Ahead of the InvestorDaily ESG Summit 2023 in Melbourne this week, U Ethical chief executive officer and executive director Mathew Browning shone the spotlight on the impact of climate-related financial disclosures on corporations, particularly because it will require them to provide forward-looking statements.
“Climate risk assessment is based on a whole bunch of assumptions,” Mr Browning told InvestorDaily.
“What an organisation’s forward-looking statements are going to say will depend on their assumptions. Therefore, the likelihood that they’re going to be accurate is relatively small because their assumptions will be varied. There will be different views about them.”
Treasury’s consultation paper on climate-related financial disclosure noted that disclosure requirements under the Corporations Act are backed by civil penalties to ensure that markets are informed and to provide remedies for misleading and deceptive conduct.
Climate disclosures require significant use of forward-looking information compared to financial reporting, and could depend on external parameters that are subject to uncertainty, such as climate scenarios, the paper said.
“Consequently, consideration is warranted for how climate disclosures should interact with the prohibitions in the act, to ensure that entities have appropriate incentives to provide accurate, comprehensive, and timely disclosures without taking on disproportionate liability risk,” the paper said.
The Australian Securities and Investments Commission’s (ASIC) current advice for forward-looking statements is that they must be made on “reasonable grounds” (with reference to s769C and s728(2) of the Corporations Act).
The Treasury is seeking views on how this could be applied for climate disclosures, and whether other mechanisms such as a safe harbour could be considered to balance incentivising disclosure and penalising misconduct.
“For instance, in its draft climate disclosure rules, the US Securities and Exchange Commission has proposed a specific safe harbour regime for Scope 3 emissions (in addition to their general provisions for safe harbour for forward-looking statements),” Treasury said.
The AICD said in its submission to the Treasury consultation paper that Australia lacks safe harbour provisions for forward-looking statements, has strict liability for misleading or deceptive conduct, and has a system where regulators are responsible for enforcing directors’ duties, rather than shareholders.
As such, it proposed introducing safe harbour provisions for forward-looking statements, Scope 3 emissions, and regulator-only enforcement action during a transitional period.
Mr Browning said that climate-related disclosure requirements could have a significant impact on companies because they would be held accountable for inaccurate disclosure.
“The other thing that’s going on concurrently is the consolidation of standards that will guide companies on how they need to disclose,” he said.
“Following on from that, there will need to be or is likely to be some form of assurance process or the equivalent of an audit to ensure that the disclosures are accurate.”
Directors are going to become increasingly vigilant about verifying the accuracy of their company’s claims about their activities in annual reports and accounts before signing off, Mr Browning added.
Mr Browning’s comments preceded the ESG Summit 2023, for which U Ethical is providing support as an event partner because of the alignment of its goals with the summit.
“Both of us want to equip advisers with the knowledge and resources to increase their contribution to ESG investing in Australia,” he said.
The perception of ESG investment has transitioned from being just a risk assessment tool to a mainstream values-driven tool, Mr Browning added.
“As a result, I think advisers want to understand the nuances of responsible investing and how they can shape their conversations with clients without overcomplicating it to enable them to invest both for financial returns and for the planet and its people,” he said.
“The ESG Summit is the place to gain that knowledge.”
To hear more about the latest ESG investment trends and outlook, and how advisers can shape their client conversations, come along to the ESG Summit this week.
It will be held on Wednesday, 29 March at Grand Hyatt, Melbourne.