While there are currently no legal requirements in Australia for sustainability reporting, there are certain obligations for companies listed on the ASX to report both financial and non-financial information.

Furthermore, over the past few years it has become increasingly evident that Australian regulatory bodies are taking steps towards formalising sustainability reporting, and it is inevitable there will be more to come.

For small caps, particularly junior explorers, there are several considerations for company boards, management and their advisers to consider.

Current rules

At the moment, all companies are bound by reporting requirements set out in the ASX listing rules and the Corporations Act 2001. Current statutory financial reporting requirements seek to provide structure while promoting comparability and transparency and the laws and guidelines listed below call for some level of sustainability reporting:

  • Corporations Act 2001 and associated Regulatory Guides and other ASIC publications (i.e. INFO 203, ASIC Report 593: Climate Risk Disclosure by Australia’s Listed Companies)
  • ASX Listing Rules (i.e. continuous disclosures, periodic disclosures)
  • ASX Corporate Governance Principles and Recommendations (ASX P&R)
  • Australian Accounting Standards (AAS).

Under the Corporations Act and the ASX listing rules, companies are required to make continuous and periodic disclosures. Specifically, ASX Listing Rule 3.1 states that corporations are required to disclose immediately any information that a reasonable person would expect to have a material effect on the price or value of the entity’s securities.

While it can be argued that Listing Rule 3.1 is focused primarily on financial issues, it is our view that, with the increased interest in ESG commitments, the disclosures should also include information related to environmental and social matters that satisfies the materiality test.

The ASX listing rules on continuous disclosure make it clear that listed corporations have an equal duty to shareholders, investors and the market generally. It is therefore commonly accepted that there is an equal onus for disclosures of sustainability information.

Currently, the Corporations Act prescribes the content of the financial report, including compliance with AAS, which is currently accepted as being limited in calling for and/or setting the standards for sustainability reporting. The directors’ report, specifically the operating and financial review (OFR), covers a range of general information related to the operation of the company, including its principal activities and outcomes during the year, as well as some forward-looking information. The OFR is governed by Regulatory Guide (RG) 247, which provides guidance for directors of listed entities on providing useful and meaningful information to investors in an OFR.

In 2019, ASIC amended RG 247 to recognise that climate change can have material impact on a company’s future financial position, performance or prospects. More importantly, ASIC identified climate change as a systemic risk that could impact an entity’s financial prospects for future years, and that may need to be disclosed in the OFR of the directors’ report. More recently, in late November 2022, ASIC published further guidance for company directors to ensure material business risks, including climate related risks, are adequately disclosed in annual reports to better inform shareholders and prospective investors.

In its December 2022 publications (22-333 MR ASIC highlights focus areas for 31 December 2022 reporting), ASIC again drew attention to the impacts of climate change and related events, and the commitments and policies on climate and carbon emissions by governments in assessing the value of a company’s assets and provisions, and business strategies. It also reminded companies to ensure their OFR disclosures adequately address the issue of climate change risk and its associated impact on the future prospects of entities.

This is a timely reminder to small caps and junior explorers to adequately outline and communicate their sustainability commitments.

In the context of the ASX P&R, we are of the view that three of the nine principles are relevant to the disclosure of sustainability information and ought to be adequately addressed by junior explorers. They are:

  • Principle 3: Instil a culture of acting lawfully, ethically and responsibly – in the context of sustainability reporting, publicly listed entities are expected to establish a code of conduct to actively promote ethical and responsible decision-making;
  • Principle 4: Safeguard the integrity of corporate reports – increasingly, investors are relying on a broader range of periodic corporate reports other than audited or reviewed financial reports (i.e. sustainability reports) to inform their investment
    decisions; and
  • Principle 7: Recognise and manage risk – in the context of sustainability reporting, it is expected that publicly listed entities establish a sound system of risk oversight and management and internal control designed to identify, assess, monitor and manage risk, and inform investors of material changes to the company’s risk profile (applicable to climate risk given its designation as a systemic risk by ASIC).

The way forward

In June 2022, the Australian Accounting Standards Board (AASB) released its project insights – Developing sustainability-related financial reporting standards in Australia – with the aim of setting out a snapshot of the proposed approach to developing sustainability-related financial reporting standard, as well as the key elements associated with the proposed approach.

It is evident the AASB is seeking to develop a separate suite of standards that specifically address sustainability-related financial disclosures made as a part of general-purpose financial reporting and prioritise international alignment. There will however be modifications for Australian matters and requirements when necessary to meet the needs of Australian stakeholders.

Given the ongoing importance of sustainability reporting in the ESG realm, we await the next phase of work to be delivered by the AASB as well as other federal regulatory bodies. In order to prepare, small caps should consider sustainability in their reporting, regardless of the current laws.

This is a timely reminder for all business to recognise that ESG is wide ranging and goes beyond having a checklist. It is important companies live and practice ESG fundamentals through its values and culture. This approach will ensure that the company will conduct itself in a manner that is consistent as well as meeting expectations of its stakeholders and the broader community.

This article was first published in the 2023 IPO Watch Australia Report.