Trends in sustainability reporting and carbon risk disclosure

Sustainability reporting is not mandatory in Australia but many companies report voluntarily on social and environmental performance to meet annual disclosure obligations, assist with stakeholder engagement and demonstrate a commitment to corporate social responsibility (CSR). A recent survey conducted by the Australian Centre for Corporate Social Responsibility (ACCSR) found that 53% of the Australian respondents supported mandatory sustainability reporting for all organisations. This reflects a similar trend in carbon disclosure where industry bodies, investors, and prudential regulators are calling for mandatory reporting of climate-related financial information.

Sustainability disclosure over the past decade has improved with the number of ASX200 companies reporting to a ‘detailed level’ increasing from 39 in 2008 to 101 in 2016. The level of climate-related disclosure lags that of sustainability reporting. Seventy ASX200 companies did not measure greenhouse gas emissions or have a policy or statement on climate-related risk in 2016.¹

Environmental reporting requirements

Australian companies are obliged to disclose sustainability-related information under the National Greenhouse and Energy Reporting Act 2007 (Cth) and the National Pollutant Inventory. Also, under the Corporations Act 2001 (Cth), directors of public companies, large proprietary companies, registered schemes and disclosing entities are required to publicly disclose information relating to the company’s environmental performance. If a company is subject to any significant environmental regulation under a law of the Commonwealth or of a state or territory, it must provide a director’s report that gives details of the company’s performance in relation to environmental regulation.

Publicly listed companies have additional reporting requirements. All listed public companies are required to include information in the annual director’s report that would help shareholders assess:

• The operations of the company;
• The financial position of the company; and
• The company’s business strategies and its prospects for future financial years. The report may omit this information if it is likely to result in unreasonable prejudice to the company. If information is omitted, the report must say so.

Because many environmental issues have the potential to impact the financial performance of a company, the scope of this reporting requirement is far-reaching. There is potential for it to include:

• Penalties for proceedings brought under federal and state environment legislation (for example, the maximum corporate penalty under the Environmental Protection and Biodiversity Conservation Act 1999 (Cth) is $8.5 million);
• Civil claims brought by third parties for harm caused by pollution incidents;
• Climate-related risks including the vulnerability of assets during extreme weather events such as droughts, fires and floods, and damage to infrastructure and property from coastal inundation and storm surge;
• Contingent liability for the clean up of contaminated land; and
• Increased production costs due to restrictions on the availability of natural resources.

Also, a listed company is required to include in its annual report a corporate governance statement disclosing the extent to which the entity has followed the recommendations of the ASX Corporate Governance Council during the reporting period. Recommendation 7.4 relates to environmental risks and provides that:

A listed entity should disclose whether it has any material exposure to economic, environmental and social sustainability risks and, if it does, how it manages or intends to manage those risks.

Recommendation 7.4 does not require a company to publish a sustainability report. However, a company that does publish a sustainability report may meet this recommendation by cross-referring to that report.

Trends in carbon risk disclosure

In relation to carbon risk disclosure, a recent Senate inquiry has recommended that ASIC and the ASX provide more explicit guidance to directors and listed entities respectively. The Sustainable Insurance Forum, which includes the Australian Prudential Regulation Authority as a member, has encouraged insurers to follow the new recommendations made by a global industry-led taskforce on climate-related financial information to the Financial Stability Board. Also, the Australian Council of Superannuation Investors identified, in its recent analysis of ASX200 disclosure, a need for better reporting of climate-related governance and risk assessment.

The responsibilities of superannuation fund trustees to consider climate-related risks are similar to those of company directors. The scope of a director’s duty to act with care and diligence under the Corporations Act extends to considering climate-related risks where those risks intersect with the interests of the company. While super fund trustees should consider climate risks to the extent that they intersect with the financial interests of beneficiaries.

In August 2017, two shareholders commenced proceedings in the Federal Court alleging a breach of the Corporations Act by a financial institution. The shareholders allege that the bank failed to disclose the risk climate change poses to its financial position in its 2016 annual report, including risks from lending to owners of properties in coastal areas. The case, which is the first of its kind in Australia, should provide guidance to companies on the scope of their carbon risk disclosure obligations.

Findings of ACCSR’s survey

The ACCSR has published the results of its survey on how companies in Australia and New Zealand are addressing CSR priorities, UN sustainable development goals and trends in sustainability reporting. The online survey was completed by 1215 professionals. The ACCSR’s Annual Review of the State of CSR in Australia and New Zealand 2017, identifies the following key results:

• 83% of those surveyed considered that building stronger relationships with stakeholders is the highest CSR priority. Managing regulatory impacts is also a high priority;
• The top sustainable development goal addressed by the organisations of the respondents surveyed is gender equality;
• 88% of those surveyed said that sustainability reporting had helped build their reputation as a responsible business;
• 53% believe that sustainability reporting should be mandatory for all organisations of a certain size, including not-for-profits, educational institutions and sporting clubs; and
• The Global Reporting Initiative remains the most widely used reporting framework.

Implications for business

• Companies may have a legal obligation to publicly disclose sustainability-related information as a result of regulatory reporting and disclosure requirements. Data collected for compliance purposes can assist a company with sustainability reporting and carbon-risk disclosure.
• There is an increasing trend by companies to voluntarily disclose information about social and environmental performance. The demand by industry bodies, prudential regulators and investors for heightened disclosure of carbon-risk is likely to support this trend.
• Sustainability reporting can identify opportunities for cost savings, capture operational efficiencies and lead to better stakeholder engagement. It alerts a company to its own social and environmental impacts, those of its suppliers and the impact of its products. It may also help identify potential areas of regulatory non-compliance.

Written by Charmian Barton.

¹ Corporate Sustainability Reporting in Australia, ACSI, July 2017.