Revised ASX Corporate Governance Principles increase focus on climate change, environmental and social risks

by Carol Adams

Main points:

  • The ASX has released revised Corporate Governance Principles
  • The term ‘social licence to operate’ has gone following consultation feedback
  • Climate change and sustainability risks gain prominence
  • Reference made to TCFD, GRI, CDSB and IIRC disclosures / Frameworks
  • Importance of stakeholders to long term value creation is emphasised

The Australian Securities Exchange (ASX) has just released its revised Corporate Governance Principles with key changes to address gender diversity, climate change and other social and environmental risks.  It is one of a growing number of quasi-regulatory initiatives from around the world covered on this site to recognise the significantly changed and changing risk and opportunity context for business and investors as a result of sustainable development megaforces.

In my response to the consultation last year I provided examples of the lack of awareness of climate change and other sustainable development issues amongst Board Directors and argued that climate change and sustainability risks should be on Board skills matrices.  I also argued that the disclosure recommendations were inadequate and, although I welcomed the specific reference to the IIRC, GRI and CDSB Frameworks, I argued that the TCFD recommendations should be mandatory and took issue with the use of the term ‘social licence to operate’ to guide disclosures.

In the final version of the updated Principles the reference to the TCFD was added and the term ‘social licence to operate’ dropped and replaced with reference to ‘reputation’ and ‘standing in the community’. The ASX’s response to the consultation noted that ‘social licence to operate’ was “unquestionably the most polarising issue” (p4) although:


Almost all investor groups, accounting firms and standard setters supported the concept… and wider stakeholder accountability.

But it noted that the opposition was concerned about the vagueness of the term and that its meaning would change over time.  Indeed, my concern was that companies would carry on the practice of not considering future generations and long-term risks to sustainable development and economic prosperity.  In response, Principle 7.4 dealing with disclosure now states:

How an entity manages environmental and social risks can affect its ability to create long-term value… Accordingly investors are calling for greater transparency on the environmental and social risks faced by listed entities…

Climate change risks get a particular mention with physical risks such as water availability and food security identified as well as policy, legal, technology, market and reputation risks associated with the transition to a low-carbon economy.

Whilst sustainability and climate change skills were not recommended for inclusion on the Board skills matrix, a new provision recommends that Boards satisfy themselves that their risk management framework adequately deals with emerging risks and specifically sustainability and climate change risks (Principle 7.2).

Various Commissions and Enquiries have eroded trust in Australian businesses of late and culture and values have been given prominence in the revision.  The statement of values should reflect the expectation that companies act lawfully, ethically and responsibly. Recognising the importance of stakeholder to long term value creation Principle 3.1 now states the need for an entity to:

…protect its reputation and standing in the community with key stakeholders

The changes largely mirror those raised in the UK FRC’s corporate governance code consultation early last year – although the focus on diversity there included ethnic diversity.  Hopefully the consideration of climate change and sustainability risks and opportunities in these British and Australian developments will be reflected in corporate governance policies around the world.

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