Best practice standards for ESG considerations—both here and internationally—are constantly evolving. The content in this document is therefore only a guide and should be read alongside legislative and regulatory developments, as well as changing stakeholder expectations regarding corporate governance.
The current Australian legal and regulatory landscape in relation to company directors includes:
- Directors' duties: in addition to fiduciary duties, company directors have a range of statutory duties under the Corporations Act. These include the duty to exercise reasonable care and diligence, and the duty to act in good faith in the best interests of the corporation and for a proper purpose. The consequences of breaching directors' duties can be severe, with both civil and criminal penalties potentially applicable. Directors may also be personally liable for any loss or damage caused by a breach of their duties.
- Directors' obligations under Corporations Act / Modern Slavery legislation to sign off on ESG disclosures.
- ASX Listing Rules: the ASX Listing Rules are a set of regulations governing the admission of securities to listing on the ASX, as well as the ongoing obligations of listed entities. They cover a wide range of areas, including continuous disclosure obligations and aspects of a listed entities conduct. The purpose of the ASX Listing Rules is to ensure the market operates in a fair, orderly and transparent manner, providing investors with sufficient information to make informed investment decisions.
- ASX Principles: ASX-listed entities are also required to report, on an annual basis, the extent to which they have followed the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations (the ASX Principles) and, if the ASX Principles are not complied with, to give reasons for not doing so (ie an 'if not, why not' approach). While the ASX Principles apply directly to ASX-listed entities, they are often seen as a benchmark for governance standards in the wider Australian corporate landscape.
Governance checklist
Directors should ensure their organisations have appropriate governance arrangements in place to support a consistent and integrated approach to ESG matters. We recommend boards consider the following:
- The board is able to evidence its ongoing oversight of key ESG risks (whether or not they are material risks). The board should retain ultimate responsibility and accountability for ensuring the company's long-term resilience in the face of such risks.
- The board composition is sufficiently diverse in knowledge, skills, experience and background to debate and make decisions informed by ESG risks and opportunities. The board's competencies with respect to managing ESG risks have been properly assessed (eg by conducting performance reviews or internal evaluations) and the criteria used to assess competencies and/or measures used to enhance competencies are properly documented.
- ESG considerations are embedded into board and committee structures. There is evidence of understanding, and the opportunity to discuss, ESG risks at board and sub-committee levels, which might include appropriate board training.
- There is evidence that the board has set clear roles and responsibilities for senior management in managing ESG risks and implementing relevant commitments, and holds management to account—eg ensuring management regularly reviews the effectiveness of key frameworks, policies and tools with respect to ESG risks, and makes appropriate revisions.
- Management of ESG risks is embedded within the company's broader risk management framework (including risk management policies and procedures) and strategic planning.
- There is evidence that the company's risk appetite framework incorporates the risk exposure limits and thresholds for ESG-related risks that the company is willing to bear.
- External expertise (eg from legal advisers, specialist consultants, academics and/or scientific bodies) is deployed where reasonably necessary to support the business to manage ESG risk, pursue opportunities and formulate and implement relevant commitments.
- The board has oversight over the company having regular exchanges and dialogues with peers, policymakers, regulators, investors and other stakeholders to encourage sharing of methodologies and to stay informed on current best practice in ESG matters.
- As regulating reform in relation to ESG issues continues to roll out, the board is satisfied the organisation has the necessary capabilities and resources available to it to achieve compliance.