Social and environmental risks climb the corporate ladder

Proposed changes to the Governance Principles and Recommendations applicable to Australian listed companies have been welcomed by sustainability advisory firm Net Balance. It has applauded the introduction of Recommendation 7.4, which asks companies to disclose how economic, environmental and social sustainability risks are being identified and managed.

“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,” said Net Balance Director Terence Jeyaretnam.

“Understanding and managing key social and environmental risks, and explaining this to stakeholders, is just good business practice and we congratulate the Australian Stock Exchange (ASX) Corporate Governance Council (Council) and the ASX for introducing these reforms.”

According to Jeyaretnam, there are many recent examples of companies who have not understood their social and environmental risks.

“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,” said Jeyaretnam.

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

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.

Jeyaretnam said that while investors are looking for greater transparency regarding the social and environmental risks, the information is important to all stakeholders. He also encourages all companies to adopt environmental and social disclosure and expects many will follow the large percentage of their peers who are already voluntarily disclosing their sustainability performance.

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

“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.”

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. They are available on the ASX website.