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Chapter Seven - Sustainability reporting: Current legislative and market requirements
7.1
In Australia,
there is no legal requirement for sustainability reporting per se. However
there are certain obligations on companies to report both financial and non-financial
information in a number of areas. Submitters' views on the appropriateness of
current reporting requirements were highly polarised. Corporations and business
associations almost unanimously agreed that the current arrangements are
appropriate whereas accounting bodies, non-governmental organisations and
consultants in general agreed that there is scope for improvement.
7.2
This chapter looks at the existing reporting
requirements, for both financial and non-financial information. The financial
reporting framework is covered in some detail in the recognition, as some
submitters suggested, that existing provisions for disclosure of financial
information could be extended to include non-financial information. As Professor
Deegan submitted:
...there is nothing to preclude the introduction of [non-financial]
performance-related disclosures within these sources of regulation...[321]
7.3
Matters discussed in this chapter include:
-
Statutory requirements for financial reporting;
-
Reporting requirements of the Australian Stock
Exchange (ASX) Corporate Governance Council Recommendations;
-
The current review of the ASX Corporate
Governance Council Recommendations;
-
Other ASX requirements; and
-
Statutory requirements for non-financial
reporting.
Statutory requirements for financial reporting[322]
7.4
Existing statutory requirements for financial reporting
are intended to provide structure, comparability and transparency. Some of
these requirements are also relevant to sustainability reporting. There are
broadly two ways in which listed companies formally disclose information to the
market: continuous disclosure and periodic disclosure.
Continuous disclosure
7.5
The regulation governing continuous disclosure is
contained in the Corporations Act 2001
(Corporations Act) and is complemented by the ASX Listing Rules.[323] Under ASX Listing Rule 3.1 listed
corporations are required to disclose immediately
any information that a reasonable person would expect to have a material effect on the price or value of the entities securities.
7.6
Section 677 of the Corporations Act defines 'material
effect on price or value' stating it as information that:
...would, or would be
likely to, influence persons who commonly invest in securities in deciding
whether to acquire or dispose of the [enhanced disclosure] securities.
7.7
Whilst Listing Rule 3.1 is focused primarily on
financial issues, it potentially also covers information relating to
environmental and social matters that satisfies the materiality test. The ASX
Guidance Note on continuous disclosure makes clear that in making continuous
disclosures, the listed corporation has an equal duty to shareholders,
investors and the market generally.[324]
As the interest of institutional investors in corporate responsibility grows,
and as the impacts of a company's non-financial performance on overall company
value are better understood, this mechanism may become important for
disclosures of sustainability information.
7.8
The Australian Human Rights Centre cited the 2003 Ernst
& Young report, The Materiality of Environmental Risk to Australia's
Finance Sector as an indication
that materially significant environmental risk is currently
under-reported by ASX companies.[325] Mr
Spathis of the Australian Council of Super
Investors (ACSI) supported this view saying that a recent study conducted by Monash
University found that 'information
on the material risks was either unavailable or difficult to obtain'.[326] The committee hopes that this trend
diminishes as corporations increasingly recognise the importance of
non-financial risks to their longer-term financial performance.
7.9
Similar obligations apply to unlisted disclosing
entities under the Corporations Act.[327]
Periodic disclosure
7.10
The regulations governing the disclosure of company
financial information in annual reports is contained in the Corporations Act 2001, Accounting
Standards, and Australian Stock Exchange listing requirements (for listed
entities).
7.11
All companies (other than some small private companies)
and registered managed investment schemes must prepare and file with ASIC an
annual report, comprising:
-
a financial report; and
-
a directors' report.[328]
Financial report
7.12
The Corporations Act prescribes the content of the
financial report, including compliance with the accounting standards.[329] Some matters that could be included
within a non-financial reporting framework can have direct financial implications.
However, there is no requirement that environmental and social aspects of a
company's operations be covered in the financial report.[330]
Directors' report – operating and
financial review
7.13
The directors' report covers a range of general
information concerning the operation of the company, including its principal activities
and outcomes during the year, as well as some forward-looking information.[331] Of particular interest is the
introduction of an operating and financial review (OFR, also known as the management
discussion and analysis, MD&A) contained in section 299A. Under this
provision listed companies are required to include in the directors' report any
information that shareholders would reasonably require to make an informed
assessment of:
-
the operations of the company reported on;
-
its financial position; and
-
the company's business strategies and its
prospects for future financial years.
7.14
The OFR obligation aims to ensure greater transparency
and accountability within the company's operations and greater opportunity for
stakeholders to take an interest in the business operations of the company.
7.15
Section 299A was introduced in response to a
recommendation in the Royal Commission report The Failure of HIH Insurance
(April 2003).[332] The Royal Commissioner
referred to the proposals in the United Kingdom
for an OFR (discussed previously in chapter 6), containing such information that
the directors decide is necessary to obtain an understanding of the business, including
details of the company's performance, plans, opportunities, corporate
governance and management risks.
