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Chapter 3 - Environmental reporting
Introduction
3.1
The Company Law Review Act 1998 among
other things inserted s.299(1)(f) into the Corporations Law. The
paragraph provides as follows:
Annual directors’ report –
general information
299(1) [General information about
operations and activities]. The directors’ report for a financial year
must:
...
(f) if the entity’s operations
are subject to any particular and significant environmental regulation under a
law of the Commonwealth or of a State or Territory – details of the entity’s
performance in relation to environmental regulation.
3.2
The Government indicated that it opposed the
amendment and referred the matter to the PJSC for inquiry.
3.3
The PJSC received 46 submissions which addressed
this topic, of which 6 were in favour of the provision and 40 opposed to it.
Arguments against the submission
Environmental reporting is
inappropriate for the directors’ report
3.4
A number of submissions advised that the
environmental reporting requirement was inappropriate. Mr R I Barrett submitted
that the annual report contents, as mandated by the Corporations Law,
concentrated on matters of clear relevance to an informed assessment of the
company’s financial position and performance. They were not designed to
encourage conduct that is responsible according to some broader social
criterion. If disclosure of certain conduct is seen as necessary or desirable
from some public interest or social standpoint unrelated to a company’s
financial standing, that issue should be addressed quite separately from the
Corporations Law. In this context the United States securities laws do not
require disclosure on environmental compliance simply for the sake of
disseminating information about a company’s environmental practices. The
emphasis is on financial effects for the information of creditors and
shareholders, that being the proper province of corporate regulation. The
matters which are disclosed are related clearly to proper reporting of a
company’s financial position. The Australian Law Reform Commission submitted
that to the extent that environmental reporting is necessary and justified it
should form part of the environmental law itself. It should also form part of
the technical benchmarks prescribed by that law. The Australian Society of
Certified Public Accountants, the Institute of Chartered Accountants in
Australia and the Chartered Institute of Company Secretaries (W.A.) submitted
that such reporting may have some merit but should be in environmental
legislation not the directors’ report.
3.5
Freehill Hollingdale and Page (Perth) submitted
that this is not a corporations issue and should not be in the Corporations
Law. The degree of such reporting should be set by environmental agencies. The
Australian Industry Group submitted that ASIC was being made a de facto
environmental agency. The Australian Institute of Company Directors (AICD)
submitted that the provision duplicated regulatory authorities; ASIC were a new
environmental regulatory agency.
3.6
The AICD further submitted that the requirement
lacked any clear objective. It would do little to provide either environmental
or financial information to debt and equity investors or to the public and is
unlikely to focus directors’ attention on appropriate corporate environmental
behaviour. The National Association of Forest Industries (NAFI) submitted that
the requirement serves the interest of non-shareholders rather than
shareholders. Mr J A Sutton submitted that the provision was unnecessary. The
Australian Chamber of Commerce and Industry (ACCI) submitted that the
legislative approval is too doctrinaire and disproportionate to the issue it
seeks to address. Blakiston and Crabb submitted that the provision was
prescriptive and contrary to the simplification thrust of the Company Law
Review Act 1998. Mr Timothy Walshaw submitted that the Corporations Law was
not the appropriate venue for this type of information. Companies’ officers and
auditors should not be used to enforce compliance in areas in which they are
not qualified. Rio Tinto submitted that the provision was incongruous, given
the mainly financial basis of the Corporations Law.
Environmental performance should
not be singled out for mandatory reporting
3.7
A number of submissions advised that
environmental performance should not be singled out for mandatory inclusion in
the annual directors’ report. The Australian Law Reform Commission questioned
whether such sector specific obligations have a place in the Corporations Law,
which is designed to be of general application. Arnold Bloch Leibler asked why environmental
performance had this special status and whether this meant that everything else
was of lesser importance. The Australian Industry Group (AIG) submitted that
there was no other regulatory reporting in s.299. Mr John Wilkin (Corrs
Chambers Westgarth) submitted that if it involved reporting breaches of the law
why did it not include, for instance, breaches of tax and other regulation.
3.8
KPMG submitted that companies should not be
required to report compliance with some laws but not others. The Australian
Society of Certified Practising Accountants and the Institute of Chartered
Accountants in Australia asked why other categories of non-financial
information were not included. Mr R I Barrett submitted that it was not logical
to single out one particular cause of financial risk or burden to the exclusion
of others. Mr Timothy Walshaw submitted that the provision could open the door
to numerous other reporting requirements which are the fashion from time to
time, such as occupational health and safety or affirmative action. Ernst and
Young (Melbourne) asked why this area of social responsibility should be
different to any other. Six other submissions made the same general point.
