Chapter 12. Mandatory ESG Reporting
Introductory articles on emerging exposures, risk mitigation
and insurance risk transfer for clients of Omnisure.
A compendium of introductory ESG articles on emerging exposures, risk mitigation and
insurance risk transfer for clients of Omnisure with claims examples.
Martin Birch – March 2022
Chapter 12 – Mandatory ESG Reporting (Global Momentum)
In December 2021 Corrs Chamber Westgarth Lawyers (“CCW”) reported that recent developments in climate-related and ESG reporting requirements around the world highlighted a growing momentum in favour of mandatory ESG disclosure.
Mandatory climate reporting – recent global developments
Investors and stakeholders around the world are increasingly demanding transparency and accountability in relation to climate-related risks and opportunities. In the 2021 Global Policy Survey on Climate published by Institutional Shareholder Services (‘ISS’) Governance, 88% of international investor respondents and 75% of international non-investor respondents indicated that they expect companies to provide clear and appropriately detailed disclosure of climate change governance, strategy, risk mitigation efforts and targets.
In October 2021, the UK Government introduced the draft Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2021 (with regulations relating to limited liability partnerships to follow). These regulations were signed into law on 17 Jan 2022 and on this date the UK became the first G20 country to enshrine into law mandatory climate-related financial disclosures. The two new statutory instruments, The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 and The Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022 (together, the “CFD Regulations”) were published by the Department for Business, Energy and Industrial Strategy (“BEIS”) on 17 January 2022 and will impact over 1,300 of the UK’s largest companies and financial institutions in line with recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
In October 2021, the New Zealand parliament passed the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021 (FSAA). The FSAA will amend various existing acts to provide a uniform policy to broaden non-financial reporting. It will require approximately 200 reporting entities with a high level of public accountability (such as listed issuers, large banks, licensed insurers and managers of registered investment schemes) to make disclosures in relation to climate-related risks and opportunities in line with TCFD recommendations.
At the Responsible Investment “Climate and Global Financial Markets” Webinar in July 2021, US Securities and Exchange Commission (SEC) confirmed that mandatory climate risk disclosure rules were imminent and that a proposal is expected by the end of 2021. The SEC will seek to ensure that climate-related disclosures are comparable, consistent and tailored to each issuer.
Since June 2016, companies listed on the Singapore Exchange (SGX) have been required to complete annual sustainability reporting on a ‘comply or explain’ basis. These reports address matters such as identifying material ESG issues, strategies to mitigate or enhance material ESG risks and opportunities and KPIs that best track performance against these mitigation or enhancement strategies.
In July 2020, the Hong Kong Stock Exchange (HKEX) introduced new ESG reporting requirements for listed companies, with both mandatory disclosure requirements and ‘comply or explain’ provisions. HKEX-listed companies must provide a statement setting out the board’s consideration of ESG matters, an explanation of the application of various ESG reporting principles and the reporting boundaries of their ESG report.
In May 2021, the Securities and Exchange Board of India announced that it would require the top 1000 listed companies to report on their ESG parameters. From FY23, these companies will be required to submit a Business Responsibility and Sustainability Report. Disclosure under the Report is divided into essential (mandatory) and leadership (voluntary) reporting requirements.
Broad-based ESG reporting remains voluntary in Australia currently1, although certain entities have mandatory reporting obligations under various ESG-related acts (for example the Modern Slavery Act 2018 (Cth)). Listed entities must comply with continuous disclosure regimes and the overriding prohibition against misleading and deceptive conduct, both of which provide companies with an added incentive to meet their disclosed ESG targets. In a memorandum of opinion to the Centre for Policy Development, Noel Hutley SC and Sebastian Hartford Davis stated that a company and its directors face a risk of being found liable for misleading and deceptive conduct ‘by not having had reasonable grounds to support the express and implied representations contained within its net zero commitment’.
In relation to climate-related disclosure, ASIC recommends that listed companies with material exposure to climate risk follow the TCFD recommendations. Other voluntary guides include APRA’s Prudential Practice Guide on Climate Change Financial Risks and the Governance Institute of Australia’s Climate Change Risk Disclosure Guide. These guides provide an indication of how regulators may expect organisations to consider, manage and report climate-related risks in the future. Please see our Foundation Document for a more fulsome discussion on prudential guidance for APRA-regulated entities CPG 229 Climate Change Financial Risks
Please refer to our Foundation Document2 for a more fulsome discussion on this topic as well as information about that some regulated companies are failing to adequately report ESG issues, particularly climate-related financial risks3. At a CFA Australia Investment Conference in October 2021, RBA Deputy Governor discussed the tension between existing Australian disclosure laws and the recent global momentum for bespoke climate reporting requirements. Read also about a report published by the International Monetary Fund on 6 December 2021 suggested that ASIC could improve standardised climate-related disclosures by large public companies. In a speech given on 6 December 2021, ASIC Commissioner Cathie Armour indicated that climate change disclosures will be one of the most significant governance issues of 2022.
2 Our Foundation Document is the original full text version of “ESG Discussions – Introductory articles on emerging exposures, risk mitigation & insurance risk transfer” for clients of Omnisure, compiled by Martin Birch. Register on our website for a full copy.
3 APRA-regulated entities should manage the financial risks associated with climate change (ie climate risk) has been the subject of three recent developments:
- APRA has released draft cross-industry prudential guidance CPG 229 Climate Change Financial Risks (CPG);
- Noel Hutley SC and Sebastian Hartford Davis released a further supplementary legal opinion on company directors’ duties and climate change;
- Noel Hutley SC and James Mack released an updated legal opinion on superannuation trustees’ duties and climate change.
Please contact Martin Birch for a copy of the full-text Foundation Document at firstname.lastname@example.org