ASX listed companies will be expected to report on the way in which they manage material economic, environmental and social sustainability risks, with the release of the third edition of the Corporate Governance Principles and Recommendations (CGPR).
The ASX Corporate Governance Council (CGC) released the third edition of the CGPR on 27 March 2014. This replaces the 2007 edition of the CGPR, and it seeks to embrace national and international corporate governance developments arising post-GFC.
In particular, the new CGPR includes strengthened recommendations in relation to the principle of recognising and managing risk. This principle now includes consideration of economic, environmental and social sustainability risks (Recommendation 7.4).
We previously discussed the proposal for reporting on economic, environmental and social sustainability risks in the draft versions of the third edition of the CGPR.
The third edition of the CGPR will be effective from a reporting entity’s first full financial year commencing on or after 1 July 2014. This means that, for example, companies with a financial year ending:
- 30 June – should report in accordance with the third edition for the financial year ending 30 June 2015; and
- 31 December – should report in accordance with the third edition for the financial year ending 31 December 2015.
However, the CGC is encouraging the adoption of the new CGPR prior to this date, for companies which are prepared to do so.
Recommendation 7.4 of the new CGPR states:
"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."
The new CGPR defines the each risk with a long-term view:
- economic sustainability: the ability of a listed entity to continue operating at a particular level of economic production over the long term;
- environmental sustainability: the ability of a listed entity to continue operating in a manner that does not compromise the health of the ecosystems in which it operates over the long term; and
- social sustainability: the ability of a listed entity to continue operating in a manner that meets accepted social norms and needs over the long term.
The CGC's commentary on Recommendation 7.4 indicates that economic, environmental and social sustainability risks are now viewed as having a direct impact on a range of stakeholders and a long term impact on society and the environment. Improvements in international standards and demands for greater transparency in relation to these risks have been drivers of regulatory reform to allow investors to assess their investment portfolios against these risks.
In this regard, the new CGPR closely aligns with ASIC Regulatory Guide 247 (Effective disclosure in an operating and financial review) which requires a discussion of environmental and other sustainability risks.
Change from the draft Recommendation
Previous draft versions of Recommendation 7.4, which were issued for public comment last year, did not include the threshold of "material exposure" seen in the final version. The threshold is defined as:
"a real possibility that the risk in question could substantively impact the listed entity’s ability to create or preserve value for security holders over the short, medium or long term."
Listed entities will have to consider economic, environmental and social sustainability risks in relation to the "material exposure" threshold. This is a significant change from the draft Recommendation which was issued for public consultation in September 2013.
How do you comply?
Listed entities are encouraged to review the new risk recommendations carefully in order to meet the new corporate governance benchmark. While the CGPR are not mandatory, listed entities who do not follow the recommendations are required by the ASX Listing Rules to disclose that fact and explain why.
The CGPR expressly states that Recommendation 7.4 does not compel a listed entity to produce a sustainability report. However, if a sustainability report is already published, this may meet the requirements and should be cross-referenced when any disclosure is made.
Listed entities who do not prepare sustainability reports will have to consider whether current governance disclosures appropriately address Recommendation 7.4.
Governance disclosures will have to address the management, or planned management, of any economic, environmental or social sustainability risks where material exposure may exist.
To assist listed entities streamline disclosure requirements, ASX will allow listed entities to make governance disclosures on their website, rather than in an annual report.
Further Listing Rule amendments
Supplementary consultation in relation to further changes to the ASX Listing Rules to give effect to other reforms in the third edition of the CGPR closed on 28 March 2014. The CGC expects these changes will also come into effect on 1 July 2014 and align with the commencement of the third edition of the CGPR.
These reforms continue the aim of the CGC to increase investor confidence in the market and encourage entities to meet stakeholder expectations.
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