Governance issues
and ESG

Governance

While governance has always been a core area of focus for stakeholders, 2024 provided further examples of the adverse consequences that can flow for companies that don’t invest in strong corporate governance processes. In particular, 2024 demonstrated the importance of getting disclosure right, both in prospectus disclosure and through ongoing periodic and continuous disclosure.

Getting disclosure right

Listing on public markets comes with increased expectations regarding corporate governance from stakeholders, which goes hand in hand with more fulsome disclosures about business practices and compliance with the law, regulations and company policies. This means that your “business as usual” processes may have an additional layer of scrutiny – particularly if you have an unusual corporate structure or your post-listing BAU involves ongoing conflicts of interest or material transactions with key management personnel and related parties.

Prior to listing, it may be difficult to anticipate the importance of disclosure (including periodic and continuous disclosure) and the step change involved in transitioning from a private company to a listed company. Disclosure and shareholder engagement may be one of the most challenging aspects of being a listed company and the reporting footprint for many companies (listed and unlisted) is going to increase with the introduction of climate reporting.

2024 demonstrated that disclosure missteps, including at the time of listing, can come back years later to cause issues – not only can this be reputationally damaging, but also a significant distraction for management with the risk of regulatory investigations and shareholder class actions. The key takeaway? Getting your governance ducks in a row, before listing, is vital. Prior to listing, entities should go through a process of “maturing” governance structures and getting into the “groove” of their obligations as a listed company. Entities looking to list should review their obligations, market practice and seek advice about a governance structure that is fit for purpose and will add value to the business rather than simply being seen as ‘window dressing’ or a ‘tick the box’ exercise.

Companies, stapled entities, listed trusts … ASX has a spot for you

We continue to see a range of corporate structures being utilised by newly listed entities, which in turn come with more bespoke governance structures. Typically, the choice of corporate structure is driven by the commercial benefits, and the governance structure then needs to be ‘tailored to fit’ the chosen corporate structure. While the ASX Corporate Governance Council (ASX CGC) Corporate Governance Principles and Recommendations are drafted with a primary focus on a standard listed company structure, they contemplate adaptations to other structures such as listed trusts and various stapled structures. For listings involving registered schemes and/or multiple boards of directors, there may be a need to engage more closely with ASX and ASIC during the listing process and enhanced disclosure in some circumstances (i.e. more detailed disclosure in the prospectus to explain the division of responsibilities and how decision-making will work in practice).

Social

Setting the right tone on DEI

The ESG talking point of the moment is the ‘pushback’ against DEI initiatives, which has been brewing for a while but has reached fever pitch with President Donald Trump’s return to the White House. Closer to home, the ASX Corporate Governance Council has failed to achieve a broad consensus on the draft 5th edition of its Corporate Governance Principles and Recommendations (ASX CGC Recommendations) due to the divergence of views among its members. The 5th edition was expected to come into effect within the next 12 months, but instead the current 4th edition of the ASX CGC Recommendations will remain in effect without amendment. Key changes that had been proposed to the ASX CGC Recommendations in the 5th edition included diversity recommendations that extended beyond gender, an increased focus on stakeholders (not just shareholders), and enhanced disclosure regarding board skills and the process for determining skills on the board.

The 4th edition ASX CGC Recommendations still require ‘if not, why not’ reporting for any listed entity (as well as entities seeking listing in their IPO prospectus) against recommendations linked to gender diversity and inclusion, including requirements to have a diversity policy and to set measurable objectives for achieving gender diversity. With DEI commitments and initiatives facing resistance from stakeholders and segments of in the investment community, boards will need to think carefully about how they set and articulate their approach to DEI.

It seems futile to try and reconcile the views of stakeholders given the current divergence and heat in the debate. A better approach is to laser in on whether and how diversity, equity and inclusion supports and unlocks sustained financial performance, and focus the board’s policy and initiatives around those areas where a clear ‘best interests of the company’ can be articulated.

Environment

Climate reporting

2024 marked the passage of legislation which requires companies to report on their sustainability performance, metrics, targets, risks and opportunities against newly created climate accounting standards in a “Sustainability Report” each year. While this applies to both listed and non-listed entities, as with any reporting, we expect that there will be increased attention on listed companies.

Importantly, ASIC has released draft regulatory guidance which outlines how ASIC will enforce the new regime¹. Paragraphs 125 to 127 of the draft regulatory guidance outline ASIC’s view that where disclosure of climate related information is needed to comply with prospectus disclosure requirements, any such climate information should comply with the newly created climate accounting standards – which requires an entity to disclose information about climate related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long-term. ASIC has also indicated that issuers should include an overarching narrative and analysis explaining the significance of sustainability related information within the broader context of the strategy, business model and prospects of the company. This is in addition to existing ASIC guidance that companies should consider whether climate change should be included as a potential risk to an entity’s business and more broadly whether it is an external threat to the industry an entity operates within².

We expect that ESG will continue to be of core interest to Australian regulators. In our experience, regulators have paid particularly close attention to ESG related risks and opportunities throughout transaction processes. While there are certainly examples of some jurisdictions and companies rethinking their ESG commitments, we consider that Australian entities will not be exposed to a “relaxing” of ESG commitments, especially due to increased regulatory attention. As noted above, we expect Australian entities will realign and integrate their ESG commitments with the broader commercial strategies and focus on ESG matters which are core to their business.