Voluntary reporting is preferable
3.9
A number of submissions advised that the quality
of disclosure under the provisions would not be high. Voluntary rather than
mandatory environmental reporting would produce the best results. The
Australian Law Reform Commission submitted that the breadth of language of the
provision is such that the likely result is generalised reporting of little use
or benefit to shareholders. Blakiston and Crabb submitted that reporting would
likely become a standard format. The CPA/ICA/CICS (W.A.) submitted that the
requirement would be honoured by good companies and avoided by the bad ones.
The Australian Listed Companies Association Inc. submitted that reporting would
become a meaningless but not onerous general statement. The Australian
Institute of Petroleum (AIP) submitted that environmental reporting should be
left to the board of each company, with the government and shareholders
developing suitable guidelines. The Australian Business Chamber submitted that
the voluntary approach is preferable. The Australian Petroleum Production and
Exploration Association (APPEA) submitted that compulsion is inappropriate. Rio
Tinto Limited submitted that it and other major companies produced good quality
stand-alone environment reports without a legislative requirement.
3.10
The AIG submitted that the provision for
mandatory reporting was introduced even though there was no evidence that
voluntary reporting had been unsuccessful. The preference in Australia has been
to encourage company environmental reporting along voluntary lines. The United
States experience of mandatory reporting is that it leads to a minimum common
standard. The NAFI submitted that the provision would result in a lowest common
denominator, making it harder to distinguish between the companies with good
and bad environmental records. It would become harder rather than easier to
identify environmental performance from company reports. Under the previous
voluntary arrangements there was an opportunity for companies to demonstrate
best practice.
The provision is vague and unclear
3.11
A number of submissions advised that the
provision was uncertain and not well drafted. Allen Allen and Hemsley submitted
that the provision was unclear. For instance, did it apply to trivial and
technical breaches and to compliance with all standards? The Henry Walker Group
submitted that there was no appropriate threshold for the operation of the
provision. The Chartered Institute of Company Secretaries submitted that it was
too vague for any meaningful disclosure. The Australian Institute of Petroleum
submitted that the provision was vague and unworkable. Esso Australia Resources
Ltd submitted that the provision was impractical and bound to cause confusion.
Ernst and Young, Sydney, submitted that it was far too broad. The Australian
Business Chamber submitted that it lacked clarity and a minimum level of
detail. The Association of Mining and Exploration Companies Inc (AMEC)
submitted that the application of the provision was a matter of speculation.
The AICD submitted that it was subjective with no definitions. The AICD and the
Business Council of Australia (BCA) both submitted that interpretation was an
issue, both in determining when the reporting obligation was triggered and, if
triggered, the nature of the requirement. The APPEA submitted that it was
uncertain in scope and application. KPMG submitted that the provision was open
to differences of interpretation. The CPA submitted that it was subjective and
thus could be unreliable; it was premature and needed more debate. The
CPA/ICA/CICS (W.A.) submitted that the provision was subjective, leading to
possible avoidance.
3.12
A number of submissions advised that the
drafting of the provision was deficient. The AIG submitted that the provision
had no verb, there were differences in the qualification of when an entity must
report and that it came under the general reporting provision when it should
have been included in the specific reporting provisions. The AICD and the BCA
both criticised the grammar of the provision.
3.13
Arthur Anderson submitted that the provision did
not require reporting in relation to overseas environmental performance.
Absence of appropriate safeguards
3.14
A number of submissions advised that the
provision did not include appropriate safeguards in relation to its exercise.
Allen Allen and Hemsley submitted that s.299(3) provided that prejudicial
information about other aspects of s.299 need not be disclosed, but that there
was no such safeguard for environmental reporting. There was no protection
against self-incrimination, which the High Court has held to be absolutely
fundamental. Also disclosure under the provision may prejudice the company in
any civil proceedings in which it is engaged. The Victorian Minister for Fair
Trading, Ms Jan Wade MP, also submitted that the provision might infringe the
privilege against self-incrimination. Siddons Ramset Limited submitted that the
provision implies an assumption of guilt with the onus on the company to
disprove this.
3.15
Freehill Hollingdale and Page (Perth) submitted
that Listing Rule 3.1, which requires a listed company to disclose any information
material to the value of its securities, is subject to safeguards. There are no
such safeguards, however, for this provision, which could force a company to
make admissions which could be used against it in litigation or for
environmental liability claims. Also, lobby groups could make harmful use of
immaterial breaches.
