The call for corporate accountability for environmental, social and governance (ESG) issues is getting stronger.
In early March 2023, ASIC accused a retail superannuation giant of misleading members about the sustainability of its investments in a landmark greenwashing case. ASIC alleged that the group claimed it excluded companies involved in fossil fuels, alcohol production and gambling outfits from its ‘Sustainable Investments’ fund, but then invested heavily in 49 stocks across these sectors. The case is currently before the courts.
This follows a recent review by ASIC addressing the threat of ‘greenwashing’ as a marketing tactic to create the impression of sound environmental policies without substantiation.
With the continuous expansion and development of ESG reporting at a domestic and international level, there is a growing requirement for assurance to enhance the reliability and confidence in ESG disclosures.
Broad-based ESG or ‘sustainability’ reporting has some way to go for corporate Australia. However, Australia’s regulators are getting restless! The Australian Securities and Investment Commission (ASIC), the Australian Prudential Regulation Authority (APRA), and the Australian Securities Exchange (ASX) now either recommend or require organisations to consider several sustainability-related risks for reporting.
What does ESG stand for?
ESG (Environment, Social and Governance) is a framework for assessing risks to a company’s operations related to large-scale, long-term environmental, social, and governance issues.
ESG covers a wide range of issues, from environmental threats like climate change, to social issues related to diversity, equity, and inclusion, to social responsibility in investing and production, to governance issues related to data security, executive pay and financial reporting.
What are director responsibilities?
In Australia, directors have a duty to act with due care, skill and diligence and in the best interests of the company they represent. There have been significant regulatory and judicial developments and activist action in the last 12 months that has resulted in heightened scrutiny on the exercise of directors’ duties in relation to climate risk in particular.
It is not enough for directors to consider and disclose such risks. They also need to ensure they have taken reasonable steps to determine the climate change strategy of the business, and this strategy is supported by documented systems and processes.
Beyond formulating climate policies, boards may need to assess climate change risks in making investment and project approvals decisions or entering into new long term contracts. Consideration of climate risks needs to be balanced against business’ core objectives, including the need to realise shareholder value.
Further, although companies are increasingly facing pressure from shareholders and activists to make bold statements on climate change, care should be taken to avoid over-promising on climate-related statements. Greenwashing is an ongoing concern.
ASIC has recommended that organisations consider ESG including the impact of climate risk on financial statements.
What are ESG reporting requirements for Australian companies?
At present, there is limited legislation in place in relation to ESG reporting requirements. There’s no doubt this will develop
Existing mandatory reporting requirements in relation to ESG include:
- Environmental – National Greenhouse and Energy Reporting Act 2007, conditions to Commonwealth and State environmental and planning approvals and the recently introduced Climate Change Act 2022.
- Social – Workers’ rights under Commonwealth and State industrial relations and work health and safety legislation; various discrimination and equal opportunity laws.
- Governance – ASX Corporate Governance Principles and Recommendations, and disclosure obligations of directors and financial reporting obligations under legislation.
There are also various voluntary ESG disclosures Australian companies should consider including:
- Particular social risk disclosures – The Global Reporting Initiative, the UN Guiding Principles on Human Rights and OECD Guidelines for Multinational Enterprises.
- Particular climate risk disclosures – The Sustainability Accounting Standards Board and the Taskforce on Climate-Related Financial Disclosures.
- Industry based reporting frameworks –Principles for Responsible Investment requiring asset owners and investment managers to meet minimum annual reporting requirements.
- Reconciliation Actions Plans
- Net zero commitments and aspirational targets
What should accounting firms consider?
For accounting firms working with clients in the energy and resources sector, a strong understanding of ESG policies and director responsibilities is essential when strategic advice is being provided.
What should external auditors be aware of?
As disclosure becomes the norm, the way companies provide ESG information also becomes more important. Climate-related impacts are showing up in more financial reports today, and auditors are already evaluating how those impacts are generated, how they’re captured and the risks they create.
- Financial implications
Auditors should understand the potential risks and opportunities that ESG factors pose to a company’s financial performance, as well as its long-term sustainability. This includes issues such as climate change, social inequality, and corporate governance.
- Regulatory requirements
There is an increasing number of regulatory requirements related to ESG reporting and disclosure, and auditors need to be familiar with these requirements to perform effective and efficient audits. Failure to comply with these requirements can result in regulatory sanctions or legal liabilities for the company and its auditors.
- Materiality assessments
Auditors should be familiar with the process of conducting materiality assessments to identify the ESG factors that are most relevant to a company’s business model, operations, and stakeholders. This involves evaluating the significance of each ESG issue based on its potential impact on the company’s financial performance and sustainability.
- Data collection and verification
Auditors should be proficient in collecting and verifying ESG data to ensure that it is accurate, reliable, and complete. This involves evaluating the quality of the data, assessing the data collection methods, and verifying the data against external sources.
- Reporting and assurance
Auditors should be familiar with the various ESG reporting frameworks and assurance standards, such as the International Standard on Assurance Engagements (ISAE) 3000. They should be able to provide assurance on the reliability of ESG information disclosed in a company’s sustainability report.
By understanding these key aspects of ESG, auditors can effectively evaluate a company’s ESG performance and provide valuable insights to stakeholders on its financial performance, sustainability, and impact on society and the environment.
Key questions to consider
- Are you aware of these changes?
- Do you know if your clients are affected by these changes?
- Can you discuss the impact of these changes with clients?
- Are there any additional services you could provide to your clients?
For more information, refer to:
ASIC’s current focus: What are regulator’s expectations on sustainability related disclosures?
https://asic.gov.au/about-asic/news-centre/articles/asic-s-current-focus-what-are-the-regulator-s-expectations-on-sustainability-related-disclosures/
ASX. ESG Reporting Guide for Australian Companies
https://www2.asx.com.au/about/regulation/asx-compliance
APRA. Prudential Practice Guide. CPG 229 Climate Change Financial Risks
https://www.apra.gov.au/news-and-publications/apra-finalises-prudential-guidance-on-managing-financial-risks-of-climate
About the National Audits Group
As an independent auditing firm, National Audits Group provides accountants, advisors and trustees with the confidence that their audits are being managed professionally with regard to all requirements.
We are more than just auditors! Let’s get talking – call now and discuss how National Audits Group can provide cost effective solutions, to meet your operational needs and strategic objectives.
For further information, contact us directly at 1300 734 707.
Steven Watson, Director, National Audits Group | www.audits.com.au
As Managing Director of National Audits Group, Steven provides assurance and advisory services to all types of entities in a diverse range of industries. His team has an enduring commitment to efficient, quality and value of auditing services.
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