By Commissioner Sean Hughes
The momentum for effective regulatory frameworks underpinning sustainable finance continues to be a key theme and strategic priority in 2023 for global and domestic securities regulators, including ASIC.
Directors should be aware that we will be focused on the oversight of sustainability-related disclosure and governance practices of listed companies, managed funds, superannuation funds and green bonds.
Although it is encouraging to see more and more listed companies in Australia voluntarily making sustainability and climate-related disclosure, there is a case for improvement, and best practice should continue to evolve to be attractive to investors.
Transitioning to international standards
Our recent review of climate change-related disclosure practices by larger listed companies found that while standards continue to improve overall, there remains:
- a lack of consistency, comparability and structure in disclosures, and
- some selective adoption of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.
Directors should be aware that ASIC continues to encourage listed companies to use the TCFD’s recommendations as the primary framework for voluntary climate-related disclosures, including the Guidance on Metrics, Targets, and Transition Plans. In doing so, companies should be well placed to transition to any future disclosure standards in Australia such as those proposed by the International Sustainability Standards Board (ISSB).
As the ISSB progresses with its proposals and other related developments evolve, directors will need to carefully consider what kind of governance structures might be required to be developed now, in order to best support company disclosure and reporting in the future, having regard to the likely deeper connection between sustainability reporting and financial reporting.
Overall, we expect to see continued improvement in sustainability-related governance and disclosure practices. Our work with peer domestic and international regulators, such as the Council of Financial Regulators Climate Working Group and the International Organization of Securities Commissions Sustainable Finance Task Force is intended to coordinate action, improve disclosure practices and avoid market fragmentation in this area.
Ensuring clarity in communication
ASIC’s 2022 How to avoid greenwashing when offering or promoting sustainability-related products (INFO 271) lists several principles to help firms avoid greenwashing or overstating their 'green' credentials. These suggestions apply broadly to entities offering or promoting financial products that take into account sustainability-related considerations in their investment strategies and decision-making. Examples of disclosure practices that may fall short of meeting existing regulatory obligations are also provided in INFO 271.
The Australian Council of Superannuation Investors (ACSI) has found that, as at 31 March 2022, 95 companies across the ASX 200 (representing 70% of the ASX 200’s collective market capitalisation) have adopted ‘net zero’ commitments.
If your company has a stated sustainability-related target – such as a ‘net zero’ commitment – the law requires you to have reasonable grounds for making that statement. Information provided to investors must be useful, clear and accurate. You should clearly explain:
- what your target is
- how and when you expect to meet your target
- how you will measure your progress milestones
- any assumptions you have relied on when setting that target or when measuring your progress.
The key is to put in place clear, time-based action plans to avoid breaching the existing misleading statement prohibitions. Directors should also ensure:
- that the statements are properly framed, and can be clearly substantiated
- appropriate governance is in place at board level for signing off on the statements
- there is ongoing compliance with continuous disclosure obligations when events or results overtake the statements.
This article was first published in ASX’s Listed@ASX magazine in November 2022.