Climate risk disclosure by Australia’s listed companies
Due to the foreseeable risk of climate change that companies face today, the Australian Securities and Investments Commission has conducted a surveillance project examining climate risk disclosure of companies in the ASX-300. ASIC’s report sets out findings and high-level recommendations for listed companies and their directors on climate risk disclosure.
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OVERVIEW
With the increasing challenges posed by climate change in Australia, directors and officers need to understand and continually reassess existing and emerging risks and opportunities that may affect their company’s business as well as disclose this information to investors to enable them to make fully informed decisions. In 2018, the Australian Securities and Investments Commission conducted a survey examining the level of climate risk disclosure by Australian listed companies. As the Corporations Act requires listed companies to disclose material business risk the purpose of the report was to understand the standard of climate risk disclosure being reported and provide some recommendations relating to the consideration of disclosing climate risk and opportunities.
The review comprised of a sample of climate risk disclosures:
- by 60 listed companies on the ASX 300
- in 25 recent initial public offerings (IPO) prospectuses
- across 15000 annual reports
Some selected findings from the survey include:
- 17% of listed companies in the sample identifies climate risk as a material risk in their operating and financial reviews (OFRs).
- General (as opposed to specific) risk disclosure is not useful for assessing climate risk exposures.
- The majority of ASX 100 listed companies in the sample had, to some extent, considered climate risk to the company’s business.
- There is limited climate-risk-related disclosure outside of the ASX 200
ASIC’s survey focused on whether climate risk is specifically identified as a material business risk in the operating and financial reviews amongst ASX-listed companies, key risk disclosures in the investment overviews of the prospectuses and the prevalence of express disclosures on climate change-related topics in listed company annual reports.
A significant volume of climate change and climate risk-related disclosure is provided by listed companies on a voluntary basis (beyond salutatory disclosures). These include disclosure under the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations, the Carbon Disclosure Project (CDP), and environmental, social and governance (ESG) sustainability policies.
Consequently, while companies do see climate change as a very real risk to business, ASIC found very fragmented and inconsistent climate risk disclosure across the respondents indicating many disclosures were too general and not comprehensive enough to be useful for investors. Furthermore, along with a generally low level of climate change content, ASIC found limited examples of companies explicitly citing and disclosing climate risk as a relevant risk factor. Disclosures were therefore insufficient to enable an investor to determine whether climate risk formed part of a companies’ broader risks and to what extent.
In spite of these findings disclosure practices in this area are still evolving, not only in Australia but also globally. ASIC recommends directors to not only consider climate risk but to also implement strong and effective corporate governance, comply with the law and disclose useful information to investors to help them develop their climate disclosure practices. Similarly, ASIC suggests directors consider the Task Force on Climate Related Financial Disclosure’s final report which serves as a useful reference for climate risk and its assessment, governance and management.
KEY INSIGHTS
- The increasing focus on climate action in recent years has prompted the need for directors to start understanding and assessing the relative impact of climate change on their companies' business.
- ASIC believes that, while climate change and its relative risks and opportunities may be uncertain and hard to define, Australian listed companies are obliged to provide useful and meaningful risk disclosure on all material business risks that may affect the companies business to enable investors to make fully informed decisions.
- The wide range of vehicles used to report climate risk disclosure and the varying forms that it takes has lead to fragmented and inconsistent disclosure throughout Australian listed companies. For investors and relevant stakeholders, this limits the utility of that information to be used as comparable data across industries and companies.
- Companies are not explicitly identifying climate change or risk as a material business risk that can affect the business, instead disclosures among Australian listed companies seem to be too general and not comprehensive enough. Specific disclosure is more useful than general disclosure.
- The majority of companies in the ASX 100 sample had considered climate risk in some manner (e.g. 40% of those companies explicitly identified climate change or climate risk as a material business risk in the OFR).
- Outside the ASX200 there is limited climate-risk-related disclosure. In a number of the sample cases, ASIC was unable to locate any express disclosure indicating that climate risk had been considered. Only 5% of listed companies identified climate change as a material business risk and only 10% provided disclosure through the CDP.
- From 2011-2017 the percentage of annual reports of all listed companies containing 'climate change content' has dropped by 8%.
- The Task Force on Climate-Related Disclosures (TCFD) Final Report of June 2017 sets out a framework for voluntary, consistent climate-related financial disclosures that would be useful for investors, lenders and the market generally. The Australian Government and ASIC recommend the use of the TCFD final report as an industry standard that Australian listed companies can follow in regards to climate risk disclosure.
- While the current standard of climate risk disclosure practices in Australia and globally is quite low, ASIC expects businesses to take on these recommendations and to see continuous improvement in these areas. Businesses that do not act now will not only face an increasingly hostile environment with regulatory risk and investor scrutiny; they may also fall behind their competitors and miss out on first-mover advantages in this space.
- ASIC's report highlights a significant amount of climate risk disclosure being provided on a voluntary basis, using various frameworks and standards. However, the lack of regulatory guidance and statutory law surrounding how Australian listed companies can define and disclose climate change risks and opportunities was noted as a reason for fragmentation and lack of consistency in these disclosures.
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“Australia’s changing climate represents a significant challenge to individuals, communities, governments, businesses, industry and the environment. Australia has already experienced increases in average temperatures over the past 60 years, with more frequent hot weather, fewer colder days, shifting rainfall patterns and rising sea levels. More of the same is expected in the future.”
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