10 minute read 1 Jun 2019
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Are you prepared for the increasing investor scrutiny on climate risk disclosures?

Matthew Bell
By Matthew Bell

EY UK&I Climate Change and Sustainability Services Leader

Climate change and sustainability leader. Engaging in purposeful change and creating long-term value for global organizations. Savvy in science and technology.

10 minute read 1 Jun 2019
Related topics Assurance Climate change and sustainability Climate-related reporting Nonfinancial reporting
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The Climate Risk Disclosure Barometer: Australia 2019 charts how Australian organisations align with the Task Force on Climate-related Financial Disclosures.

In June 2017, the TCFD, set up by the Financial Stability Board (FSB), finalised its recommendations on climate related financial risk disclosures (the Recommendations). The Recommendations aim to improve organisational understanding of climate risks and opportunities, and their potential impacts, and thus reduce the risk of a systemic financial shock to the economy.

The Climate Risk Disclosure Barometer: Australia 2019 report provides an annual snapshot on the alignment with the Recommendations across sectors in Australia likely to be highly impacted. This report is intended to provide companies, regulators, investors, and stakeholders of all types with an understanding of the current state of Australian climate risk reporting. It also offers insights into the differences in reporting across sectors, and suggests areas of improvement, in the quality and coverage of climate risk disclosures.

Research for this report assessed the extent to which companies had adopted the Recommendations based on publicly-available disclosures as at the end of March 2019. ASX200 companies and the 20 largest superannuation funds were filtered against sectors identified as most exposed to climate related risks.

  • TCFD recommendations

    The TCFD recommendations aim to improve an investors’ understanding of the impact of climate risks on different corporations and reduce the risk of a systemic financial shock on the economy due to climate change. The recommendations provide a reporting framework for climate risks that can be integrated with current financial reporting disclosures. They define climate impacts as:

    • Transition impacts which reflect the risks and opportunities associated with changes in the economy, including growth impacts, sector re-weighting and other macroeconomic factors.
    • Physical impacts which reflect the changes in the physical climate (e.g., altered rainfall amounts, intensities and timings) that may impact future business activities.

    The TCFD recommendations also provide specific guidance for certain higher-risk sectors such as banks, insurance companies, asset owners and managers in the financial sector and in other sectors such as energy, transportation and agriculture, food and forest products.

    The adoption of the TCFD recommendations are voluntary in most countries (although certain elements have been legislated in France). However, several national-level regulators and global investors have publicly supported the recommendations, and are driving early uptake on the disclosures. The increasing level of shareholder activism is driving companies operating in high-risk sectors to pay closer attention to their disclosures and familiarize themselves with the recommendations.

Climate change is a trend. The impact of a trend is ongoing, whereas a cycle is temporary… What if droughts are more frequent, or cyclones happen more often? The supply shock is no longer temporary but close to permanent. That situation is more challenging to assess and respond to.
Guy Debelle
Deputy Governor, Reserve Bank of Australia

Key trends and observations

  • As the urgency of climate change continues to be emphasised, businesses need to understand and respond to the impacts now

    In October 2018, the Intergovernmental Panel on Climate Change (IPCC)’s Special Report on global warming of 1.5°C outlined that global warming is likely to reach 1.5°C within the next 12-30 years. The report also highlighted that climate-related risk for natural and human systems are significant even at 1.5°C. Other forecasts have highlighted that the 1.5°C warming threshold could temporarily be exceeded within the next five years.

    Australia’s climate is characterised by variability and extremes. CSIRO’s State of the Climate 2018 report outlines that Australia can expect to experience: further increases in temperature, with more extremely hot days, an increase in fire risk, high-intensity storms, and intense heavy rainfall. Australia’s changing climate will be felt by businesses, affecting different parts of the economy, infrastructure, community and ecosystems. While the physical impacts of climate change are significant, businesses also need to understand the risks associated with transitioning to a low carbon economy. The risks of transitioning to a low carbon economy are currently viewed as more immediate risks to business. 

  • Australia’s financial regulators align backing disclosure of climate-related financial risk

    Australia’s main financial regulators have clarified their expectations that climate risk disclosures should be considered by Australian companies. In March 2019, the RBA completed the trifecta of Australian financial regulators promoting the disclosure of climate-related financial risk. The Council of Financial Regulators (CFR), comprising RBA, APRA and ASIC, has convened a working group to monitor regulatory developments in climate risk and promote efforts to improve risk management and disclosure.

    In December 2018, the Australian Accounting Standards Board (AASB) and Auditing and Assurance Standards Boards (AUASB) issued an advisory bulletin on the practicalities of disclosing the impact of climate-related risks that are material to financial statements. This included disclosing whether and how climate risks are reflected in the financial statements and if not, why not. The 2019 ASX Corporate Governance Principles and Recommendations, also included specific reference to climate risk and encourages entities to implement the Recommendations.

