Boards still in the dark regarding their disclosure obligations in regard to ESG risks.

A major review into corporate governance practice has revealed many boards of ASX listed companies are still in the dark regarding their disclosure obligations in regard to environmental, social and governance (ESG) risks.

Company Matters Director Janine Rolfe says this is particularly apparent for newly listed entities and entities joining the S&P/ASX 300, many of which struggle to manage increased scrutiny from institutional investors and shareholder activists.

Ms Rolfe’s comments follow the release of KPMG’s analysis of listed entities’ disclosures against the ASX Corporate Governance Council Principles and Recommendations (Third Edition).

Ms Rolfe said an important finding from the KPMG Report is that there is a “significant variation in the disclosures in relation to Recommendation 7.4. which requires a listed entity to disclose whether it has any material exposure to economic, environmental and social sustainability risks, and if it does, how it manages or intends to manage those risks.”

According to Ms Rolfe: “Some disclosures simply aren’t compliant and are coming up short.”

“Even if economic, environmental and social sustainability risks are properly disclosed, many disclosures just stop there and don’t proceed to discuss how those risks are managed, or are intended to be managed.”

Ms Rolfe said: “In the lead up to the 2016 reporting season where ESG disclosures will sit squarely on the radar of proxy advisors and shareholder activists, we are encouraging boards to pay more attention to ESG reporting,”

Ms Rolfe says this is a challenge in itself given the current over-crowding on board agendas with culture , IT/cyber security, diversity and board skills as well as the more traditional focuses of financial reporting/audit and capital management all vying for necessary board meeting time.

“Companies need to ensure that they discuss their material exposure to each of the economic, environmental and social sustainability risks for completeness,” Ms Rolfe said.

On top of demanding improvement to risk management governance practices, shareholder groups and activists are also calling on boards to include megatrends in their risk profiling. Megatrends can be characterised as major global societal and transformative forces that present material risks and opportunities to companies and their shareholders – such as digitisation, climate change and population growth.

Ms Rolfe said there is “no doubt the risk related findings in the KPMG Report will be well received by shareholder groups,” who in recent years have agitated for greater disclosure of ESG investment risks.

She said “recognising ESG factors as critical to the financial performance of entities is key to both initial and ongoing investment decisions.”

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