Listed companies must already
disclose material information
3.16
A number of submissions advised that companies
must under the ASX listing rules already report material information, which
included environmental performance. Freehill Hollingdale and Page (W.A.)
submitted that Listing Rule 3.1 requires companies to disclose immediately any
information which would have a material effect on the price or value of their
securities. Bristile Ltd submitted that material events must be reported under
the continuous disclosure rules and it is not justified to report on immaterial
events. The AMEC submitted that given the listing rules the provision is an
unnecessary duplication and complication of the process. There were problems
with extending the process to non-material issues. Blakiston and Crabb
submitted that the listing rules were adequate. Four other submissions made the
same general point.
The provision does not apply to all
legal structures
3.17
A number of submissions advised that
environmental reporting should not depend on legal structure. Freehill
Hollingdale and Page (W.A.) submitted that environmental law applies to all
legal structures, not just companies. Mr R I Barrett submitted that if such
disclosure was thought necessary then it should not apply only to companies
formed under the Corporations Law.
3.18
The APPEA submitted that the effect of the
provision on joint venture arrangements was unclear. Virtually all exploration
and production of oil and gas is undertaken by unincorporated joint ventures;
one participant usually reports to the appropriate authorities on environmental
performance. All joint participants are jointly and severally liable for
actions of the joint venture. Some participants have an interest of less than
1%. Esso Australia Resources Ltd submitted that in the upstream petroleum
industry operations are usually owned by a number of unrelated legal entities
via joint ventures. Environmental reporting has been done on an operations
basis not an entity basis. If relevant information is apportioned and
separately reported it will be less transparent. Rio Tinto Limited submitted
that in the case of a large listed group of companies, which prepares financial
statements on a consolidated basis, it is an unnecessary administrative burden
to require subsidiary companies in the group to report separately.
The provision adds an unnecessary
cost
3.19
A number of submissions advised that the
requirement imposes an additional and unnecessary cost. Mr Ian Cochrane
submitted that reporting obligations are extensive enough already without
adding to the burden. The Henry Walker Group submitted that there was a vast
amount of environmental legislation with which companies must comply. Mr John
Wilkin submitted that if companies were complying with environmental
regulations then reporting this was a burden and expense with no benefit to
anyone. The Australian Institute of Petroleum submitted that costs are high for
extensive reports. The Australian Industry Group submitted that costs could be
high. The Australian Business Chamber submitted that there could be high costs
for such open ended mandatory reporting. The Victorian Minister for Fair
Trading, Ms Jan Wade MP, submitted that the provision could impose significant
additional costs on small and medium business enterprises. Mr Timothy Walshaw
submitted that the provision raised significantly the cost of reports; the aim
of business law reform should be to reduce, not increase the cost of doing
business. The AMEC submitted that the provision was unnecessary and flew in the
face of company law simplification.
3.20
A number of submissions advised that the
provision duplicated other requirements. The AIP submitted that compliance was
already reported to environmental agencies. Gunns Ltd submitted that there were
existing processes for reporting to government agencies. Esso Australia
Resources Ltd submitted that the provision duplicated State requirements. The
ACCI submitted that it was an additional regulatory burden on business, which
duplicated Commonwealth and State legislation. The AICD submitted that it
duplicated existing and future requirements. The APPEA submitted that it
duplicated other reporting requirements, which resulted in cost but little
benefit.
Arguments in favour of the provision
3.21
The PJSC received submissions from two
environmental organisations.
Greenpeace Australia
3.22
Greenpeace Australia submitted that there is
little dispute that environmental issues are the most significant challenge
that humanity faces. One common theme to the solution of these problems is the
role of the corporate sector in changing the practices which have produced
them. The provision is a positive proactive step which has the potential to
produce significant environmental and economic benefits. There may be some
teething difficulties but this is not an excuse to abolish the provision.
3.23
There are potential benefits in the provision
for business, the environment and government;
- business benefits in two main ways; through potential cost
savings in better environmental behaviour and through goodwill with the
community. A number of business groups have referred publicly to these
benefits.
- the environmental benefits are mostly self-evident. Public
interest and concern about environmental issues remains high.
- the government benefits because agencies do not have enough
resources to police environmental laws. Mandatory reporting can assist here and
make environmental regulation more effective.
3.24
Environmental reporting should be compulsory because
the voluntary system is clearly not adequate. The level of reporting in
Australia is unsatisfactory and lags behind other countries. Enforcement of the
provision should be through an enhanced ASIC practice note, which would
include guidelines and minimum standards.
3.25
There are adequate responses to criticisms of
the provision;
- as noted above, the voluntary system is not sufficient. The
majority of companies have not done the right thing and must now be compelled.
There will be no extra costs for the better companies and the rest will now be
on a level playing field.
- there will always be some confusion and misunderstanding when a
new system is introduced, but other provisions are also imprecise. The only
companies that will have a problem are those with something to hide.
- while there may be a problem with the volume of environmental
laws this is not an argument for voluntary reporting. Instead, the environment
laws may need to be rationalised, with one set of Federal laws.
