ASIC has issued new guidance to assist stakeholders in complying with their climate risk disclosure obligations. These new updates supplement ASIC's existing, high-level, principles-based regulatory disclosure guidance.
In issuing this guidance, ASIC continues to build on its momentum in the area of meaningful climate risk disclosure by Australian listed companies1.
ASIC's climate risk updates amend the following publications:
- Regulatory Guide 228 (REG 228): Prospectus: Effective disclosure for retail investors
- Regulatory Guide 247 (REG 247): Effective disclosure in an operating and financial review
- Information Sheet 203 (INFO 203): Impairment of non-financial assets: Materials for directors
The key changes revolve around the requirement to expressly identify climate change as a relevant risk with respect to disclosure obligations.
RG 228: EFFECTIVE DISCLOSURE FOR RETAIL INVESTORS
RG 228 sets out ASIC's guidance on disclosure requirements where a company intends to issue securities to retail investors through a prospectus.
ASIC identifies climate risk as an express example of 'common risks' that must be disclosed in a prospectus.
Within this context, ASIC highlights the transition risks and physical risks of climate change (see 228.77 Table 7)2.
In considering transition risks and the consequent financial and reputational risks of climate change, ASIC observes that the transition to a 'lower-carbon economy' could entail extensive policy, legal, technology and market changes in order to mitigate and adapt to requirements related to climate change.
In its reference to the physical risks of climate change, ASIC notes that such risks could vary from being event-driven to longer term shifts in climate patterns with implications encompassing direct damage to assets (eg, as a result of extreme whether events) and indirect impact (such as supply chain disruptions).
While ASIC's disclosure obligations concern risk in a general sense rather than climate risk per se, the corporate disclosure of climate risk would be prudent given the far-reaching impact of climate change on business as usual, and ASIC's express reference to climate risk in RG 228.
RG 247: EFFECTIVE DISCLOSURE IN AN OPERATING AND FINANCIAL REVIEW
RG 247 sets out ASIC's guidance on disclosure in an Operating and Financial Review (OFR) as part of annual reporting obligations for listed entities. The purpose of an OFR is to set out information that shareholders would reasonably require to assess an entity's operations, financial position, business strategies and prospects for future financial years3.
ASIC's update to RG 247 expressly highlights climate risk as a risk consideration when reporting on the prospects of the company for future financial years (see 247.66)3. In particular, climate change is identified as a 'systemic risk' with potential to have 'material impact on the future financial position, performance or prospects of entities'.
INFO 203: IMPAIRMENT OF NON-FINANCIAL ASSETS: MATERIALS FOR DIRECTORS
INFO 2034 sets out the responsibilities of a director in the testing of non-financial assets for impairment in financial reports.
The update to INFO 203 is consistent with RG 228 and RG 247 in that climate change is identified by ASIC as a risk to be considered when assessing possible impairments to non-financial assets. Importantly, climate change is expressly mentioned as a key assumption that is commonly neglected in the process of assessing possible impairments.
IMPLICATIONS: CLIMATE RISK DISCLOSURE AND CLIMATE RISK GENERALLY
As ASIC further clarifies its expectations regarding climate risk disclosure, it is anticipated that regulatory obligations in this area will continue to strengthen and expand into other facets of public company disclosure.
It is pivotal that directors are aware of relevant corporate climate risk disclosure obligations, especially where such disclosure concerns retail investors.
Even where there are no express legislative requirements for climate risk disclosure, climate change is a legitimate business risk that can have important short- and long-term financial implications. Companies should also be mindful that their voluntary disclosure of climate risks is increasingly viewed by key stakeholders as an indicator of good corporate governance.
1 Understanding and Addressing Climate Risk: A Quick Guide for Company Directors
2 ASIC RG 228: Prospectuses: Effective disclosure for retail investors
3 ASIC RG 247: Effective disclosure in an operating and financial review
4 ASIC INFO 203: Impairment of non-financial assets: Materials for directors
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