ASIC’s tips on climate risk management and disclosure

Strong corporate governance facilitates better information flow within a company and facilitates active and informed engagement and board oversight when identifying and managing risks such as climate change.

That’s the message from the Australian Securities and Investments Commission (ASIC) in a new report on climate risk disclosure by Australia’s listed companies.

The corporate watchdog says transparency is one of the fundamental tenets of strong corporate governance. ‘When climate risk is material, consideration should be given to disclosing the company’s governance and risk management practices around climate risk.’

Regardless of whether a company follows the disclosure recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), ASIC recommends that directors and senior managers consider the TCFD’s final report.

ASIC views it as a useful reference for climate risk and its assessment, governance and management. And, it doesn’t believe there is any legal or policy impediment to listed companies reporting under the TCFD recommendations, provided that the disclosure is not misleading or deceptive.

‘Regardless of whether TCFD reporting is adopted, we recommend that, where appropriate, listed companies assess and disclose climate risk with reference to the broad categories formulated by the TCFD: physical and transition risk. Further, listed companies should strive for consistency between the categorisation of climate risk adopted across voluntary and statutory disclosures.’

ASIC suggests that listed companies consider disclosing climate separately to other general risk categories, such as environmental or regulatory risk.

It adds that directors of listed companies should carefully consider the requirements relating to operating and financial review (OFR) disclosure under s299A(1)(c) of the Corporations Act.

‘We consider that the law requires an OFR to include a discussion of climate risk when it could affect the entity’s achievement of its financial performance or disclosed outcomes. Directors should also consider the requirement to include any relevant analytical comments and specify how risk factors that are within the control of management will be managed: see paragraph 64 in RG 247.’

ASIC adds that preparers of disclosure documents should consider the issuing company’s exposure to climate risk as part of any due diligence process. When that risk is material, the prospectus should disclose it in a clear, concise and effective way.

ASIC’s report is based on a review it conducted of climate risk disclosures by 60 ASX 300 companies, 25 recent initial public offering prospectuses and in 15,000 annual reports.

It found that 17 per cent of listed companies in its sample identified climate risk as a material risk in their OFRs. The majority of the ASX 100 companies in its sample had, to some extent, considered climate risk to the company’s business, but there was limited climate-risk-related disclosure outside of the ASX 200. Several listed companies in its sample also intend to adopt the TCFD recommendations, either in full or in part.

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