Insight: Heating up climate change disclosures

Tuesday, 01 August 2017

Kerry Hicks photo
Kerry Hicks
Senior Policy Advisor, Australian Institute of Company Directors

    Kerry Hicks from the AICD Governance Leadership Centre explores the Financial Stability Board’s recommendations on responding to climate change.

    In April 2017, the Australian Senate Economics References Committee released a report Carbon risk: a burning issue. The report recommends the government commit to implementing the recommendations of the Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosures (the Taskforce) where appropriate, and undertake the necessary law reform to give them effect.

    It also recommends further guidance is provided in relation to meeting the existing requirements contained in both the Corporations Act 2001 and the Australian Stock Exchange (ASX) Corporate Governance Council’s Corporate Governance Principles and Recommendations. The federal government response to this report has not yet been issued. In March, Blackrock, the world’s largest asset-manager, issued its engagement priorities for the year ahead.

    Included in its list of five engagement priority areas is the disclosure of climate risks on the basis investors cannot be fully informed about climate change impacts of a business without enhanced and meaningful disclosures.

    “Given climate risk is a universal issue, we believe disclosure standards should be developed that are applicable to listed companies across each market and, ideally, that are globally consistent,” says Blackrock.

    It also notes the work of the FSB Taskforce on climate-related financial disclosures, indicating that this guidance provides a relevant roadmap for companies. What is the FSB Taskforce?

    The Taskforce was established in December 2015 by the FSB. It is an industry-led partnership of users and preparers of financial reports. Its objective is to design a set of recommendations for consistent disclosures that will help financial market participants understand climate-related risks.

    The FSB was asked to look into these areas by the Group of 20 (G20) finance ministers and central bank governors in April 2015. G20 has concerns about financial stability, since inadequate information about risks can lead to asset mispricing, misallocation of capital and potentially result in abrupt market corrections.

    The FSB emphasised any disclosure recommendations of the Taskforce would be voluntary, would need to incorporate the principle of materiality and would need to weigh the balances of costs and benefits.

    What has been produced?

    The Taskforce presented their final report on 29 June 2017 which sets out recommendations for helping businesses disclose climate-related financial disclosures.

    The key features of the recommendations are as follows:

    • Adoptable by all organisations.
    • Included in mainstream annual financial filings.
    • Designed to solicit decision-useful, forward looking information on financial impacts.
    • Strong focus on risks and opportunities related to transition to lower-carbon economy.

    The Taskforce noted that, while several climate-related disclosure standards have been developing across different jurisdictions, there is a notable lack of information on financial implications around the climate-related aspects of an organisation’s business.

    Investors’ decision making is hindered through lack of consistency and comparable disclosures. “Users also cite inconsistencies in disclosure practices, a lack of context for information, use of boilerplate, and non-comparable reporting as major obstacles,” the Taskforce says.

    The report identifies the main climate-related risks and opportunities (refer Figure 1) that should be considered as affecting an organisation’s revenues and expenditures, estimates of future cash flows as well as assets and liabilities.

    The recommendations are expressed around four thematic areas that represent core elements of how organisations operate (refer Figure 2). For each of the recommendations, recommended disclosures have been produced and guidance produced that is relevant for all organisations across sectors and jurisdictions.

    To underpin its recommendations and help guide current and future developments, the Task-Force developed seven principles for effective disclosure, designed to achieve high quality and decision-useful disclosures. These principle include disclosures that are:

    • Relevant
    • Specific and complete
    • Clear, balanced and understandable
    • Consistent
    • Comparable
    • Reliable, verifiable and objective
    • Timely

    Existing Australian requirements in annual reports

    In Australia, the Corporations Act 2001 contains general disclosure provisions for the disclosure of carbon risks within the directors’ report contained in Section 299(1). Further, listed companies are required by Section 299A(1) to produce an operating and financial review (OFR).

    Guidance on this, in the form of ASIC’s Regulatory Guide 247, indicates an OFR should include a discussion of environmental and other sustainability risks where those risks could affect an entity’s achievement of its financial performance or outcomes disclosed.

    Listed entities are also required to comply with Principle 7 of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations in the form of ‘if not why not’. Which means if they do not disclose they have to say why not. In this case, a listed entity should disclose whether it has any material exposure to economic, environmental and social sustainability risks and how it intends to manage those risks.

    The taskforce recommendations are a significant moment in understanding and managing the implications of climate change. They seek to strike a balance between accessibility and ambition, and are both high level but detailed enough to provoke genuinely useful disclosures.

    In Australia, the Senate Committee considers that legislative reform should give effect to implementing the taskforce recommendations. Time will tell as to whether the government supports and implements such recommendations. In any event, the investor community is seeking more information on climate related disclosures, and the FSB taskforce recommendations provide corporates with a good starting place to determining what is relevant.

    Figure 1

    Example climate-related risks Example potential financial impacts
    Transition risks, include:
    • Policy and legal risks
    • Technology risk
    • Market risk
    • Reputation risk
    • Fines and judgments
    • Write-offs and early retirement of existing assets
    • Changing revenue mix and sources
    • Impacts on workforce management and planning
    Physical risks, can be:
    • Acute
    • Chronic
    • Reduction or disruption in production capacity
    • Increased operating and capital costs
    Example climate-related opportunities Example potential financial impacts
    Resource efficiency
    • Reduced operational costs
    • Increased employee satisfaction
    Energy source Reduced exposure to future fossil fuel price increases
    Products and services Increased revenue through new solutions to adaptation needs
    Markets Increased diversification (eg green bonds)
    Resilience Increased reliability of supply chain and ability to operate under various conditions

    Figure 2

    Themes Recommendations
    Governance Disclose the organisation’s governance around climate-related risks and opportunities.
    Strategy Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning where such information is material.
    Risk Management Disclose how the organisation identifies, assesses and manages climate-related risks.
    Metrics and Targets Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.

    About the Governance Leadership Centre

    The Governance Leadership Centre is the AICD’s governance think-tank, exploring over-the-horizon issues in governance. Each month the GLC publishes new insights and research. 

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