Sustainability Reporting Frameworks in Australia
In Australia, there’s no specific legal mandate for sustainability reporting. However, companies are obligated to report financial and non-financial information within certain areas. Views on the appropriateness of current reporting requirements vary, with corporations generally favouring the status quo while accounting bodies and NGOs see room for improvement.
a) Current Reporting Requirements
This section delves into existing reporting requirements for both financial and non-financial information. It explores the potential extension of provisions for financial information disclosure to encompass non-financial aspects, as suggested by Professor Deegan, who is a professor of Accounting at The University of Tasmania.
1) Statutory Requirements
a) Continuous Disclosure
Listed companies follow two main avenues for formal information disclosure: continuous and periodic. Continuous disclosure, regulated by the Corporations Act 2001 and the Australian Stock Exchange (ASX) Corporate Governance Council’s Listing Rules, mandates immediate disclosure of information with a material effect on securities. While focused on financial issues, it can potentially cover environmental and social matters, gaining significance as institutional investors increasingly prioritise Australian corporate responsibility.
b) Periodic Disclosure
Regulations governing periodic disclosure, including annual reports, involve the Corporations Act 2001, Accounting Standards, and ASX listing requirements. This includes a financial report and a directors’ report. While the financial report is mandated by the Corporations Act, there’s no specific requirement to include environmental and social aspects.
1) Operating and Financial Review (OFR)
The OFR, introduced in response to the HIH Insurance failure, requires listed companies to provide information in the directors’ report crucial for shareholders to assess operations, financial position, and future prospects. While not as detailed as the UK OFR provisions, it allows flexibility in disclosure, evolving with shareholders’ information needs.
2) G100 Guide and Non-Financial Aspects
The G100 Guide recommends a comprehensive review of financial and non-financial information, emphasising the importance of sustainability measures, social and environmental performance indicators, and discussions on risk management, including environmental issues.
3) Recommendations and Corporate Auditing
The committee suggests that company auditors annually review non-financial disclosures in OFRs, making recommendations to the board for evolving shareholder and market needs in assessing non-financial performance, risk profiles, and risk management.
Corporate Governance Council Recommendations
In response to corporate collapses in the early 2000s, the ASX Corporate Governance Council introduced Principles of Good Corporate Governance and Best Practice Recommendations. While not mandatory, ASX Listing Rule 4.10.3 requires companies to disclose adherence to these recommendations in their annual reports.
Relevance to Sustainability
Three principles directly relevant to sustainability information disclosure include:
Principle 3: Promote Ethical Decision-Making
Encourages publicly listed entities to establish a code of conduct promoting ethical decision-making and enhancing investor and stakeholder confidence.
Principle 7: Recognise and Manage Risk
Emphasises the establishment of a sound system for risk oversight and management, including material non-financial risks.
Principle 10: Recognise the Legitimate Interests of Stakeholders
Requires the establishment of a code of conduct to guide compliance with legal obligations to legitimate stakeholders.
Principle 10 of the ASX Corporate Governance Council Recommendations underscores the importance of listed companies recognising and managing the legitimate interests of stakeholders. This principle advocates for the establishment and disclosure of a comprehensive code of conduct, guiding companies in complying with legal obligations to their stakeholders.
Content Guidelines for the Code of Conduct
To ensure clarity and relevance, the code of conduct should address various key areas, including:
1) Responsibilities to Clients, Customers, and Consumers:
- Ensuring fair dealings.
- Prohibitions on the offering and acceptance of bribes.
2) Employment Practices:
- Occupational health and safety.
- Training and education support.
- Prohibitions on offering and accepting bribes.
Responsibilities to the Community:
- Environmental protection policies.
- Support for community activities.
- Donation or sponsorship policies.
4) Compliance with Legislation:
- Adherence to legislation affecting operations, especially for companies operating internationally.
