ASX focuses on sustainability risk and disclosure

With more and more regulators around the world demanding companies disclose their key environmental, social and economic risks, it is becoming increasing clear that sustainability should be an integral part of any company’s core business strategy.

Non-financial performance disclosure is being introduced by international stock exchanges including South Africa, Hong Kong, Singapore, India, United Kingdom and Brazil, while US-based advocacy group CERES is pursuing a global initiative to encourage a mandatory sustainability reporting standard across all stock exchanges.

Reflecting this trend, earlier this year both the Australian Securities Exchange (ASX) and the European Parliament announced new requirements for disclosure of non-financial information.

The European Parliament released its directive in April requiring more than 6000 companies and groups across Europe to disclose “policies, risks and results as regards environmental matters, social and employee-related aspects, respect for human rights, anti-corruption and bribery issues, and diversity on boards of directors”. The Council of the European Union (EU) is expected to adopt the directive in October 2014.

In Australia, the importance of identifying and disclosing sustainability risks has been underlined by changes to the ASX Corporate Governance Principles; specifically Recommendation 7.4, which requires “a listed entity [to] 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”.

While most companies can articulate how they manage financial risk, the ASX now requires them to disclose their risk-management practices across the whole triple bottom line.

According to the ASX, the introduction of Recommendation 7.4 was a result of business failing to adequately understand and address risk in the past, which ultimately led to the global financial crisis.

Recommendation 7.4 defines material exposure 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 and long term”. It requires companies to demonstrate that they understand their material exposure beyond financial risk to include social, economic and environmental risk. While some companies are experienced in sustainability materiality assessments, this will be new ground for many.

The way in which organisations meet this requirement has not been specified, although both the ASX and EU directive suggest they use international, European or national guidelines such the United Nations Global Compact, ISO 26000 or the Global Reporting Initiative. The method of disclosure is also not prescriptive, with options including web-based reporting and sustainability reporting.

The changes to the ASX requirements highlight that economic, environmental and social sustainability issues have become an increasingly important issue for investors who want assurance that companies have strategies in place to identify and mitigate these risks.

And while investors are looking for greater transparency, this information is important to all stakeholders, with the ASX recognising that the way companies conduct their business impacts on a wide range of groups including employees, customers and governments as well as investors.

The focus now will be on how companies choose to respond. While the principles and recommendations detail corporate governance practices and reporting requirements for companies listed on the ASX, they are not mandatory; boards who do not adopt the recommendations need only to explain why.

Also of interest will be the level of accountability and transparency companies apply to disclosure. While financial performance data is thoroughly audited prior to release, the same rigour is not always applied to sustainability information.

With the ASX changes coming into play from 1 July 2015, listed companies need to examine how they are identifying and managing their key sustainability risks and preparing for disclosure at the end of this financial year.

Kathryn Franklin is a director in the EY climate change and sustainability services team. EY assists many of Australia’s largest companies to identify, mitigate and manage material economic, environmental and social risk. The team also works with companies to advise them on reporting these risks and engaging their stakeholders in this process. Prior to joining EY, Kathryn worked for sustainability advisory firm Net Balance, which was acquired by EY in September 2014.

Disclaimer: The views expressed in this article are the views of the author, not Ernst & Young. This article provides general information, does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Liability limited by a scheme approved under Professional Standards Legislation.