Climate-related disclosures on governance horizon

Task Force for Climate-related Financial Disclosures (TCFD) provides recommendations that keep investors up to date on risks.

Australia’s largest companies are responding to market concerns about the effects of climate change through greater disclosure, target setting and adoption of reporting frameworks.

Almost half of ASX 200 companies disclosed a climate-related policy statement, according to the latest Australian Council of Superannuation Investors (ACSI) report on corporate sustainability reporting . And 112 companies reported their greenhouse gas (GHG) emissions.

About one in five companies reported greenhouse gas (GHG) emissions-reduction targets and 22 companies reported against the Task Force for Climate-related Financial Disclosures (TCFD).

Established in 2015 by the Switzerland-based G20 Financial Stability Board, with final recommendations released in June 2017, the TCFD provides voluntary, consistent disclosure recommendations that companies can adopt to provide information to investors and other stakeholders about climate-related risks.

The TCFD also recommends that companies describe the resilience of their strategy, considering different climate-related scenarios, including a two degrees Celsius or lower scenario.

The TCFD recommendations are structured around four themes:

• Governance of climate-related risks and opportunities;
• Actual and potential impacts on the organisation, its strategy and financial planning;
• Organisation processes to identify, assess and manage climate-related risks; and
• Metrics and targets used to assess and manage climate-related issues.

Australia has had the National Greenhouse and Energy Reporting (NGER) Scheme since 2007 as a single national framework for companies to report information about GHG emission. But the NGER is not tied to disclosures to financial markets through annual reports or other ASX announcements, meaning the TCFD framework fills a climate-change reporting gap for listed Australian companies.

ACSI research suggests 32 ASX 200 companies have now adopted the TCFD (including 10 that reviewed the framework and adopted it this year). “Although that is only a handful of companies so far, it signals that climate risks are increasingly being considered as part of corporate strategy,” wrote ACSI CEO Louise Davidson.

Analysis and disclosure of climate-change risks on organisations has become a bigger governance issue for Australian boards since October 2016 after the publication of an influential legal opinion by Noel Hutley SC and Sebastian Hartford-Davis.

They wrote: “It is conceivable that directors who fail to consider ‘climate-change risks’ now could be found liable for breaching their duty of care and diligence in the future”.

Legal experts such as Sarah Barker, Special Counsel at Minter Ellison, at the time concluded that Hutley’s opinion confirmed that, from an evidentiary perspective, risks associated with climate change had evolved from “ethical environmental” to material financial issues, and that directors who fail to grapple with them are legally exposed.

Hutley effectively warned that directors who perceive climate change presents risks to their business should assess the adequacy of their organisation’s disclosure and reporting of them.

That trend is well underway, judging by ACSI’s data on climate-change reporting. As often happens in governance change, there is a lag between the adoption of organisation policy and target setting and reporting.

With 95 ASX 200 companies now disclosing climate-related risks, it is likely that more listed corporates in Australia will adopt the TCFD framework, which ACSI describes as “the gold standard” for climate-related disclosures.

The Governance Leadership Centre spoke to Ed John, Executive Manager, Governance Engagement and Policy at ACSI, about the implications of the TCFD for boards. Here is an edited extract of his interview:

GLC: Is ACSI satisfied with progress on climate-related disclosure in the ASX 200?

Ed John: Generally, we are seeing solid improvement on climate-related reporting. More than half of ASX 200 companies now report their greenhouse gas emissions. That is at least double the number five years ago. Also, just over 30 companies have adopted the TCFD.

GLC: Why does ACSI favour the TCFD framework over competing reporting frameworks?

EJ: It’s a well-considered, practical framework that allows companies to adapt climate-related disclosure and reporting for their operations and industry. It also has a lot of industry guidance. We find it’s a good way for companies to articulate to the investment community the alignment of climate-related risks and opportunities with their corporate strategy and risk-management processes.

