The ASX Corporate Governance updates deal with non-financial disclosures to address emerging investor expectations on ESG performance.
The fourth edition of the Corporate Governance Principles and Recommendations has been released after a long, and at times polarising, consultation process. The inclusion in the draft of the term ‘social licence to operate’ sparked debate across corporate Australia, with some stakeholders seeing the term as too vague and elastic to allow companies to meaningfully respond to the proposed new guidance.
Updates to the fourth edition of the Corporate Governance Principles and Recommendations
In response, references to social licence have been removed from the final version released in February 2019; however, the sentiment remains. The ASX has now set a very clear expectation that listed companies in Australia need to be more transparent in articulating how they “instil and continually reinforce a culture across the organisation of acting lawfully, ethically and responsibly”.
Summary of key changes:
- Stronger focus on corporate culture, reputation and standing in the community (Principle 3), with the inclusion of a recommendation for entities to articulate and disclose their values. The ASX outlines that entities need to protect their reputation and standing in the community and with key stakeholders to create sustainable value for security holders.
- Verification of any periodic corporate reports is now a recommendation (Recommendation 4.3), which includes integrated reports and sustainability reports, recognising that investors are relying on a broader range of corporate reports than audited or reviewed financial statements to inform their decisions.
- More explicit guidance for disclosure of material exposure to environmental and social risks (Recommendation 7.4), with the ASX highlighting that how an entity manages its environmental and social risks can affect its ability to create long-term value for security holders. This sets a clear expectation that all companies should be disclosing information on environmental and social risks, with a specific focus on climate risks, both transition and physical risks and guidance on the use of Task Force on Climate-related Financial Disclosure (TCFD).
With mounting evidence of a trust deficit in corporate Australia, it is critical that organisations use the opportunity afforded them to have an open and honest conversation with their stakeholders on their purpose and plan for long-term value creation. Now is the time to review your approach to non-financial disclosure, and assess the impacts of the introduction of the fourth edition of the Corporate Governance Principles and Recommendations.