7.16
Section 299A does not specify the same level of detail
as was required in the comprehensive UK OFR provisions, which, for instance,
specifically referred to risks and information about the impact of the business
on the environment, employees or other interests. Instead, the Explanatory Memorandum
to section 299A stated that the provision was intentionally expressed in broad
terms:
-
to
enable directors to make their own assessment of the information needs of
shareholders of the company and tailor their disclosures accordingly; and
-
to
provide flexibility in form and content of the disclosures, as the information
needs of shareholders, and the wider capital market, evolve over time.[333]
7.17
The Explanatory Memorandum directs companies to the
G100's Guide to Review of Operations and
Financial Condition (the G100 Guide), which significantly, makes reference
to both company stakeholders and the provision of financial and non-financial
information. The G100 Guide notes:
A contemporary Review should include an analysis of
industry-wide and company-specific financial and non-financial information that
is relevant to an assessment of the company's performance and prospects.[334]
7.18
In various sections, the G100 Guide makes reference to
non-financial aspects of business operations including:
The Review should
include a discussion and analysis of key
financial and non-financial performance indicators (KPIs) used by
management in their assessment of the company and its performance ... Where
practical, KPIs ... should include multiple perspectives such as sustainability measures including social and
environmental performance measures, where relevant.[335] [emphasis added]
The Review should
provide a commentary on the strengths and resources of the company whose value
may not be fully reflected in the statement of financial position ... Disclosure
of information about unrecognised
intangible assets such as ... human
resources, customer and supplier relationships and innovations is helpful
to users in making decisions.[336]
[emphasis added]
The Review should
contain discussion of the company's risk profile and risk management
practices... All relevant aspects of risk management ... should be discussed.
... The discussion of the risk profile, management and mitigation of risk ...
may include:
- Availability
of staff and other resources;
- Occupational
health and safety;
- Environmental
issues; and
- Product
liability.[337]
7.19
The Corporations and Markets Advisory Committee noted
the potential importance of this development stating:
The provision applies to annual reports of listed companies from
2005. While potentially a significant development, it will take some time to
assess any change in quantity or quality of information reported as a result of
the new provision.[338]
7.20
Several corporate representative bodies such as the
Australian Bankers Association and the Australian Institute of Company
Directors argued that the OFR requirements set out in section 299A provide
adequate scope for companies to report their operational and financial
performance.[339] In contrast,
environmental groups such as the Australian Conservation Foundation argued that
it is unlikely that this provision will result in greater disclosure of
specific environmental data for most companies.[340]
7.21
The committee is of the view that the OFR in
combination with the G100 guide provide an effective mechanism for companies to
disclose, and for investors to assess and value, material non-financial
performance, risk profile and risk management strategies. The committee
believes that the non-financial disclosures that result from this new mechanism
should be closely monitored by company auditors to ensure that disclosures are
meeting the evolving needs of shareholders and the wider capital market.
Recommendation 8
7.22
The committee recommends that each company auditor on
an annual basis:
- review the extent to which companies are making
non-financial disclosures in their Operating and Financial Reviews; and
-
make recommendations to the company Board
regarding the adequacy of the disclosures to meet the evolving needs of
shareholders, and the wider capital market in order to assess and value
material non financial performance, risk profile and risk management strategies.
Requirements of the Corporate Governance Council Recommendations
7.23
In response to a number of high-profile corporate
collapses which occurred in Australia
and overseas throughout 2001 and 2002, the ASX Corporate Governance Council
released its Principles of Good Corporate
Governance and Best Practice Recommendations (the ASX Council
Recommendations).[341] ASX Listing
Rule 4.10.3 requires companies to provide a statement in their annual report
disclosing the extent to which they have followed the 28 ASX Council
Recommendations, which are framed under ten Principles of Good Corporate
Governance. The ASX Council Recommendations are said to be neither mandatory
nor prescriptive. They point out that '[i]f a company considers that a
recommendation is inappropriate to its particular circumstances, it has the
flexibility not to adopt it – a flexibility tempered by the requirement to
explain why.'[342] Where companies
have not followed a recommendation, they must give reasons for taking an
alternative approach. This is referred to as the 'if not, why not' obligation.