5) Reporting Requirements
Principle 10 mandates listed companies to publish a description of the code of conduct on their website, preferably in a dedicated corporate governance section. Additionally, any deviation from best practice recommendations in Principle 10 should be explained in the annual report.
Trends in Adoption
The ASX Corporate Governance Council’s reports for 2004 and 2005 indicate a positive trend in the adoption of these recommendations. In 2004, the average adoption rate was 68%, rising to almost 85% for the top 500 companies. The subsequent 2005 report showed continued improvement in overall adoption.
Evolving Sustainability Reporting Frameworks
ASX Council’s Response to Sustainability Reporting
In response to a request from the Minister for the Environment and Heritage Senator the Hon Ian Campbell in 2005, the ASX Corporate Governance Council initiated efforts to develop a voluntary reporting framework for sustainability reporting. The objective was to enhance comparability and relevance by considering options for a standardized framework.
Working Group Recommendations
A working group, formed to explore options for greater non-financial reporting, presented recommendations to the ASX Corporate Governance Council in December 2005. The Council plans to release a consultation document addressing:
1) The definition of corporate responsibility.
2) Applicability to different companies.
3) Aspects for voluntary disclosure and mandatory suggestions.
4) Benefits to investors, the community, and markets, weighing against compliance costs.
Options for Adaptation
Four potential options were discussed:
Option 1: Incorporate a Standardised Framework
- Advantages include structure, rigour, and comparability.
- Concerns include market diversity, potential for greenwashing, and prescriptiveness.
- Submitters favouring enhanced disclosure preferred this option, but disagreement arose on the specific framework.
1) Committee’s View and Recommendation
The committee supports greater comparability in sustainability reporting and views the ‘if not, why not’ model as flexible for companies choosing alternative frameworks. While endorsing the GRI Framework, the committee deems it premature to adopt it as the Australian standard. Instead, it recommends monitoring its acceptance and uptake nationally and internationally, considering it as a potential basis for a voluntary Australian sustainability reporting framework.
2) Promotion of the GRI Framework
Despite not recommending the GRI Framework as the standard, the committee advocates for its greater acceptance in Australia. A specific recommendation in Chapter 8 encourages promoting the GRI Framework to Australian corporations, fostering familiarity and comfort with its principles.
This comprehensive overview highlights the dynamic landscape of sustainability reporting in Australia, emphasising the importance of continuous evolution in disclosure practices to meet the changing needs of stakeholders and the wider capital market. The interplay between statutory requirements, corporate governance recommendations, and evolving market expectations creates a robust framework for companies to navigate and enhance their sustainability reporting practices.
Option 2: Providing Further Guidance
1) Merits of Additional Guidance
Option 2, suggesting further guidance on existing Australian Stock Exchange (ASX) Corporate Governance Council Recommendations, has been acknowledged by the Chair of the ASX Corporate Governance Council, Mr Mayne as a valuable approach to enhance clarity for listed entities. However, he notes its temporary nature, contingent on company adoption over one to two years.
2) Addressing Content Adequacy
Despite robust adoption rates, concerns persist about the adequacy of disclosed content, with RepuTex highlighting instances where compliance amounts to minimal statements. Specific subject areas, such as bribery and corruption, have been identified as lacking in attention, emphasizing the need for clearer guidelines.
3) Stakeholder Concerns
Institutional investors, represented by the Australian Council of Super Investors ACSI and BTGAS, express reservations about the depth of disclosures under Principles 7 and 10. Examples citing significant financial impacts of work-related injuries and energy-related risks underscore the growing importance of non-financial considerations.
4) Council’s Review Findings
The ASX Corporate Governance Council’s 2005 review revealed deficiencies in sustainability disclosures, particularly regarding risk management policies. The report indicates a lack of uniform understanding among companies about the expected disclosures, emphasizing the necessity for further guidance.
