In January 2020, investment titan and Blackrock boss Larry Fink rocked the corporate world by using his yearly letter to the CEOs of large listed companies to call on groups to disclose their environmental credentials alongside a key global standard.
Many of Australia’s largest companies have spent the past two years improving their disclosure of environmental risks and governance to investors.
The pathway to net zero emissions by 2050 includes no new
coal or gas developments from 2021. |
Macquarie Group has also joined a group of asset managers working towards “net zero”, though a recent report by The Age and The Sydney Morning Herald questions how the financial behemoth would account for its investments in a wide range of funds exposed to the oil and gas industry.
Against this backdrop, a recent report by top corporate law firm King & Wood Mallesons into the environmental social corporate governance (ESG) disclosure practices of the ASX50 shows the huge steps forward in reporting by large corporates but also highlights the risks for companies delving into this area face.
The law firm, which has one of the biggest corporate advisory businesses in the country, found that 82 per cent of top ASX companies have taken on board the advice of the corporate watchdog and have started to report against a set of recommendations from the Task Force on Climate-related Financial Disclosures (TCFD).
Will Heath, King & Wood Mallesons partner Mergers &
Acquisitions
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“It’s a battle of the codes, or a battle of the standards,” says Will Heath, King & Wood Mallesons partner mergers and acquisitions, who praises the companies involved as their reporting has been a voluntary response to investor needs.
“I think all stakeholders would like to see more direction from regulators and governments as to what the reporting standard should be and how they should work.”
Heath says the law firm’s report also tried to unpack some increasingly ubiquitous phrases in the business lexicon, such a “carbon neutral”, “net zero” and “net zero carbon” and what impact the differences in various targets have on company reporting.
‘Tricky things’
“How are you actually going to measure that? Are you talking about CO2? Are you talking about all greenhouse gases? Are you taking into account abatement actions that you do here in Australia or overseas? Are you looking at the impact of the product you’re exporting or just what happens onshore? All those really tricky things start to come into play.
“The policy vacuum here is frustrating, but also really interesting, as to what regulators will do in this area.”
The law firm’s report highlights the variation in company disclosures and stress test scenarios. Some companies are sticking to stress testing their business to 1.5 degree increases in temperatures and others to testing for 2 degrees.
But disclosure and regulation can create significant danger for companies, says Heath.
“As companies disclose more about what they’re doing on ESG, and particularly what they’re doing on climate change, that disclosure opens the companies and their boards and management teams up to potentially more litigation, because most of the litigation we see in a company law context is related to disclosure.
‘People who don’t disclose and get left behind and then are pushed to make disclosure.’“And you’re damned if you do and you’re damned if you don’t because as the market gets more disclosures, people who don’t disclose and get left behind and then are pushed to make disclosure.
Will Heath, King & Wood Mallesons partner mergers and acquisitions
“And that’s dangerous.”
Heath says that, conversely, disclosing can be dangerous where regulators and governments haven’t put in “guard rails” around what that disclosure should say. This is particularly so when the law generally imposes strict liability for inaccurate disclosure, meaning a company is liable for ensuring its public statements are accurate.
“People can make inadvertent mistakes, which hopefully don’t have consequences and that’s understood as being a learning thing,” he says.
“And on the other hand, some guard rails will help curb greenwashing disclosures where companies are trying to hide practices that aren’t reflective of the company’s best interest, but they’re dressing it up using all these acronyms.”
Heath says this is particularly important once you start looking at below the ASX50 and into the ASX100 and beyond.
“I think in the rest of the market, there are going to be some people who will see opportunities to leverage the grey and the opaqueness,” he says.
“That’s where regulators do have a role to play to set standards and enforce and equally make sure those standards are clear so that people can report against them.”
Links
- ‘Big mountain to climb’: Macquarie chief says Australia behind on EV transition
- A changing landscape: Climate change risk
- China's Carbon Goals
- A big week for the fossil fuel sector: climate activism hits global courts and boardrooms
- Climate Related Financial Disclosures In The Public Sector (pdf)
- Global deal near on forcing companies to disclose climate risks
- Banks publish disclosure rules for extreme climate risk
- Directors’ duties to disclose climate-related financial risks
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