7.24
During the inquiry the Chair of the ASX Corporate
Governance Council, Mr Eric
Mayne was asked whether he
thought the 'if not, why not' mechanism has the practical effect of making the
ASX Council Recommendations quasi-mandatory. Mr Mayne
acknowledged that companies tend to regard them as 'somewhat prescriptive'
because the recommendations essentially set a framework for companies'
responses. However, Mr Mayne
agreed that in disclosing information about corporate governance practices,
companies are responding to market expectations and that market forces should
dictate how companies respond.[343]
7.25
The results from the ASX's recently released review of
disclosures in 2005 annual reports (discussed below) suggest that companies
don't see the ASX Council Recommendations as prescriptive, as 26 per cent of
the market chose not to adopt the recommendations or adopted an alternative
practice.[344]
7.26
Despite being criticised as a 'lost opportunity'[345] and 'benign in many ways'[346] the ASX Council Recommendations
were generally viewed as a positive mechanism to encourage listed companies to
improve their corporate governance practices. Corporate ResponseAbility
described their strength as giving 'both a high level overview and clear
direction without being overly prescriptive.'[347]
7.27
Although the ASX Council Recommendations are
specifically designed to encourage improved corporate governance practices,
three of the ten principles contained in the ASX Council Recommendations are
directly relevant to the disclosure of sustainability information. These are:
- Principle
3: Promote ethical and responsible decision-making;
- Principle
7: Recognise and manage risk; and
- Principle
10: Recognise the legitimate interests of stakeholders.
Principle 3: Promote ethical and
responsible decision-making
7.28
As discussed in chapter 6, ASX Council Recommendation
3.1 creates an expectation for publicly listed entities to establish a code of
conduct to actively promote ethical and responsible decision making. The ASX
Council Recommendations state 'investor confidence can be enhanced if the
company clearly articulates the practices by which it intends directors and key
executives to abide.'[348] Depending
on the content of the code of conduct, the confidence other company
stakeholders have in the company could also be enhanced. For example the
ASX Council Recommendations suggest that the code of conduct could include
'fair dealing by all employees with the company's customers, suppliers,
competitors and employees' which would obviously provide these stakeholders
with a degree of enhanced confidence.
Principle 7: Recognise and manage
risk
7.29
Of all the principles, Principle 7 is perhaps the most
closely aligned with one of the key characteristics of corporate responsibility
– risk management. Principle 7 refers to listed companies establishing 'a sound
system of risk oversight and management and internal control' designed to:
-
identify,
assess, monitor and manage risk; and
-
inform
investors of material changes to the company's risk profile.
7.30
In order to
satisfy this principle, Recommendation
7.1 specifies that the board or appropriate board committee
should establish policies on risk oversight and management.
7.31
According to the guidance on Recommendation 7.1 the policies should include a risk profile component,
which 'should be a description of the material risks facing the company. Material risks include financial and
non-financial matters.'[349]
[emphasis added]
7.32
The guidance to Principle 7 goes on to state that a
description of the company's risk management policy and internal compliance and
control system should be made publicly available, ideally by posting it to the company's
website in a clearly marked corporate governance section.[350]
7.33
Recommendation 7.2 is also potentially relevant to a
company's management of non-financial risks. It states that:
The chief executive
officer (or equivalent) and the chief financial officer (or equivalent) should
state to the board in writing that ... the company's risk management and
internal compliance and control system is operating efficiently and effectively
in all material respects.[351]
7.34
The requirement set out in this Principle is for the
disclosure of material risks, be they financial or non-financial. The question
of materiality is by its nature a subjective one. As a result, whether
companies disclose information on non-financial risks under this Principle will
depend on whether it is seen as material by each individual organisation. Despite
this uncertainty, this Principle is clearly relevant to the concept of
corporate responsibility.
Principle 10: Recognise the
legitimate interests of stakeholders
7.35
This Principle
refers to listed companies establishing and disclosing a code of conduct to
guide compliance with their legal and other obligations to legitimate
stakeholders. It sets out various suggestions for matters to be covered by that
code of conduct.
7.36
Guidelines for the content of the code of conduct are
provided and include reference to:
-
Responsibilities
to clients, customers and consumers;
-
Employment
practices – such as occupational health and safety; special entitlements above
the statutory minimum; training and further education support; and prohibitions
on the offering and acceptance of bribes;
-
Responsibilities
to the community – this might include environmental protection policies,
support for community activities, donation or sponsorship policies; and
-
How the
company complies with legislation affecting its operations – for example for
companies that operate outside Australia, whether those operations comply with
Australian or local legal requirements.
7.37
Principle
10 requires listed companies to publish (ideally in a clearly marked corporate
governance section on their website) a description of any applicable code of
conduct or a summary of its main provisions. They should also include within
their annual report an explanation of any departure from the best practice recommendation
in Principle 10.
7.38
2004 was the first year that listed companies were
required to provide disclosure against the ASX Council Recommendations. In May
2005 the ASX released a report on the corporate governance disclosures reported
in 2004 annual reports. This report indicates that the average adoption rate
for all ASX Council Recommendations for the whole market was 68 per cent and
almost 85 per cent for the top-500 companies.[352] The NSW Young Lawyers observed that
'this indicates a clear acceptance of the principles at the board-room level.'[353]
7.39
The updated 2005 report was recently released by the
ASX, and this report indicates an improved trend in overall adoption of the ASX
Council Recommendations.[354]
7.40
During the course of the inquiry, adaptation of the ASX
Council Recommendations was often referred to as a possible option for
encouraging a greater level of sustainability reporting in Australia.