  • Companies should be prepared for climate questions and resolutions at Annual General Meetings

    In the past year there has been an increasing number of resolutions raised at Annual General Meetings requesting improved disclosure relating to climate risk and companies positions on climate change and energy issues. In 2018, a number of Australian companies faced this type of resolution including QBE Insurance Group, Origin Energy, Rio Tinto, Santos, and Whitehaven Coal.

  • Directors duties and increasing litigation risk

    An influential legal opinion prepared by Noel Hutley QC on Climate Change and Director Duties and commissioned by the Centre of Policy Development, concluded that Australian company directors “who fail to consider ‘climate change risks’ now could be found liable for breaching their duty of care and diligence in the future”. This has made company directors more aware of the potential personal liabilities of not addressing climate risk. In 2019 this conclusion was reiterated, reemphasising the need for directors to take affirmative action to understand, manage, and disclose climate risks.

  • The climate risk disclosures of Australia’s largest companies are amongst the world best. But we cannot be complacent: the global average is not good enough

    In 2018, for the first time, EY’s climate risk disclosures analysis was expanded to cover more than 500 companies in 18+ countries and regions. This included the assessment of Australia’s 30 largest listed entities. The Global Climate Risk Disclosure Barometer provides a global snapshot and allows comparisons across countries with varied regulatory drivers. This report dives deeper in to the Australian context for 175 of Australia’s largest listed companies. 

EY findings continue to expose the lack of depth in climate-related disclosures. There has been an incremental improvement compared to 2017, however there is room for improvement.

This is particularly evident in the area of strategy. Almost all sectors of the economy face major disruption from climate transition and climate impacts over the coming years. Yet the majority of companies are still not engaging seriously with these risks, or positioning themselves to take advantage of potential opportunities.

With investors paying increasing attention, this is likely to affect their reputation and valuation even before the impacts are fully realised. An example of this is Norges Banks’ recent divestment announcement, which only resulted in the divestment of oil and gas companies that had not integrated climate solutions, such as renewable energy, in to their strategy. This type of action causes a short-term valuation change based on the company’s strategic understanding of climate risks and opportunities.

Assessing climate-related risks and opportunities can be complex, and may require detailed analysis. However, disclosing information on climate change scenario planning not only addresses the TCFD recommendations, but also provides companies with new inputs into business strategy, and engages increasingly socially aware employees with the strategy, which in turn enhances internal capability and processes.

Climate-related risks (including physical, transition and litigation risk) present foreseeable risks of harm to Australian business. This requires prudent directors to take positive steps: to inform themselves, disclose the risks as part of financial reporting frameworks, and take such steps as they may see fit to take, with due regard to matters such as the gravity of the harm, the probability of the risk, and the burden and practicality of available steps in mitigation… Company directors who fail to consider climate change risks now could be found liable for breaching their duty of care and diligence in the future… A negligence allegation against a director who had ignored climate risks was likely to be only a matter of time.
Noel Hutley SC and Sebastian Hartford Davis
So where to start?

Disclosing climate-related risks likely requires changes to the governance and risk assessment processes (as per the TCFD recommendations). It may require several years for an organization to be in a position to generate valuable information for investors and shareholders to help them make informed decisions. The earlier your company embarks on this journey and provides a platform to help educate directors and management about climate risks, the better positioned your company will be to engage with investors and shareholders on the impacts and opportunities for your organization.

Companies that seek to understand their climate risks exposure can ask themselves the following questions:

  • What are the biggest emission sources in my value chain?
  • What are the incentives, instruments or indicators that can help me align my strategy with the 2°C road map (e.g., internal carbon price on CAPEX and OPEX, and company-specific targets)?
  • What are my stakeholders' expectations in terms of climate footprint and carbon performance (e.g., lead the development of low-carbon products and services, or disclose information required by investors)?
  • What type of climate risks is my business exposed to in the long run?
  • How will my products and services be affected by carbon policies and targets? What are the right anticipation and adaptation strategies?
  • Are the international climate policies and national commitments integrated into my business strategy, supply chain or sourcing strategy?
  • What is the potential exposure to new regulations (e.g. carbon taxationor carbon pricing)? What assets are at risk (e.g., supply chain, products or activites) and in which geographies?
  • Are some of my products or activites at risk regarding the 2°C road map? How can I turn this into a competitive advantage?

For full details of our findings, and a sectoral breakdown of climate-related reporting, please download our full report.

Summary

This year’s Australian barometer shows that on average Australian companies are amongst global leaders in terms of coverage of the TCFD Recommendation, but there is still a need for improvement if companies are to meet the growing expectations of stakeholders. 

About this article

Matthew Bell
By Matthew Bell

EY UK&I Climate Change and Sustainability Services Leader

Climate change and sustainability leader. Engaging in purposeful change and creating long-term value for global organizations. Savvy in science and technology.

Related topics Assurance Climate change and sustainability Climate-related reporting Nonfinancial reporting
Upvote