Nearing Net Zero: Disclosure or distraction Is Mandatory Climate Reporting actually driving the transition

Elena Lambros
Hello and welcome to ESG Matters by Ashurst Perkins Coie.

My name is Elena Lambros, and I'm a Risk Advisory partner based in Brisbane.

You're listening to a special audio podcast taken from our regular Nearing Net Zero video mini-series. In this episode, we tackle one of the most debated and talked-about issues in the energy transition: regulation and compliance. This is especially topical in Australia right now because climate-related financial disclosures have come into force.

For this discussion, I was joined by my regular co-host for Nearing Net Zero, Dan Brown. Dan is Global Leader for the energy and infrastructure industry here at Ashurst Perkins Coie.
I kicked off the conversation with the burning question for Dan: Is mandatory reporting simply a tick-a-box compliance exercise, or will it really contribute towards Australia achieving its sustainability ambitions? Let's hear what he had to say…

Dan Brown
Yeah, it's a really important question because, at the end of the day, we want to have impact with our our journey to net zero, but we lawyers do like a good checklist!

Elena Lambros
So I shouldn’t laugh because I work in risk compliance! But that’s right!

Dan Brown
But it's so true, isn't it? You know, and at core of the ability to deliver on the promise of net zero is getting things done in a really effective, efficient way. And it's really easy to build complexity because you're just adding something. It's really hard to simplify because: in order to simplify something, you're effectively removing an element that someone's really fought quite hard to add.
So here endeth the philosophical observation!

So yes: is this really a distraction, or is it something that is actually going to help propel us forward in a meaningful way to meet our carbon reduction obligations? I want to hear your insights on this…

Elena Lambros
Thank you. So I would start by [saying] where they [the climate-related financial disclosures] came from originally is there is a lot of voluntary reporting around climate social issues that people have done for many years under various standards that are recognized. The voluntary nature of them, I think, led to scrutiny from the litigation ‘greenwashing’ angle.

Investors would have to kind of decipher exactly the way that you've interpreted certain words or the way that you want to put out your information. And I think it allowed people to commit to certain – or make certain – statements around what their company stood for without really kind of [quantifying that]. I would say more intense scrutiny comes when you can easily compare something on the same standard that's mandated by ASIC.

Dan Brown
Yes.

Elena Lambros
So I think from my perspective, just that shift to that transparency – [the way] comparable information is done and compiled in the same way is a really important point. I think that has been a good shift.
I would also say that one that we've seen: the reports are being released in a phased approach based on the size of your company. And from the first, I think it's 259 sustainability reports that have been lodged with ASIC under these new standards, I think ASIC has made a few comments around the quality of those disclosures and the way in which people are using them to either really firm up their commitments or maybe just kind of take a slightly different approach, which technically complies but isn't really probably what the legislation intended.

Dan Brown
Yes but I imagine it's like all things where there is a lack of clarity or perhaps even a bit of ambiguity around what it is that you need to report or how you're reporting it.
The moment that we create some certainty or a clear pathway around what must be disclosed, then naturally people are going to step back from what they originally promised because now they realize that there is a greater sense of obligation and expectation around those promises.

So it's probably natural, isn't it, that there's been a revision to some of those approaches from corporations that are reporting about this.

Elena Lambros
Yes I think that's fair. And I think you see people previously having disclosed what they think the weather-related impact of the climate change will have on their business – to now walking back from that, not mentioning it, not considering it a material risk to their business anymore, because they are now doing it under mandatory standard.
So I understand the concern, but I do think there is probably a lot more that can be done to really think about the way that you think through these risks, how you're assessing them, how you're measuring them, how you're quantifying it.

When you read [these], there's quite a lot of reports so far from very big companies, and there doesn't seem to be a lot of disclosure around anything being a particularly material risk related to climate change which probably leads ASIC to question it in a little more depth.

Dan Brown
Yeah, and so what is the sanction if you get this wrong? Like, does ASIC just go ‘Fix it up next time?’ I'm sure there's a much more eloquent response than that! But what does ASIC do if we get this wrong?