Options for adaptation are discussed below.
Review of the Corporate Governance Council Recommendations[355]
7.41
In September 2005,
Senator the Hon Ian Campbell, Minister for the Environment and Heritage, asked
the ASX Corporate Governance Council to consider the development of a voluntary
reporting framework for sustainability
reporting. Recognising that reporting against a standardised framework
would increase comparability and make reports more relevant to business and
other stakeholders, the Minister asked the Council to consider options on
how to enhance comparability. In particular, the Minister recommended
consideration of an agreed reporting framework using an 'if not, why not'
approach to allow for greater comparability, whilst maintaining the principle
of voluntary sustainability reporting.
7.42
Following the request by Senator Campbell, the ASX Corporate
Governance Council set up a working group to consider
how best to encourage greater non-financial reporting.
7.43
The working group
reported to ASX Corporate Governance Council
in December 2005. To capture industry views the ASX Corporate Governance Council
has agreed to prepare a consultation document which will address:
- What corporate responsibility means;
- Which companies it should apply to;
- Which aspects should be left to the market (i.e.
voluntary disclosure) and which aspects
should be suggested or mandated (i.e. what the reporting framework should be); and
- What the
benefits to investors and the community and the markets will be and whether those benefits outweigh additional
compliance costs.[356]
7.44
During his appearance before the committee Mr
Mayne indicated four possible options to
enhance the ASX Council Recommendations in response to Senator Campbell's
request:
-
A voluntary, standardised reporting framework
such as the GRI;
-
Providing further guidance;
-
Providing further guidance and the inclusion of a
reporting trigger; and
-
Await the findings of the Parliamentary Joint
Committee on Corporations and Financial Services as well as the report from the
Corporations and Markets Advisory Committee.[357]
7.45
Mr Mayne
elaborated on all four options, which are discussed in more detail below.
Option 1: Incorporate a standardised
framework
7.46
On the first option, to incorporate a standardised
framework such as the GRI, Mr Mayne
acknowledged the advantages of a standardised reporting framework, such as
providing structure, rigour and comparability to sustainability reports, and
highlighted a range of concerns including the diversity of the market, the
potential for greenwash, and the possibility that it would become a
prescriptive framework.[358]
7.47
The majority of submitters that favour enhancing the
non-financial disclosure requirements under the ASX Council Recommendations
preferred this option, although there was disagreement on which framework
should be adopted. For example, KPMG suggest that the ASX Corporate Governance
Council should be encouraged to include sustainability reporting in the ASX Council
Recommendations and that an Australian framework for sustainability reporting be
established that is consistent with international requirements such as the GRI
for use by those reporting entities which elect to issue sustainability reports.[359]
7.48
As an alternative the Ethical Investment Association
recommended the inclusion of a United Kingdom
style OFR as the standardised framework under the ASX Council Recommendations. Mr Turner
suggested that draft guidelines for environmental and social reporting from the
Department of Environment and Heritage (DEH) and Department of Family and
Community Services and Indigenous Affairs (FaCSIA) be used. The Public Law
Clearing House recommended the inclusion of a disclosure framework referable to
universal standards of assessing corporate conduct, presumably an instrument
such as the UN Global Compact.[360]
7.49
Mr Mayne
threw some doubt on this option by saying:
The council working group that has been looking at this
particular option, I think it is fair to say, probably does not favour
that as the option that should go forward.[361]
Committee view
7.50
The committee notes that this view of the Council
working group may be somewhat premature, given that it is a view formed prior
to the release of the Council's industry consultation paper. The committee
supports greater comparability of sustainability information from the
perspective of:
- financial markets, in terms of valuing
non-financial risk management performance;
- corporations, for the purpose of benchmarking
best practice; and
-
public interest, for the purpose of corporate
transparency.
7.51
A lack of comparability undermines the utility of
sustainability reporting and also reduces public confidence in the considerable
corporate responsibility activities that Australian companies are pursuing.
Over time the absence of a standardised sustainability reporting framework will
raise questions over the genuine commitment of Australian corporations in this
area.
7.52
The committee also believes that the 'if not, why not'
model of the ASX Council Recommendations provides sufficient flexibility for
those corporations which choose to undertake sustainability reporting, but
which also wish to use an alternative framework. Furthermore, the committee
notes the inherent flexibility built into a standardised framework such as the
GRI, allowing companies to tailor the reporting structure to suit their own
needs. For these reasons the committee strongly supports Senator
Campbell's referral to the ASX Corporate
Governance Council, and encourages the Council to consider fully the
development of a voluntary reporting framework for sustainability reporting.
