Climate change poses risks across all industries, and these risks are not confined to the long term. To what extent, if any, are companies obliged to disclose the effect of climate change on their business?
In April 2015, the G20 asked the Financial Stability Board (FSB) to "convene public- and private-sector participants to review how the financial sector can take account of climate-related issues". The FSB is an international body that aims to promote international financial stability by coordinating national financial authorities and international standard-setting bodies.
In response, the Task Force on Climate-related Financial Disclosures (Task Force) was launched to develop recommendations for voluntary climate-related financial disclosures. It is chaired by Michael Bloomberg, and is made up of 32 members drawn from the private sector across G20 economies, including major companies, accounting firms, banks and insurers.
In December 2016, the Task Force published a set of recommendations which aim to assist businesses to analyse and disclose climate change risks. Following a consultation period, the Task Force's final report will go to the G20 in May 2017. The Task Force recommendations represent a strong push by an influential body of stakeholders to propel climate related risk reporting from the periphery to the core of public financial reporting. The clear hope is that, despite the challenges this poses, the area will develop and standardise rapidly.
This begs the question: to what extent is disclosure already required under Australian law? In late 2016, barristers Mr Noel Hutley SC and Sebastian Hartford-Davis published an opinion (Hutley Opinion) for The Centre for Policy Development and the Future Business Council which found that Australian company directors who fail to consider climate change risks could be found liable for breaching their duty of care and diligence. Further detail on the duty to disclose, and the suggested framework for disclosure, is set out below.
What is climate change risk?
There are two types of climate change risk:
- Physical risks are those related to the physical impacts of climate change, which may be acute or chronic. They include increased incidence and severity of extreme weather events and longer-term shifts in climate patterns which may result in rising sea levels or chronic heat waves.
- Transition risks are those which are associated with transitioning to a lower-carbon economy. These include changes in regulatory policy (such as carbon pricing), technological improvements that support the transition, reputational risks and changes in consumer behaviour and preferences.
Although companies will be affected by these risks to varying degrees, it is difficult to imagine any company or business is completely insulated from the impact of climate change. The effects of climate change are well understood and are already becoming apparent; NASA's recent analysis indicates that 2016 is the warmest since record keeping began in 1880, and the third year in a row to set a new record for global average surface temperatures.1
The obligation to disclose
To comply with their duties under the Corporations Act 2001 (Cth), directors must, inter alia, exercise their powers and discharge their duties with the degree of care and diligence of a reasonable person in the same position.2 The Hutley Opinion argues that climate change risks are capable of representing risks of harm to the interests of Australian companies, and would be considered by a court to be foreseeable risks at the present time. As such, directors who fail to consider climate change risks now could be found liable for breaching their duty of care and diligence in the future.
Further, as set out in detail in the Hutley Opinion, the Australian Securities Exchange (ASX) requires listed entities to publish a corporate governance statement in their annual report, which must disclose any “material exposure to economic, environmental and social sustainability risks and, if it does, how it manages or intends to manage those risks”.3 Non-disclosure of material information may constitute misleading and deceptive conduct.
Therefore, although there is no consistent framework for the disclosure of climate change risk, directors may already be required to take steps to analyse the impact of climate change on the business and disclose any material risks. As such, directors should be proactive in assessing the impact of climate change on their business – the Task Force's recommendations should assist with this undertaking.
Analysing and disclosing the risks
The Task Force has aimed to identify the information needed by investors, lenders, and insurance underwriters to appropriately assess climate change and price climate-related risks and opportunities. Its recommendations are structured around 4 themes:
- Governance: Who should be responsible for assessing and reporting on climate-related risks and opportunities?
- Strategy: What are the actual and potential impacts of climate-related risks and opportunities?
- Risk Management: What processes are used to address these impacts?
- Metrics and Targets: What data sources and methodologies can be used to measure these impacts?
The Task Force seeks to set out a framework by which assessment and disclosure of climate change risk can occur in a consistent fashion. Key takeaways for companies include:
- Financial impact assessment will require senior management engagement. The Task Force considers the scenario testing recommended will lead to the need to assess the impact of that on core financial metrics such as cash flow analysis and asset valuation. As such, the expectation is that CFOs will need to be involved in the evaluation of climate-related risks and opportunities.
- Disclosure needs to be useful. The Task Force is pushing the mantra of "forward looking, decision-useful information" as the basis for disclosure. It recognises concerns around scenario testing revealing commercially sensitive business strategies or being used as fodder for climate litigation, but considers these should be able to be managed rather than used as a basis for making limited disclosure.
- Waiting for better data tools is not good enough. The Task Force is pushing for disclosure to work with the data and methodologies available and suggests that gaps and limitations are highlighted (rather than those gaps being used as the reason for not disclosing). In particular, the Task Force considers that asset owners and asset managers should engage with reporting metrics on GHG emissions associated with their investments.
In the Task Force's view, the success of its recommendations depends on near-term, widespread adoption by organizations in the financial and non-financial sectors, as only then will climate change risk analysis become ingrained in business risk management and strategic planning processes. Support from the G20 and other governments and supranational authorities such as the FSB is therefore important.
In the meantime, and in light of the Hutley Opinion, it is clearly time for the Australian business community to elevate the consideration of climate change to the board room to ensure that all companies and directors are aware of, and prepared for, its short- and long-term impacts.
- Corporations Act 2001 (Cth) s 181(1)
- ASX Guidance Note 9, “Disclosure of Corporate Governance Practices” (July 2014), p 5