sound risk management and decision making and ultimately the provision of more useful and reliable disclosures, all of which serve to benefit the company and its stakeholders overall.

Thank you and I would be pleased to take questions.

Last updated: 14/10/2021 12:00