7.53
Despite the committee's strong support for a voluntary
sustainability reporting framework and the widespread acceptance of the GRI as
the emerging international standard for sustainability reporting, the committee
believes that it is too early to recommend the GRI as the voluntary Australian
standard. The diversity of opinion over the appropriate framework for inclusion
in the ASX Council Recommendations demonstrates that there remains uncertainty
as to which framework is preferable to suit Australian market conditions. It is
also prudent prior to nominating the GRI as the Australian standard, to
consider the Australian sustainability framework currently under development by
CPA Australia and the University
of Sydney.
7.54
It is worth noting however that the State of Sustainability Reporting in
Australia 2005 shows a clear trend for Australian based companies to report
'with reference' to the GRI Framework.[362]
If this trend continues, Australian corporations will become more familiar and
comfortable with the GRI Framework, particularly once Australian organisations
gain experience with the revised and improved G3, and the Australian Government
should reconsider the suitability of the GRI as the Australian sustainability
reporting standard.
Recommendation 9
7.55
The committee recommends that:
- it is premature to adopt the Global Reporting
Initiative Framework as the voluntary Australian sustainability reporting framework;
and
-
that the Australian Government continue to
monitor the acceptance and uptake of the Global Reporting Initiative Framework,
both nationally and internationally, with a view to its suitability as the, or
a basis for a, voluntary Australian sustainability reporting framework.
7.56
Despite not recommending the GRI Framework as the
voluntary Australian standard, the committee believes there is value in
promoting its greater acceptance and uptake in Australia.
In chapter 8 the committee makes a recommendation to promote the GRI Framework
to Australian corporations including small to medium enterprises.
Option 2: Provide further guidance
7.57
On the second option, to provide further guidance on the
existing ASX Council Recommendations, Mr
Mayne noted the merit of this approach in
giving greater clarity to the listed entities, but acknowledged that it would
be a temporary one to two year arrangement depending on company take-up.[363] It can be inferred from Mr Mayne's
remarks that if, after one or two years, companies were not using the
additional guidance to improve their non-financial disclosures, then more
detailed requirements would be necessary. Submitters preferring a less
structured approach, such as the Australian Institute of Company Directors,
favoured this option.[364]
7.58
The need for clearer guidance was illustrated by
the fact that despite the reasonably strong adoption rate of the ASX Council
Recommendations, several submitters questioned the adequacy of the content of
disclosures. For instance RepuTex submitted:
...compliance [with the ASX Council's Recommendations]
may be deemed adequate even if it amounts to merely a brief sentence or
paragraph. This is not the desired outcome of the [ASX Council Recommendations],
which are deliberately flexible to reflect the diverse nature of Australian
companies.[365]
7.59
Several specific subject areas
were brought to the committee's attention which may warrant further guidance in
the ASX Council Recommendations. For instance the committee was referred to a
report by the Centre for Australian Ethical Research, entitled Just how business is done? A review of
Australian business' approach to bribery and corruption.[366] The report found that 51 per
cent of the ASX 100 companies have stated policies which address bribery and
corruption amongst their officials, which compares with 92 per cent in the UK,
80 per cent in the US
and 91 per cent in Europe. The report suggests that 'the
ASX does not currently suggest corruption as an issue for inclusion in a
business ethics codes.'[367]
7.60
Two organisations representing
or advising institutional investors also raised concerns over the adequacy of
disclosures. Evidence from Mr Spathis
of ACSI demonstrates that, although the ASX Council Recommendations are a step
in the right direction:
The anecdotal feedback I am getting from our and other
representatives on the ASX Corporate Governance Council is that the feedback
from corporations on principle 7 has been pretty light on.[368]
7.61
These concerns were echoed by BTGAS which submitted
that there needs to be greater consideration of the responses companies give
under Principles 7 and 10.[369]
7.62
BTGAS provided several compelling examples which
clearly illustrate why certain non-financial risks are becoming so important to
both institutional investors and to companies' longer term financial position.
For instance it submitted that Australian work-related injuries are estimated
to cost Australian companies $27 billion per annum, with indirect costs
potentially up to four times greater. In relation to energy
and greenhouse risks BTGAS cited analysis by the Carbon Disclosure
Project which indicates that a five per cent increase in energy prices could
impact per share earnings by as much as 15 per cent in certain industries.[370]
7.63
Finally, the ASX Corporate Governance Council's
recently released review of 2005 corporate governance disclosures seems to
confirm that the sustainability information being provided to the market is ad
hoc and inconsistent. The report found deficiencies in relation to Principle 7
disclosures, stating 'while many companies referred to responsibility for risk
management ... fewer companies actually reported on the policies in place or
disclosed a description of these policies.'[371]
7.64
The report's sustainability and corporate
responsibility section also demonstrates that some companies do not have a full
understanding of what is expected in the disclosures they make. For instance,
sustainability and corporate responsibility disclosures were not necessarily
made in the context of a specific principle. Where companies did refer to a
Principle they referred to Principles 1, 3, 4, 7 and 10 or a combination of
these Principles.[372] This suggests
that further guidance is required regarding the disclosure of non-financial
information. This is particularly true given the ASX Corporate Governance
Council's view that 'meeting the
information needs of a modern investment community is also paramount in terms
of accountability and attracting capital.'[373]
7.65
ACSI put forward a proposal to encourage corporations
to disclose a level of non-financial performance information that is material
to their long term financial performance. Essentially the proposal is for
companies to self-identify the non-financial risks that are of greatest
importance to the organisation. ACSI suggest that corporations should
self-identify their top five sustainability risks and the strategies and
mechanisms planned, or in place, to manage them. Ms McCluskey
of the fund manager Portfolio Partners, who appeared before the committee with
ACSI, noted that BHP Billiton had used this approach in its 2004 Health Safety Environment and Community
Report, which was 'very effective'.[374]
By comparison with BHP Billiton's annual report disclosure in response to
the Principle 7, the top five sustainability risk disclosure is far more user
friendly and informative.
