Heating up on Climate Change Disclosures

Climate change disclosures are inconsistent, incomparable and of poor quality. Is more regulation the answer for the Australian government?

Last month the Australian Senate Economics References Committee released a report Carbon risk: a burning issue. The report recommends that the government commit to implementing the recommendations of the Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosures where appropriate, and undertake the necessary law reform to give them effect. It is also recommends that 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 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 that investors cannot be fully informed about climate change impacts of a business without enhanced and meaningful disclosures.

“Given climate risk is an [sic] 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.

Blackrock also notes the preliminary report of the FSB Task Force on Climate-related Financial Disclosures issued in December 2016, indicating that this guidance provides a relevant roadmap for companies.

Who 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 requested to look into these area by the G20 (Group of 20) Finance Ministers and Central Bank Governors in April 2015. G20 have 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 that 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 by the Taskforce?

The Taskforce preliminary report, issued 14 December 2016, identifies the main climate-related risks and opportunities that organisations should consider and sets out the recommendations for helping businesses disclose climate-related financial risks and opportunities within the context of their existing disclosure requirements.

The Task Force noted that whilst 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…”, says the Taskforce.

The report identifies the main climate-related risks and opportunities that should be considered as affecting an organisations’ revenues and expenditures, estimates of future cash flows as well as assets and liabilities. These are summarised below:

The recommendations are expressed around four thematic areas that represent core elements of how organisations operate. For each of the recommendations, recommended disclosures have been produced and guidance produced that is relevant for all organisations across sectors and jurisdictions. The key recommendations are reproduced below:

The Task Force indicates that such disclosures should be timely (at least annually) and they should be incorporated into mainstream financial filings. It was noted that in most G20 jurisdictions, public companies have a legal obligation to disclose material risks in their financial filings, which include material climate-related risks.

Existing Australian’s 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 Regulatory Guide 247, indicates that 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’. In this case, a listed entity should disclose whether it has any material exposure to economic, environmental and social sustainability risks and how they intend to manage those risks.

In conclusion

The Taskforce draft 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. The final recommendations will be released in July 2017.

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.

Access the full Taskforce draft recommendations here:
https://www.fsb-tcfd.org/publications/recommendations-report/

Access the Senate Economics References Committee report here:
http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Carbonriskdisclosure45/Report

Access the Blackrock engagement priorities for 2017/18
https://www.blackrock.com/corporate/en-us/about-us/investment-stewardship/engagement-priorities