by Terence Jeyaretnam
The 3rd Edition of the ASX Corporate Governance Principles and Recommendations, released last month by the ASX Corporate Governance Council, formally recognises that economic, environmental and social sustainability issues form a crucial part of the risk landscape for publicly listed companies.
The changes are the first made by the ASX since the global financial crisis and represent a significant shift in thinking from considering financial risks alone to highlighting the non-financial aspects of corporate performance.
This is highlighted by Principle 4 which has changed from ‘safeguard the integrity of financial reporting’ to ‘safeguard the integrity of corporate reporting’, a move which paves the way for broader non-financial reporting such as sustainability reporting. More specifically, Recommendation 7.4 suggests ‘a listed entity should disclose whether it has any material exposure to economic, environmental and social sustainability risks and, if it does, how it manages those risks’.
Another significant addition is Principle 3 which calls for companies to “act with ethics and integrity’ and has introduced commentary discussing the role of the company as ‘a good corporate citizen’. It defines a good corporate citizen as one who is addressing human rights, creating a safe and non-discriminatory workplace, dealing honestly and fairly with suppliers and customers, acting responsibly towards the environment, and dealing with business partners who demonstrate similar ethical and responsible business practices.
Around 2,000 companies listed on the ASX are required to comply with the principles from 1 July 2014 or must give detailed reasons for their non-compliance. A failure to do so may ultimately lead to a company being delisted.
The ASX is not alone in increasing the focus on sustainability risks. The Johannesburg Stock Exchange, along with a handful of others, has already mandated some level of environmental, social and governance reporting.
From a broader international perspective CERES, a US advocacy group, announced a global initiative to encourage a mandatory sustainability-reporting standard across all stock exchanges. The final proposal Investor Listing Standards Proposal: Recommendations for Stock Exchange Requirements on Corporate Sustainability Reporting is now being debated by stock exchanges around the world. The proposal is supported by The World Federation of Exchanges (WFE) which has sent the proposal and comment form to its membership of more than 60 stock exchanges around the world. WFE’s CEO is encouraging members to participate in the consultation and increase discussion with the investment community. CERES has conducted this work in collaboration with the UN’s Sustainable Stock Exchanges Initiative (UN SSE) and the Principles for Responsible Investment’s SSE Investor Working Group.
While these recent changes are focused on listed companies, there is an expectation that many non-listed companies will follow suite as the new requirements also provide valuable risk management and disclosure frameworks.
Terence Jeyaretnam is a Director of Net Balance (firstname.lastname@example.org),
one of the world’s leading sustainability advisory firms.
Terence is based in Melbourne.
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