Committee view
7.66
The committee concluded that only limited non-financial
performance information is being provided to the market. This is a particular
concern of institutional investors which as discussed in chapter 5 have an
obligation to consider long term risks, such as those posed by environmental and
social risks. Given the apparent inadequacy of non-financial disclosures that
are currently being made under Principles 3, 7 and 10, the committee believes
that it is appropriate to provide further guidance and clarity regarding the
extent of non-financial information expected.
7.67
In the committee's view the ASX Corporate Governance Council
should provide further guidance on Recommendation
7.1 regarding how companies should achieve the non-financial aspect of
the 'risk profile' component of the 'policies on risk oversight and
management'.[375] In particular, an
ASX Guidance Note should clearly articulate that companies should inform investors of material
non-financial aspects of the company's risk profile by disclosing their
top five sustainability risks, as well as the associated management strategies in the 'risk management' section.
7.68
The benefit of this approach is that it would provide
companies with a large degree of flexibility as they would be able to
self-identify the most appropriate sustainability risks for their business.
This flexibility would be coupled with the inherent flexibility of the 'if not,
why not' formulation of the ASX Council
Recommendations. It would provide investors with an indication of a company's
major non-financial risks and the strategies being pursued to manage, minimise
or take advantage of those risks.
7.69
The ASX Corporate Governance Council should also use
its discussion paper as a mechanism to consult with companies, investors and
other stakeholders regarding other areas where greater clarification and
guidance is required under Principles 3, 7 and 10 in relation to non-financial
performance, risks and management.
Recommendation 10
7.70
The committee recommends that the Australian Stock
Exchange Corporate Governance Council (ASX Council) provide further guidance to
Principle 7 of the ASX Council's Principles
of Good Corporate Governance and Best Practice Recommendations to the
effect that companies should inform investors of the material non-financial
aspects of a company's risk profile by disclosing their top five sustainability
risks (unless they demonstrate having fewer); and providing information on the
strategies to manage such risks.
Recommendation 11
7.71
The committee recommends that the ASX Council undertake
industry consultation to determine whether there are areas where companies,
investors, and other stakeholders believe further guidance is necessary in
relation to the non-financial disclosure requirements under the ASX Council's Principles of Good Corporate Governance and
Best Practice Recommendations.
7.72
In recommending that the ASX Council formulates further
guidance, the committee highlights what it sees as an important consideration
in providing such information that is its accessibility and utility to
financial markets. If non-financial disclosures are to be relevant to financial
analysts they must be in a form that is readily accessible. The committee heard
evidence that 'corporate Australia
is being run by an Excel spreadsheet.'[376]
These sorts of considerations should be taken into account so that material
disclosures of sustainability risks are as effective as possible.
7.73
In recognition that it is not only the disclosure of
material non-financial information that is leading to undervaluation of
sustainability risks, but also the way it is used, the following chapter
discusses this issue and sets out a complementary recommendation to raise
awareness amongst investors of material sustainability risks.
7.74
In relation to the specific bribery and corruption
example mentioned above, the committee notes that the ASX Council
Recommendations already suggests that, in relation to employment practices, a
company code of conduct 'might include reference to ... prohibitions on the
offering and acceptance of bribes'.[377]
Given the recent publicity in this area, it may be appropriate for the ASX Corporate
Governance Council to elaborate further on what is expected.
Option 3: Further guidance plus a
reporting trigger
7.75
The third option being considered by the ASX Council as
advised by Mr Mayne
is to include further guidance within the Principles, and in addition to
require a reporting trigger. The committee interpreted this trigger to imply
the inclusion of a new recommendation within the ASX Council Recommendations
for companies of a certain size or ranking to disclose publicly sustainability
information.
