On September 20, the Australian Securities & Investments Committee (“ASIC”) released Report 593 Climate risk disclosure by Australia’s listed companies, which examined climate risk disclosure by 60 listed companies in the ASX300, in 25 recent IPO prospectuses and across 15,000 annual reports. Ultimately, the report found that of the 60 listed companies examined, only 17% identified climate risk as material to their business. Moreover, even in those limited instances where companies were providing such disclosure, ASIC’s overall assessment of current disclosure practices were that they are “far too general” and “of limited use to investors.” Accordingly, ASIC has encouraged listed companies and their directors and advisors to:
- Adopt a probative and practice approach to emerging risks, including climate risk;
- Develop and maintain strong and effective corporate governance which helps in identifying, assessing and managing risk;
- Consider how best to comply with the law where it requires disclosure of material risks; and
- Disclose meaningful and useful climate risk related information to investors—the voluntary framework developed by the Taskforce on Climate-related Financial Disclosures (“TCFD”) can assist in this regard.
The report was part of a larger shift towards broad adoption of climate-reporting in recent years, encouraged by the Australian government and by shareholders. This has coincided with a global push towards ensuring that companies are recognizing and reporting on the risks faced on account of the physical impacts of climate change as well as the regulations attendant with countries’ commitments under the Paris Climate Accord to reduce their GHG emissions.
As the risks to companies associated with climate change have become more fully realized as a result of severe weather events and more aggressive regulations aimed at curbing GHG emissions, reporting frameworks have been developed in order to allow investors to better understand how companies are managing these risks. The most prominent of these reporting frameworks is that of the TCFD.
The TCFD was established by the Financial Stability Board’s Chair and the Governor of the Bank of England, Mark Carney, in 2015. The TCFD’s recommendations, the final version of which were published June 2017, are structured around four core elements of how organizations operate, including governance, strategy, risk management, and metrics and targets. For each category, the TCFD recommends disclosures to help investors and others to understand how reporting organizations assess climate-related risks and opportunities. Further, the TCFD has provided guidance to support organizations in developing climate-related financial disclosures in line with the recommendations, while supplemental guidance is provided for certain sector-specific considerations.
The TCFD recommendations have been widely embraced; as of August 2018, over 390 organizations (including Glass Lewis) have expressed their support for the TCFD. However, despite large strides in investors’ understanding of climate change-related risks and the establishment of decision-useful frameworks for the disclosure of climate risk-related information, companies have been slow to disclose such information in a meaningful way.
Report 593 was compiled in response to the Australian government’s Carbon Risk: A Burning Issue, released in March 2018, which includes its responses to recommendations from the Senate Economics Reference Committee. The government ‘agreed in principle’ to two recommendations: (i) for ASIC to review its guidance to directors to ensure that it provides a proper understanding of the manifestations of carbon risk, and reflects evolving asset measurement implications of carbon risk; and (ii) that the Australian Stock Exchange provide guidance regarding the circumstances in which a listed entity’s exposure to carbon risk requires disclosure under Recommendation 7.4 of the Australian Stock Exchange Corporate Governance Principles and Recommendations. However, recommendations that (i) the government nominate a single government entity to have primary responsibility for coordinating the response to the TCFD recommendations; and (ii) that the government commit to implementing the TCFD recommendations where appropriate, and undertaking the necessary law reform to give them effect, were only ‘noted’ by the government. While the government encouraged “all stakeholders to carefully consider the recommendations,” it did not consider further law reform was required. As such, it does not appear that mandatory reporting will be required by the government. However, it is important to note that the timing of this report comes at a time of national uncertainty concerning climate regulations; the recent ousting of Malcolm Turnbull as Prime Minister was due in part to his proposed National Energy Guarantee (“NEG”), which embedded emissions reduction targets in line with the Paris Agreement.
In a similarly turbulent regulatory environment, a proposal has been made in the United States, which ultimately withdrew from the Paris Agreement following the election of Donald Trump. On September 17, Senator Elizabeth Warren introduced the Climate Risk Disclosure Act of 2018, a bill that would instruct the SEC to issue rules requiring companies to report on their climate-related risks. Specifically, the bill would require industry-specific disclosure of:
- Companies’ direct and indirect greenhouse gas emissions;
- The total amount of fossil-fuel-related assets that they own or manage;
- How companies’ valuation would be affected if climate change continues at its current pace or if policymakers successfully restrict greenhouse gas emissions to meet the Paris Climate Accord’s goal; and
- Companies’ risk management strategies related to the physical and transition risks posed by climate change.
Although Senator Warren’s bill does not specifically call for reporting to the TCFD recommendations, the reporting requested in the bill does generally align with portions of the framework.
These moves toward greater disclosure of climate-related risks come at a time when, on a global basis, investors are requesting that companies report against the framework. For example, one of the goals of the Climate Action 100+ (an investor-led initiative to engage systematically important GHG emitters) is to ensure that targeted companies enhanced corporate disclosure in line with the TCFD recommendations. Additionally, in Australia, in 2017 and 2018, both Origin Energy and QBE Insurance Group Ltd received shareholder proposals requesting reporting in accordance with the TCFD recommendations. Similarly, Topdanmark A/S (a Danish insurance company) and the Laurentian Bank of Canada received shareholder proposals requesting that it report against the recommendations at their 2017 and 2018 annual meetings, respectively.
It is currently unclear what impact the Australian and U.S. moves toward enhanced climate reporting will ultimately have on the general state of climate risk reporting. However, it appears that with political leadership on the issue in question, investor demands for enhanced climate risk reporting are only getting firmer, and louder. Accordingly, companies should expect to be held to continuously higher standards concerning their evaluation of and reporting on climate change-related risks.
Andrew Vasey contributed to this report. Andrew is Manager, Australia Research. Courteney is Director, ESG Research.