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Australian companies need to improve sustainability reporting

Three quarters of Australia's top listed companies are still not making clear and comprehensive disclosures about how they ensure the credibility of their unaudited reporting, two years after new ASX guidelines came into effect.

Whether it be the unaudited information at the front of an annual report, or information in a separate integrated or sustainability report, investors are not being adequately informed about how companies ensure the integrity of the growing volume of unaudited disclosures.

A report from Deakin University's Integrated Reporting Centre analyses how ASX300 companies have responded to Corporate Governance Recommendation 4.3 since it was introduced to ensure the integrity of company reports other than audited financial statements.

The paper follows initial findings released last year, which showed significant room for improvement, and new data from 2021/22 highlights that very little has changed in the second reporting year.

The risk of greenwashing

Professor Peter Carey, one of the lead authors of the Deakin report, said this was particularly concerning given the increasing push for companies to adopt broader reporting initiatives beyond strict financials, many focused on driving sustainability.

'One hopes that the information being reported in these areas is credible, but we know as ASIC has recently identified that there's a lot of greenwashing going on,' Professor Carey said.

'This week the International Sustainability Standards Board issued two new sustainability disclosure standards, which are likely to be adopted in Australia, with the Treasury subsequently releasing its Climate-Related Financial Disclosure Consultation Paper stating that Australian requirements should be aligned with international practices.'

'Recommendation 4.3 is an important way the ASX can ensure disclosures like these are credible. But what our research shows is that most companies aren’t following the recommendation as intended. Most companies are providing either boilerplate disclosures or vague disclosures which are not particularly informative for investor decisions,' explained Professor Carey.

Recommendation 4.3 says a listed company should disclose its process to verify the integrity of any periodic corporate report released to the market that is not audited or externally reviewed. But in the 2021/22 financial year, 35% of the ASX300 provided no entity specific disclosure and 38% provided limited disclosure.

Only 27% provided what were rated as clear and comprehensive descriptions of the processes they used to ensure the integrity of other periodic corporate reports. Up just one percent on the previous year.

Better business reporting

Better business reporting

Most companies are still not meeting business, two years after they came into effect. Important recommendations are being made to ensure Australian companies are aligned with international best-practice and reporting standards.

Australia taking a 'backward step' on reporting

'Nothing has changed, and that’s a problem,' Professor Carey said. 'Our report last year showed there was significant room for improvement. There has been none.'

'In fact, we have taken a backward step as the international corporate reporting environment is evolving rapidly through the recent issuing of standards by the International Sustainability Standards Board and the increasing momentum for the adoption of integrated reporting.'

'Take-up concerning Recommendation 4.3 is likely slow because companies perceive informative disclosures as optional and prefer to report on as little as possible. The poor quality of disclosure suggests directors are not taking their responsibility seriously.'

'If a company provides a vague or uninformative explanation as to how they ensure the integrity of their unaudited disclosures, there don’t appear to be any consequences. There is no one is checking, and the outcome is we have a capital market that is not properly informed. There needs to be more monitoring and a call out of companies that aren’t following the guidelines.'

Deakin University Chancellor John Stanhope AM, chair of the Deakin Integrated Reporting Centre’s advisory board, said the report highlighted important recommendations for the sector, especially with integrated reporting adoption likely to become more widespread under the IFRS Foundation’s direction and more sustainability reporting requirements coming down the line.

'It’s critical that Australian integrated reporting, sustainability disclosure and assurance requirements are aligned with international best-practice and viewed with credibility,' Mr Stanhope said.

'The ASX must strengthen Recommendation 4.3, particularly in relation to integrated reports including disclosures under the new sustainability disclosure standards, to further propel the journey towards better business reporting.'

Key recommendations

  • The ASX Corporate Governance Council modify Recommendation 4.3 in the upcoming 5th edition and provide greater direction to companies on the disclosure of integrity-enhancing mechanisms including:
    • the identification of all periodic corporate reports subject to Recommendation 4.3
    • formal acknowledgement of board involvement in the review process and confirmation of the board’s responsibility for the integrity of disclosures
    • clear direction that disclosure should be comprehensive and entity specific.
  • The ASX strengthen its monitoring process regarding these disclosures.

This article was published by Deakin University. Read the original article here.