7.76
In relation to this proposal, Mr
Mayne indicated that 'it may well be too
soon to embark upon that area' and that it would depend on feedback from the
discussion paper.[378]
7.77
Regarding this option the committee notes two broad
categories of recommendation it received. These were:
-
full sustainability reporting; and
-
a minimum benchmark approach.
7.78
Full sustainability reporting was advocated by a number
of submitters, either in the context of the ASX Council Recommendations or as a
requirement under the Corporations Act.[379]
Various submitters including most corporations and industry bodies opposed full
sustainability reporting.[380]
7.79
This option differs from Mr Mayne's first option
in that, in the case of the ASX Council Recommendations, it would specify an 'if
not, why not' requirement for sustainability reporting rather than specifying a
sustainability reporting framework for companies that voluntarily chose to
report.
7.80
The general thrust of a minimum benchmark approach is
for companies, within an overall voluntary sustainability reporting framework,
to disclose a minimum level of non-financial performance information that is
vital to companies' long-term financial performance. Within the ASX Council
Recommendations such an approach would have the flexibility inherent in its 'if
not, why not' model.
7.81
This approach was advocated by organisations such as
AMP Capital Investors Sustainable Funds, which proposed the following four
specific key performance indicators as minimum non-financial performance
indicators: non-compliance with law; occupational health and safety performance;
greenhouse gas emissions; and political donations.[381] Mr
Berger of the Australian Conservation
Foundation added a potential option to streamline this concept when he
suggested 'a minimum threshold so that companies such as investment vehicles
that have trivial or negligible [greenhouse] impacts are exempt from those
reporting requirements.'[382]
Committee view
7.82
The committee does not favour a full sustainability
reporting approach. It has the potential to become a requirement that promotes
form over substance. The committee believes that it is vitally important for
companies to be encouraged strongly to engage voluntarily in sustainability
reporting rather than being forced to do so. The committee heard evidence from
several of Australia's leading performers in the area of corporate
responsibility (such as Insurance Australia Group and ANZ Bank) of the
significant shift in an organisation's culture which is required to integrate fully
the concept of sustainability into its core business practices and structures.
Imposing a sustainability reporting requirement, even with the inherent
flexibility of the 'if not, why not' framework, could force those Australian
companies which to date have not fully engaged in the corporate responsibility
debate, into a knee-jerk and ill-considered attempt to comply with a
sustainability reporting requirement. This would result in such companies
developing a piecemeal and minimalist approach, rather than integrating the
concept of corporate responsibility into the corporation's core operations and
activities in a manner that best suits the company and its stakeholders. In the
committee's view a well thought through and integrated approach that has
sufficient time to develop properly will be far more effective than one that is
forced on companies. The committee is also concerned to ensure that any
approach is cost-effective for Australian business, particularly smaller listed
companies.
7.83
The committee is more favourably disposed to a minimum
benchmark approach. The committee acknowledges the legitimate need of a growing
number of institutional investors and fund managers to have access to information
regarding non-financial risks and company management strategies to deal with
those risks.
7.84
On balance however, the committee is of the view that
the minimum benchmark approach is more rigid and inflexible than the approach
whereby companies are able to self-identify relevant risks. The committee notes
that although major non-financial risks may be common within industry sectors
(for example OH&S and energy use within the mining sector), because
different industry sectors will typically have different major non-financial
risks, a minimum benchmark approach may need to be varied according to the
industry sector. There already exist a number of regulatory and market-based
mechanisms by which companies, if the market dictates, are able to disclose such
additional non-financial information. These include the Operating and Financial
Review (section 299A of the Corporations Act), and the Review of Operations and
Activities (ASX Listing Rule 4.10.17 discussed below). As investors and other
stakeholders demand more non-financial information, the ASX could consider
options to enhance the non-financial disclosure aspects of the Review of
Operations and Activities or the ASX Council Recommendations.
Option 4: Await inquiry
recommendations
7.85
On the fourth option, to await the recommendations of
both this committee and the CAMAC, Mr Mayne
commented that 'I suspect that that is probably not an option that we would
embark upon.'[383]
Committee view
7.86
The committee believes that this option is an internal
matter for the ASX Corporate Governance Council to determine. The
committee expects the ASX to take account of this report and to refer to the
helpful submissions to this inquiry.[384]
Other Australian Stock Exchange requirements
7.87
Apart from the requirements under the ASX Council Recommendations,
ASX Listing Rule 4.10.17, which relates to the Review of Operations and
Activities, is relevant to sustainability reporting.
7.88
This listing rule is based on section 299 of the
Corporations Act. The guidance note to that Listing Rule states that, while the
ASX does not require the review to follow any particular format, it supports
the Group of 100 publication, Guide to the Review of Operations
and Financial Condition (the G100
Guide).
7.89
The G100 Guide, which is reproduced in Guidance Note 10
of the ASX Listing Rules, makes
clear that there is scope within the existing ASX Listing requirements
for social and environmental information to be provided within the Review of
Operations and Activities, with specific reference to the associated risks.
