When climate ambitions start to look a bit too lofty…

ESG

11 Oct 2023 Insight Australia

Article - By Carolyn Pugsley, Lauren Selby and Suzannah Hewson

Companies are continuing to respond to the increasing expectations of investors and other stakeholders to articulate how they plan to contribute to national and international decarbonisation ambitions. The number of companies having published climate targets continues to grow, and for many companies, climate has become a core strategic issue.

Much has been written about the need for reasonable grounds in setting targets, and how important the selection of language is when specifying a forward-looking ambition related to climate and the net-zero transition.

As time progresses and we start to get better line of sight around the shifts in government policy settings, and pace of technology advancement and infrastructure investment, we are engaging in discussions with clients about what to do when progress against targets is not tracking as expected or questions start to emerge about whether sticking to the articulated targets continues to be an optimal strategy for the company.

Updating the market – how to report progress (or lack thereof)?

Companies that have been setting and operationalising climate targets for some time now are beginning to grapple with how, and when, to update the market if internal expectations about meeting these targets are changing.

This challenge will become more evident under the proposed new climate reporting regime, where companies will be required to comprehensively update the market on business strategy, financial performance, metrics and targets annually and be expected to keep the market informed in the interim period. However, to the extent that the information has the potential to mislead or deceive, or for publicly listed companies is materially price sensitive, the obligation to update the market already exists under the current regulatory framework.

Whether a listed company’s headline climate targets will be materially price sensitive will depend on a number of factors, including the importance placed on them by the market and how central they are to the company’s business strategy. If the climate targets are materially price sensitive, the obligation to disclose a change in internal expectations is immediate (absent a Listing Rule exception applying) and there is no scope to just ‘wait’ for the next periodic report or scheduled announcement. If the statements are not materially price sensitive, there will still be an obligation to correct the statements if they have become stale and could mislead the market. However, for non-price sensitive statements, you may be able to update the market at the next logical opportunity (such as the AGM or next periodic report).

We set out below our top tips for navigating climate-related market updates:

Top tips

Keep track of your forward-looking statements around climate

It will be important to differentiate between statements that could mislead and deceive the market if they become stale and, for a listed company, those that could have standalone materiality. All significant forward-looking statements will need to be monitored – but in practice, only a few will fall within the ‘standalone materiality’ category.

Be guided by business strategy and reputation

Companies are clearly facing increased stakeholder scrutiny in relation to climate transition. While listed companies are well-versed in assessing the materiality of issues with near-term financial or reputational impacts, the potential market response to variations from climate-related targets can be trickier to gauge where the financial impacts are unlikely to be seen for many years. It will be important to stay attuned to market sentiment and investor expectations around how the company is managing its transition, as this will help guide the potential qualitative impact of a pivot in approach and/or targets.

Periodically re-test reasonable basis

The reasonable basis for forward-looking strategies and targets will undergo significant analysis at the time of publication. However, it will be important to periodically re-test the reasonable basis analysis, and consider the events or other types of changes that should trigger a re-assessment so that you can promptly respond when they arise. For headline targets, ambitions and strategy statements, best practice will be to put in place periodic reassessments of the reasonable basis for these statements that are more frequent than the annual reporting regime would otherwise prompt.

Consider scope to rely on existing exceptions to disclosure

Climate-related information is often unsettled and uncertain. This may mean that the information can be exempt from disclosure for listed companies under Listing Rule 3.1A – for example: Is the information insufficiently definite? Does it relate to an incomplete proposal? Is it still confidential information? Of course, if you become aware of a change in circumstances, you cannot bury your head in the sand and ignore the indicators that might suggest that the targets are becoming unachievable or inappropriate. However, you should have the benefit of time to carefully work through the analysis so long as you are carefully monitoring the early warning signs and maintaining confidentiality through the review process.

Remember that transparency is key

In the context of regulatory and activist attention on ‘greenwashing’ / overstated environmental benefits, we encourage companies to be quick to update the market of any backwards steps or missteps in their transition journey. It is broadly understood (even by ASIC) that the transition will not necessarily be a linear trajectory, and market updates can reduce the risk of any earnings surprises or market disclosures made ‘too late’. Messaging these issues in periodic disclosures may be a helpful way of bringing the market on the journey.

Key contacts

Carolyn Pugsley

Partner, Melbourne

Lauren Selby

Partner, Sydney

Timothy Stutt