In recent months the UK and NZ governments have announced regimes for mandatory climate-related financial disclosures, with the Biden administration expected to follow suit this year in the US. These international developments are likely to be instructive for both Australian regulators and Australian companies grappling with climate risk disclosures, especially those with international operations.

    New UK rules pave way to mandatory climate risk disclosures

    In November last year, the UK’s Financial Conduct Authority (FCA) announced new climate risk reporting rules for the UK’s ‘premium listed companies’ (those companies that comply with the highest standards of regulation and corporate governance). Under the new rules, companies will be required to make better disclosures about how climate risks affect their business under the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). In essence, the TCFD’s aim is to promote reliable and consistent disclosures by companies facing risks related to climate so that market participants will be better prepared to evaluate and manage risks and opportunities.

    Initially, the new UK rules will be on a “comply or explain” basis, requiring companies to include a statement in their annual financial report which sets out whether their disclosures are consistent with TCFD, and to provide an explanation where they have not done so. The FCA has said it will consider shifting to mandatory TCFD disclosure in the future. The rules apply to accounting periods beginning on or after 1 January 2021.

    The rules are accompanied by guidance to help listed companies determine whether their disclosures are consistent with TCFD recommendations. The FCA specifies that this should be informed by a detailed assessment of the company’s disclosures which takes into account certain specified TCFD materials.

    The FCA has also announced that it aims to bring in TCFD reporting obligations for asset managers, life insurers and pension providers in 2022, and will look to bring in disclosure requirements for private companies.

    Along with other regulatory measures, these announcements pave the way for the UK government to deliver on its stated ambition for the UK to be the first country in the world to make TCFD disclosures mandatory across the economy by 2025.

    Other international developments

    In September last year, New Zealand became the first country in the world to announce that it will make TCFD climate risk reporting mandatory for banks and major asset managers and insurers from 2023, capturing around 200 large financial institutions in total. Like the UK, the reporting standard is to be developed in line with TCFD recommendations. While the disclosure requirements will not directly apply to non-financial corporates, it is expected to put pressure on them to increase their disclosures so that their financial sector shareholders can meet their obligations.

    In the US, President Biden has pledged that he will “require public companies to disclose climate risks and the greenhouse gas emissions in their operations and supply chains”. Although it is unclear how the Biden administration will implement mandatory climate change disclosures, experts anticipate that the SEC will be directed to make climate disclosure mandatory for public companies.

    Late last year, Hong Kong financial regulators also announced that financial institutions and listed companies will have to disclose the financial impact of climate change on their businesses by 2025 (with some sectors required to comply earlier). Like the UK and NZ, Hong Kong companies will need to share information in line with TCFD recommendations.

    What are the TCFD reporting recommendations?

    In 2015 the Financial Stability Board (FSB, an international body that monitors and makes recommendations about the global financial system) established the TCFD with the goal of developing a set of voluntary disclosure recommendations for use by companies in providing decision-useful information to investors, lenders and insurance underwriters about the climate-related financial risks that companies face.

    The TCFD issued its final report in 2017, setting out 11 recommended disclosures to help companies produce information that is useful for investors, including general and sector-specific guidance on implementation. The TCFD recommendations are now widely considered international best practice for climate-related financial reporting and are already being used in Australia by 58% of ASX100 companies (up from just 16% three years ago) . Around 60 of the world’s 100 largest public companies either support the TCFD, report in line with the TCFD recommendations, or both.

    Will the TCFD become the global standard?

    Relatedly, the International Financial Reporting Standards Foundation (IFRS Foundation) has recently consulted on a global set of internationally recognised sustainability reporting requirements, supporting comparability and consistency. The AICD responded to the consultation and considers the establishment of a Sustainability Standards Board (SSB), drawing on existing international governance and frameworks, a positive development in order to consolidate the disparate frameworks and bodies.

    If the SSB is to be initially climate focussed, as seems likely, the AICD is of the view that it should look to adopt the TCFD recommendations, given the degree of market and regulatory acceptance globally. Importantly, entities that have already gone to significant effort to report against TCFD should not be required to commence that work again under a new standard. International regulators and organisations have also supported the IFRS Foundation’s proposals.

    What have Australian regulators said about climate risk reporting?

    While Australia is yet to mandate specific climate risk reporting, regulators including APRA and ASIC have increased their focus on climate-change risks. APRA expects financial institutions to report on the risks under existing prudential rules and has endorsed the use of the TCFD framework.

    ASIC has highlighted climate-related risk as a systemic risk in the Australian market and, like the ASX Corporate Governance Principles and APRA, recommended the TCFD framework to listed companies.

    Although these measures may encourage listed Australian companies to report and disclose meaningful climate risk disclosures, practice suggests Australian companies are not doing so. A 2018 review of climate change disclosures by ASIC found that there were fragmented disclosure practices. Law firm MinterEllison’s analysis of FY19 annual reports indicates that only 21 (seven per cent) of ASX 300 companies had “meaningful” climate change risk disclosures, and 137 (45.5 per cent) of reports containing little or none.

    MinterEllison’s assessment notes that the companies doing “exemplary work on disclosing climate change risk are, in the main, larger organisations, with 17 of the 21 companies that had meaningful disclosure in the ASX 100 – leaving just four mid- to small-cap companies (that rank between 200 and 300 on the ASX) having provided meaningful climate risk disclosure.”

    In 2020 ASIC undertook a further surveillance of climate risk disclosure by listed companies with the results yet to be released. It is unclear whether the Commonwealth government will look to mandate climate risk disclosures. Notably, while the Commonwealth government welcomed the TCFD recommendations in 2018 it did not consider law reform to mandate reporting was necessary. Undoubtedly, the Commonwealth government, ASIC and others will be following international developments closely as climate change risk continues to be a priority for institutional investors, activist investors and the wider community.

    The AICD intends to release a resource to assist directors with climate governance later this year.

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