Australians free to adopt TCFD reporting on climate risk

Glacier with large piece breaking away

There are no legal barriers stopping Australian companies from fully adopting the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) and reporting their climate risks to the market, according to the government.

In its response to the Senate Economics Reference Committee's report Carbon risk: a burning issue  in March, the government welcomed the final report of the TCFD, which provides a framework for investors and companies to appropriately assess and price climate-related risk and opportunities.

While it encouraged all stakeholders to carefully consider the TCFD’s recommendations, the government did not believe any further law reform was required to adopt them.

That’s because the disclosure requirements in the Corporations Act 2001 are principles-based and do not impede the implementation of the TCFD’s recommendations, it said.

However, the Investor Group on Climate Change (IGCC), which represents Australian and New Zealand institutional investors with over $2 trillion of funds under management, expressed disappointment that the government did not go further in its response to the senate committee’s report.

The government only agreed in principle with two of the six recommendations made by the committee.

One was that the Australian Securities and Investments Commission should review its guidance to directors to ensure that this provides a proper understanding of the manifestations of carbon risk and reflects evolving asset measurement implications of carbon risk.

The other was that the Australian Securities Exchange should provide guidance regarding the circumstances in which a listed entity's exposure to carbon risk requires disclosure under Recommendation 7.4 of its Corporate Governance Principles and Recommendations.

This recommendation, introduced in 2014, suggests that listed entities disclose any environmental, environmental and social sustainability risks and how they manage or intend to manage these risks.

However, the government pointed out that responsibility for the Principles and Recommendations rested with the ASX Corporate Governance Council and not the government.

IGCC CEO Emma Herd noted: ‘All climate change risks and opportunities have a related financial impact. These impacts need to be disclosed to the market with same level of rigour that all major financial risks are disclosed in company reports.’

She added: ‘Investors are already calling on companies to report their climate change exposure with board directors under pressure to demonstrate they are managing climate impacts.’

Herd believed that the government should work with Australia’s financial regulators to make carbon risk disclosure standard practice and strengthen industry reporting.

Adoption of the recommendations of the TCFD would ensure that Australia remains in line with other countries when it comes to corporate disclosure practices of carbon risk, she said.

As Clayton Utz partner Brendan Bateman reports, pressure is building for Australian corporate entities to improve their identification and reporting of the risks climate change poses to their financial position and business operations.

He notes that the Australian Securities and Investments Commission recommends that companies should discuss environmental and sustainability risks in their annual report, if the risks could affect financial performance.

In a speech given in 2017, the Australian Prudential Regulation Authority’s executive board member Geoff Summerhayes also warned of the potential serious legal consequences facing directors who continue to ignore climate risk obligations in the future.

And, most recently, the Reserve Bank governor Dr Philip Lowe has described the guidance given by the TCFD as ‘exactly the right direction to be heading’.

Bateman observes that numerous industry bodies, including the Governance Institute of Australia, have put company directors' potential liability for climate risks into focus. Plus, the Australian Council of Superannuation Investors released updated governance guidelines for companies, including detailed information about expectations on climate risk disclosure, in November 2017.

‘If that was not enough, interest groups have increasingly begun to look to the courts for clarification on whether a corporation's obligation to ensure its annual report presents a ‘true and fair view’ of the financial position and performance of the company extends to require the disclosure of assessment to climate related risks,’ says Bateman.

‘Even if environmental and climate risk reporting does not become mandatory in Australia anytime soon, there is a compelling case developing, reflected in the opinion of industry regulators, that corporations should look to address environmental change risk more proactively. This includes public disclosure of their likely exposure to climate risk, in order to reduce potential exposure to investors and liability of directors.’

Meanwhile, in its response to the senate committee’s report, the government did not agree with any of the eight additional recommendations made by the Australian Greens.

These included that the government reintroduce a price on carbon pollution and that the Council of Financial Regulators develop guidelines for mandatory annual public reporting of carbon risk by Australian companies.

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