Elena Lambros
It's a really good question. So there's a couple of points on that. ASIC has been very vocal around this. The first round being: they'll use it as a learning opportunity to make sure that everybody's really comfortable and making sure that their information is correct.

There is a modified liability regime in place for the next few years, which kind of protects people from making statements from litigation outside of around certain areas, particularly the forward-looking areas.

But ultimately, ASIC will be able to issue directives around what you do and don't say, and there will be able to be either regulatory or other action if you've said anything that's fundamentally inaccurate, misleading, that type of thing as well.

Dan Brown
So there seems to be a great kind of ‘stick’ at least around doing the right thing.

As we've discussed on previous episodes of Nearing Net Zero, Australia is arguably one of the most litigious greenwashing jurisdictions in the world. So, does this enhanced reporting requirement diminish the ability or likelihood of there being greenwashing litigation?

Elena Lambros
No. I would say no. It's a really good point. I think it helps because at least you've got probably some more robust processes in the way that you've represented your information. So from a company perspective, you could feel that you're protected in that way.

But what we've seen over time with litigious activity in Australia is it's focused on driving change. So, the reason why we're so litigious around like greenwashing and shareholder activism is because companies aren't moving fast enough to a target that people want them to get to.

So when we've spoken earlier in the conversation around people starting to walk back from some of their commitments or their targets, or not putting forth their opinions as strongly, then you’ll see activists becoming more active.

Because what they want to see is change. And if they see you walking back, then they just increase litigation as a way to try and drive that change.

Dan Brown
So I'm a board member of an ASX listed company. I've got all of these enhanced disclosure obligations now. What are the two or three or five things that you would be advising me to keep an eye on, then, in this new world order?

Elena Lambros
One the fact that you have to make a ‘reasonable steps declaration’. So [you need to be] very, very comfortable that all the steps that your organization has taken to put these into place really are robust and it's well thought through. It is in your governance committees. You think about climate risk, and you integrate it into your risk management frameworks. So all of those steps should make you feel very comfortable with your disclosure.

Another one is around the consistency of your information. So these climate reports are mandatory. You have to release them, but there is a lot of other disclosures that get done by companies for other reasons. Make sure that that's really consistent and that you're very clear around your message.

And I would just say, in terms of setting targets or making commitments, as long as you're comfortable that that's where your company is going to go, you should feel absolutely comfortable to make those commitments because capital does flow to companies that you know demonstrate you know they can execute. So there's benefits to it.

Dan Brown
Absolutely. Yes and I imagine one of the most robust measures around demonstrating the reasonable and supportable information covering those claims would be having Ashes Perkins Coie Risk Advisory supporting your business!

Elena Lambros
[Laughs] It is!

Dan Brown
Well, look, I feel like I'm convinced that this isn't just a distraction.

It's really important to have a clear framework around this. It's important to bring consistency across reporting, particularly when there is a lot at stake. Not just for the future of our planet, but also for people that are investing in these companies or choosing to do business with these companies – they want to be really clear on the claims that they're making around the decarbonisation.
I think that that's a fair assessment, right?

Elena Lambros
Yes I think it's an absolutely fair assessment. There is a lot of work to get it right the first time and just kind of change your thinking and the way that you think about climate risk as an actual financial [issue]. But once you've kind of put it in place that first time round, I think you will start to see that strategy and capital flows are based off some of the decisions that you're putting into these disclosures. And that's a good thing.

Dan Brown
Yes it’s fascinating, right? I imagine even [as recently] as six months ago, you and I perhaps wouldn't have been saying that capital allocation is going to be impacted by the way that corporations are disclosing these things – but here it is now, clearly having an impact around how capital is allocated based on the reporting that's being required and the insights from those reports around the decarbonisation.

Elena Lambros
Yes, that's right.

Dan Brown
Thanks. Fascinating stuff.

Elena Lambros
It is. It's really interesting. I read a lot of them, so actually, they really are quite interesting to read! [Laughs]

Elena Lambros
Thank you for listening to this episode of ESG Matters by Ashurst Perkins Coie. If you enjoyed today's discussion, you can catch future episodes of Nearing Net Zero on video, via YouTube, or on audio wherever you get your podcasts.

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