- there may be high potential costs for directors who sign off on
compliance, but this is a positive feature of the new provision. The potential
for penalties will focus the minds of directors.
3.26
This positive new provision should be given a
chance to work. ASIC should take immediate steps to clarify its operation.
The Environmental Defender’s Office
Ltd
3.27
The EDO submitted that the provision is a
progressive move which is both welcome and necessary. Before the provision the
public had little, if any, information about company compliance with
environmental law. There are a number of reasons for company environmental
disclosure;
- it provides information to economically motivated investors. This
information is important for shareholders to make informed investment
decisions.
- it provides information to environmentally motivated investors.
An increasing number of investors, both institutional and private, are making
non-economic decisions when making investment decisions. In this context,
financial concepts of materiality should not apply.
- it provides information to environmental regulators. Limited
liability may sometimes be an incentive for socially irresponsible conduct by
some companies. Therefore there is a need to regulate corporate environmental
conduct and regulators must be informed to be effective.
- it provides information to the general public. Community right to
know laws shift the focus of environmental law from a reactive crisis-by-crisis
approach towards citizen and government monitoring of existing and potential
hazards.
3.28
Australian company environmental reporting has
been poor. The provision attempts to reverse this trend and make environmental
disclosure meaningful. There have been concerns about the provision but these
can be met largely by the existing ASIC Practice Note 68, which could be
further refined.
Other submissions in favour of the
provision
3.29
MAI Services Pty Ltd submitted that the
provision was essential as a step for environmental stakeholders to replace
government regulators. Corporations must prepare this information in any event
and it would cost little to distribute electronically to their shareholders. Mr
Stan Rodgers submitted that companies are already required to report to State
authorities so it would not cost more to report again. Shareholders need to
know about weaknesses in a company’s control systems, which could affect the
share price. Mr R Furlonger agreed with the provision, on the principle of
maximum disclosure. Mr Jack Tilburn agreed with the provision.
Conclusions
3.30
The PJSC concluded that it was inappropriate for
the Corporation Law to require inclusion in the annual directors’ report of
details of performance in relation to environmental regulation. The PJSC noted
and accepted the almost total unanimity of view on this point of submissions
from the Australian financial and legal communities.
3.31
Environmental reporting is not a matter which
relates to the Corporations Law. Environmental performance may be an important
issue but it should be addressed through avenues other than the Corporations
Law. The proper place for such reporting is the environment law itself.
3.32
The PJSC asks why the provision singled out
environmental performance to the exclusion of other presumably worthwhile
performance indicators. There is no other regulatory reporting in s.299.
Presumably this means that, for instance, performance in taxation regulation or
occupational health and safety regulation are less important for sector
specific purposes of the Corporations Law than environmental performance.
3.33
Mandatory reporting of environmental performance
may be unproductive. Compulsion may lead to mediocrity and blandness in
environmental reporting, with companies using a standardised form of general
words as the lowest common denominator. The voluntary system would encourage
better companies to achieve best practice in this area, while the market will
deal adversely with those companies which lag.
3.34
The provision is vague and uncertain, which
could lead to subjective interpretation. These deficiencies are basic and, in
the opinion of the PJSC, cannot be solved by simply asking ASIC to refine a
practice note. The PJSC is grateful for the oral evidence given to it on this
point by Ms Jillian Segal, Commissioner, ASIC.
3.35
The provision is significantly deficient in that
it lacks any of the usual safeguards, even those included for other provisions
of s.299. There is no protection against self-incrimination or in relation to
civil proceedings or other liability claims. It also lacks the safeguards
provided by Listing Rule 3.1. These deficiencies appear to be fundamental.
3.36
There is an existing obligation on listed
companies to disclose immediately all events which would have a material effect
on the price or value of its securities. Any additional information required by
s.299(1)(f) would be non-material and up to a year after the event. The
practical effect of the provision would therefore appear limited.
3.37
There are significant legal or economic
structures to which the provision does not apply. For instance, it does not
apply to overseas operations of entities formed under the Corporations Law. It
is ironic that the express environmental reporting requirement does not include
overseas performance, whereas the Listing Rules do include such material events
overseas. Also the provision requires entity rather than project reporting for
mining and exploration joint ventures. These matters have the potential to
limit and distort the use of such environmental performance reporting.
3.38
The provision requires companies to duplicate
existing Commonwealth and State environmental reporting requirements, with
resulting additional costs.
3.39
The two submissions from environmental groups
put different views to the above conclusions. These views, however, were not as
persuasive as those from the business community.
Recommendation
3.40
The Committee recommends that s.299(1)(f) of the
Corporations Law be deleted.
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