Social and Environmental Factors on the Corporate Radar

The Governance Principles and Recommendations for Australian listed companies are set to acknowledge social and environmental factors for the first time.

Recommendation 7.4 in the proposed changes recently released by Australian Stock Exchange (ASX) Corporate Governance Council asks companies to disclose how economic, environmental and social sustainability risks are being identified and managed.

The Principles and Recommendations propose corporate governance practices and reporting requirements for companies listed on the ASX.  While they are not mandatory, boards which do not adopt the recommendations need to explain why.

Sustainability advisory firm Net Balance welcomed the recommendations.

“While most companies can articulate how they manage financial risk, the proposed changes ask them to disclose their risk management practices across the whole triple bottom line,” Net Balance Director, Terence Jeyaretnam said.

“While the focus of the recommendation is on risk, the reforms bring leverage to companies.”

Identification of risk could lead corporates to opportunities for positive impact in social and environmental terms.

“Risk and opportunities are intrinsically linked so this reform will also allow companies to identify and leverage opportunities, and communicate these to their stakeholder base,” he said.

Jeyaretnam said that while investors in particular were looking for greater transparency regarding the social and environmental risks, this kind of information was important to all stakeholders.

The draft released by the council noted comparable developments internationally:

• South Africa now has an “if not why not” requirement for the production of an “integrated report” that addresses material sustainability issues.

• Hong Kong Exchange has produced a guide on ESG disclosure, which it has made recommended best practice from December 2012.

• Singapore Exchange issued a non-mandatory Guide to Sustainability Reporting in June 2011.

• In the UK, legislation came into effect in October 2007 that introduced the concept of an”enlightened shareholder value” duty. This duty requires directors to have regard longer term and to various ‘corporate social responsibility’ factors, including the interests of employees, suppliers, consumers and the environment.

• From 2012, Brazil’s BM&F Bovespa “report or explain” initiative recommends that listed companies disclose whether they publish a regular sustainability report or similar document and where it is available, or if not, explain why.

The body said it had no plans to similarly extend the scope of the recommendations in the near future.

“Notwithstanding these developments internationally, the Council considers that it would be premature to expect listed entities in Australia to adopt integrated reporting until the international framework for such reporting is much better developed than it currently is,” the draft said.

“Amongst other things, the Council believes that the framework needs to adequately address issues such as relevance, materiality, time-frame, exclusion of commercially sensitive information, compliance burden and assurance before listed entities across the board can reasonably be expected to adopt integrated reporting.”

Jeyaretnam said the disclosures of social and environmental risk made good business sense.

“In the environmental space we have seen companies that had not taken into account the impacts of carbon pricing, when others have done it well for over a decade.  While these companies are now scrambling to address the cost implications, considered analysis of material risks would have identified the issue early on,” Jeyaretnam said.

“Recent examples of issues in the supply chain in Bangladesh clearly give weight to the impact of not understanding your social risks.”

The draft also responded to concerns that the Australian Government and other stakeholders had raised with the Council about the difficulty that people with disability face in securing meaningful employment.

The Australian Government had previously asked the Council to consider including a recommendation comparable to the reporting recommendation on gender diversity statistics, whereby listed entities would report the number of people they employ with a disability.

The Council said that “such a recommendation would raise very serious privacy issues, as well as prove extremely difficult to implement in practice. Nevertheless, the Council is seeking to raise the level of awareness of this issue among listed entities.”

The Australian Stock Exchange (ASX) Corporate Governance Council and the ASX have both issued consultation papers on proposed changes to the third edition of the Corporate Governance Principles and Recommendations.

The Principles and Recommendations were first adopted in 2003, and updated in 2007.

The final version of the third edition is expected to be released in early 2014.