15 Jul 2011

Carbon exposure = market disclosure?

by Geoff Hoffman

The Carbon Price Mechanism (CPM) announced on Sunday 10 July by Prime Minister Julia Gillard, as part of the Clean Energy Future package, may be targeting invisible gases, but listed companies have to be very visible when it comes to calculating its effects.

Although comparisons have been drawn with the introduction of the GST, the continuous disclosure implications of the Clean Energy Future package are much greater, for a number of reasons.

Variability and Uncertainty

The first of these is that the impact of the Clean Energy Future package is not uniform. It is a multivariate policy, with effects that will vary widely between different industries and financial years.

The variability of those effects is further complicated by the fact that the impact of the Carbon Price Mechanism on individual companies will depend on both their market power (in comparison to their suppliers and customers) and the extent to which existing contracts (with both customers and suppliers) provide for an ability to pass on the carbon cost.

Then there are the companies which will enjoy either targeted or indirect benefits from the package. These range from industries which will receive direct assistance from the Government (ie. emissions intensive and trade exposed activities exposed to a carbon price, coal, steel-making and stationary energy sectors) to those which will find their products become more price competitive in an economy where producers pay a price for in-built emissions.

And, of course, there's no certainty about what will finally emerge on the statute books. The Government's use of the Multi-Party Climate Change Committee was intended to lock in support for the legislation from the independents and Greens in both houses of Parliament. Sunday saw the announcement of the draft package which is the result of that process, but there is – in theory at least – still room for change before the necessary legislation is even put up for debate in Parliament.

The ASX24 market is already pricing in the full effect of the Carbon Price Mechanism into forward electric power prices from July 2012. So that market obviously considers the probability of an impact on power prices to be close to full certainty.

All this adds up to a very confused picture for corporate compliance officers and directors.

However, it is simply not possible to wait for 100% certainty before making any public announcement.

Increased market scrutiny

Another important difference between the introduction of the GST in 2000 and the announcement of the Clean Energy Future package is the regulatory environment.

Back in 2000, securities class actions were virtually unknown in Australia. Eleven years on, there is an industry devoted to finding mistakes and omissions in stock market announcements – and making a profit from them.

Back in 2000, ASIC didn't have the power to issue on-the-spot fines to companies it suspected of having failed to meet their continuous disclosure obligations.

Back in 2000, company directors didn't face personal liability for their companies' continuous disclosure breaches.

In 2011, directors and management will be taking a far more proactive approach towards assessing the effect of the Clean Energy Future package on their business. If that effect is financially material,[1] they will then be sharing that knowledge with the market.

What is there to say?

That depends upon the company, of course – and the board's appetite for regulatory risk.

At this stage, there may not be sufficient detail for a company to provide a complete assessment of the effect of the Clean Energy Future package on earnings. Nevertheless, we have already seen some companies provide detailed costs estimates, most notably in the case of the two major domestic airlines, who have provided dollar estimates of increased fuel costs. Even then, it is instructive that Virgin was at pains to point out that there could also be as yet unquantifiable flow-on effects on customer numbers.

As more detail emerges, therefore, we are likely to see both more announcements from companies and updates from companies which have already made announcements.

That raises the question: more detail of what? Australia is a parliamentary democracy, and the Clean Energy Future package still requires the agreement of a majority of two houses of Parliament and the signature of the Governor-General. Both the pre-parliament consultation period and the process of parliamentary debate may produce changes to the package. Would it be advisable to wait until the ink is dry on the Governor-General's signature before making a market announcement about the package's effect on a business?

A constitutional law expert may favour that approach, but the ASX Listing Rules weren't written by constitutional law experts, and aren't enforced by them.

The key Listing Rule is 3.1. This says that a company must immediately disclose information that "a reasonable person would expect to have a material effect on the price or value" of the company's shares.

It is unlikely that ASIC or a court would believe that a reasonable person would also be a constitutional law expert. A reasonable person would be more likely to take the view that, in the current political situation, there is a reasonable chance that the current package will be passed in its current form.

Where to begin?

Clayton Utz has already begun the process of analysing the Clean Energy Future package for clients, and providing a detailed analysis of:

  • the difference between the Carbon Price Mechanism and the CPRS
  • the transition to the Emissions Trading Scheme
  • the Clean Energy Future package's sectoral impact on industry.

As the Clean Energy Future package moves towards implementation, clients will be kept updated with the practical effects for them and their businesses. In addition, the Clayton Utz Corporate team will assist clients in preparing their regulatory and market responses to this whole new ball game.

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[1] ASX Guidance Note 8 says that "a variation in excess of 10% to 15%" to a previously announced financial forecast or expectation may be material.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.