Adopting a consistent reporting framework on climate-related disclosure also provides comparability across organisations and industries, helping investors to factor these issues into their decision making.

GLC: Is the TCFD framework just more compliance and reporting for companies?

EJ: It actually means less reporting in some respects. ACSI favours the TCFD framework because the focus is very much on strategic reporting and it does not enforce a one-size-fits-all approach. It helps companies focus on key climate issues for their business.

GLC: Are institutional investors showing greater interest in climate-related disclosures?

EJ: They are, particularly around capital-allocation decisions. Investors want to understand the processes boards used to factor climate-related risk and opportunities into investment decisions. There’s not one magic metric that investors look for on climate-change reporting; rather, it’s the overall process that boards oversee in this area.

Investors are also looking to increase their disclosure to their own stakeholders on climate-related risk. This year we will begin to see Australian investors starting to report against TCFD.

GLC: Will we see a big increase in ASX 200 companies that report against the TCFD in the next few years?

EJ: We hope so, but the reality is it takes time for organisations to implement a climate-reporting framework, start reporting against it and eventually have clear metrics and targets.

It’s a multi-year journey that companies are on in climate-change reporting and much will depend on their industry: those in high carbon-emitting industries will most likely adopt climate-related reporting against TCFD earlier than others that have less environmental impact.

The fact that almost half of ASX 200 companies have a climate-related policy statement is encouraging for the future adoption of the TCFD.

GLC: Where will the Australian governance community be in five years on climate-related disclosures?

EJ: I suspect we will see highly developed industry standards on climate disclosure. There will be more disclosure from listed companies on this issue, and not only on the risks of climate change. Organisations that are making progress in this area will want to get that message to the market and ensure the data is reported in a way that investors can use and compare across industries.

There will be more convergence in reporting standards: for example, some companies are reporting risk on a portfolio basis, others on an asset-by-asset basis. We also expect more target setting for greenhouse gas emissions and in other climate-related areas. We have already seen a significant lift in disclosures on the short and long-term impacts of climate risks to an organisation.

As with listed companies, we also predict increased reporting from investors to their stakeholders on these issues in coming years.

Within five years, we expect the TCFD will be the norm for climate-related disclosure and reporting, so it’s important boards begin that journey sooner rather than later.

GLC: What advice would you give boards that govern organisations with no or limited climate-change disclosure and want to introduce reporting in this area?

EJ: Firstly, boards should not let the complexity of climate change be an excuse for inaction. Directors often make decisions without perfect knowledge of an issue, or in areas that may be hard to forecast, which is true of climate change. Boards have to get started in this area.

They should treat climate-related disclosure like other risk-management issues. What are the risks of climate change to the organisation? How are those risks being analysed, managed and mitigated? If material, how are those risks disclosed to the market?

The key is having a clear internal policy and using a consistent framework, such as the TCFD, to report against.

GLC: Can the TCFD help mitigate climate-related governance risks for boards?

EJ: There is significant risk if boards do nothing on climate change from a governance perspective. The Hutley Opinion found that courts will view climate change risks as foreseeable business risks and that these issues are relevant to a director’s duty of care.

Ideally, boards should be able to show how they assess climate-related risks and opportunities as a governance issue, and that the organisation had adequate market disclosure on this issue.

GLC: In your discussions with individual directors, do you sense the governance community generally is across climate-related risks and opportunities?

EJ: Yes and no. We engage with some boards that are very much across climate-change issues and have a view that is aligned with management, and others that haven’t given the topic much consideration. In one case, a board was strongly supportive of the TCFD; in a separate meeting we found that the company’s CEO had not heard of the framework.

Climate change is a complex topic and it will take time for boards collectively to factor it into governance decisions, organisation strategy and risk management. It will also take time to effectively communicate their approach to financial markets, insurers and other stakeholders.

Increasing transparency, engagement with investors and leadership from boards has seen significant improvement in the market.

i ACSI, “Corporate Sustainability Reporting in Australia,” June 2018