Non-financial reporting
7.90
Many submissions pointed to two existing requirements
within the Corporations Act for the
disclosure of specific non-financial information.
Paragraph 299(1)(f)
7.91
Paragraph 299(1)(f) of the Corporations Act requires disclosure
of details of a company's performance in relation to any significant
Commonwealth, state or territory environmental regulation that the company's
operations are subject to. This mandatory requirement applies to all entities
that are required to prepare financial statements under the Corporations Act.
7.92
The Australian Human Rights Centre referred to studies which
indicate that the introduction of paragraph 299(1)(f) significantly improved
overall reporting by Australian companies on their environmental performance.[385]
7.93
On the other hand there was criticism of the value of
this provision, both in relation to informing investors, and in terms of its
overall effectiveness. For example its was submitted that paragraph 299(1)(f):
...doesn't allow investors to fully understand or price risk
derived from companies and directors who fail to adequately internalise
potential costs of breaches of environmental law. Hence, unless the breach is
financially material, there is little incentive for analysts to price the risk
into the valuation model. Meanwhile, the environmental damage has occurred and
there is little ongoing incentive to redress or alter internal (company) risk
management procedures (such as a formal environmental management system).[386]
7.94
The Australian Conservation Foundation was also
critical of this provision saying:
...it is so ridden with qualifications that most companies provide
no meaningful information, even when they have breached environmental laws during
the relevant period. Companies also commonly read a 'materiality' qualification
into the clause, which eviscerates it.[387]
7.95
ASIC also raised doubts about the effectiveness of
paragraph 299(1)(f). Mr Cooper said that the provision did not encourage
more of the resources sector to report more broadly on sustainability issues
and that global forces are much more important in this regard.[388]
Paragraph 1013D(1)(l)
7.96
The other provision in the Corporations Act that
requires disclosure of specific non-financial information is paragraph
1013D(1)(l). This provision requires issuers of investment products (such as superannuation
products, managed investment products and investment life insurance products)
to include in a Product Disclosure Statement 'the extent to which labour
standards or environmental, social or ethical considerations are taken into
account in the selection, retention or realisation of the investment.' The
provision applies specifically to investment products and is not a general
requirement for the disclosure of non-financial information.
7.97
In December 2003, ASIC released the Section 1013DA disclosure guidelines,
which are designed to help product issuers meet their obligations under
paragraph 1013D(1)(l). According to the ASIC guidelines they:
...do not set out what constitutes a labour standard or an
environmental, social or ethical consideration, or what methodology product
issuers should use for taking these issues into account. The guidelines do,
however, make it clear that you must disclose which of these standards and considerations you take into account
and how. If you have no predetermined
approach, then this too must be clear. The more a product is marketed on the
basis that such standards and considerations are taken into account, the more
detail is required.[389]
7.98
Ms McCluskey
of Portfolio Partners suggested that ASIC should revise its guidance on
section 1013D to make it relevant to mainstream fund managers rather than
for the more limited pool of ethical funds:
...the [ASIC] guidance note that is associated with [the section
1013D] disclosure requirement is a guidance note for socially responsible and
ethical funds reporting; it is not a guidance note for mainstream funds. From
first-hand experience, it is very difficult for a mainstream manager to report
to that guidance note. If that could be reviewed to be applicable not just to
socially responsible and ethical funds but to all managers, I think you would
have better reporting by fund managers on what they are doing to incorporate
whatever you want to call it—sustainability issues. The super funds can then
compare what the different fund managers are doing. I think that would better
allow the super funds to get a window into how the fund managers are doing
this, because there is a varying level of consideration. That is one thing that
I think could give the super funds something better to work with, because those
disclosures are really quite basic.[390]
7.99
The Financial Services Institute of Australasia
(Finsia) submitted that under ASIC Policy Statement 175.110, licensees are
advised to form their own view about how far section 945A (the 'know your
client' rule) requires that inquiries be made into a client's attitude to
environmental, social or ethical considerations. This was said to be at best 'a
'matter of good practice', but there are no requirements for advisers to broach
these issues, and therefore SRI-style options with their clients.'[391]
7.100
Finsia went on to suggest further research and
engagement with the financial planning industry and consumer groups on the
possibility of including environmental, social and governance considerations
explicitly under section 945A.
Committee view
7.101
The committee supports the need to revise the ASIC
guidelines to make them relevant to mainstream fund managers. Such a revision
would allow super funds to compare the approaches that different fund managers
are taking to the consideration of non-financial information. The committee
notes that the ASIC guidelines state: 'we intend to review these guidelines, in
light of market conduct, in the first half of 2006.'[392]
Recommendation 12
7.102
The committee recommends that the Australian Securities
and Investments Commission revise the Section
1013DA disclosure guidelines to
be relevant to mainstream fund managers rather than simply to the more limited
pool of ethical investment funds.
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