5) Committee’s Perspective
Recognising Limited Disclosure
The committee identifies a limited provision of non-financial performance information, raising concerns, particularly among institutional investors obligated to consider long-term risks. Principles 3, 7, and 10, despite their flexibility, require more comprehensive guidance.
Recommendation 10: Guiding Risk Profile Disclosures
The committee proposes that the ASX Corporate Governance Council provide explicit guidance on Principle 7.1. This guidance should instruct companies to inform investors about the material non-financial aspects of their risk profile, disclosing the top five sustainability risks and associated management strategies.
Recommendation 11: Industry Consultation for Further Clarity
The committee recommends the ASX Council conduct industry consultations to identify areas requiring additional guidance. This collaborative approach ensures a thorough understanding of the diverse needs of companies, investors, and other stakeholders.
Ensuring Accessibility and Utility
Emphasizing the importance of information accessibility, the committee underscores the need for guidance that is both effective and user-friendly. Considering the prevalence of spreadsheet-based corporate management, the committee advocates for disclosures that align with industry practices.
Addressing Specific Issues
While acknowledging the ASX Council’s existing suggestion on bribery and corruption, the committee suggests further elaboration given recent public attention in this area.
Option 3: Combining Guidance with a Reporting Trigger
1) Divergent Recommendations
Option 3 contemplates integrating additional guidance with a reporting trigger, prompting public sustainability disclosures for companies of a specific size or ranking. The committee acknowledges diverse views, ranging from full sustainability reporting to a minimum benchmark approach.
2) Committee’s Stance
The committee expresses reluctance toward a mandatory sustainability reporting approach, emphasizing the importance of voluntary engagement for effective integration. Concerns about potential minimalistic approaches arising from a mandatory requirement are highlighted.
3) Preference for a Minimum Benchmark Approach
Favouring flexibility, the committee leans towards a minimum benchmark approach. Acknowledging the legitimate needs of institutional investors for non-financial information, the committee appreciates the intrinsic flexibility of this approach.
Recommendation 13: Encouraging Voluntary Engagement
The committee recommends steering away from full sustainability reporting requirements. Instead, it suggests encouraging voluntary engagement by adopting a minimum benchmark approach. This approach allows companies to self-identify relevant risks and ensures a more organic integration of sustainability practices.
Option 4: Awaiting Inquiry Recommendations
1) Internal Decision for ASX
Option 4, awaiting recommendations from this committee and Corporations and Markets Advisory Committee CAMAC, is considered an internal matter for the ASX Corporate Governance Council. The committee expects the ASX to incorporate findings and submissions from this inquiry into their decision-making process.
2) ASX Listing Rule 4.10.17 and Other Requirements
a) Relevance of ASX Listing Rule 4.10.17
ASX Listing Rule 4.10.17, aligning with section 299 of the Corporations Act, is pertinent to sustainability reporting. The G100 Guide, supporting this rule, acknowledges the scope for including social and environmental information within the Review of Operations and Activities.
b) Existing Non-Financial Reporting Requirements
The committee identifies two existing requirements within the Corporations Act—paragraph 299(1)(f) and paragraph 1013D(1)(l)—mandating specific non-financial disclosures. While acknowledging their existence, criticisms and suggestions for revisions are noted.
Committee’s Recommendations to ASIC
1) Revision of ASIC Guidelines
The committee supports the revision of Australian Securities and Investments Commission ASIC guidelines (Section 1013DA) to make them applicable to mainstream fund managers. This revision would facilitate comparisons of approaches taken by different fund managers in considering non-financial information.
2) Recommendation 12: ASIC’s Revised Guidelines
The committee recommends that ASIC revise the Section 1013DA disclosure guidelines to cater to mainstream fund managers, enhancing the comparability of approaches taken by different managers.
Thus, the committee advocates for a balanced approach, encouraging voluntary sustainability reporting while providing clear and flexible guidance.
The proposed recommendations aim to enhance the effectiveness and relevance of sustainability reporting frameworks in the Australian business landscape.
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