Climate Risk and Fiduciary Duties Information Centre

The release of guidance from the global Financial Stability Board’s Taskforce on Climate-related Financial Disclosures’ (TCFD) on managing and disclosing climate-related financial risks has brought this issue to the fore for large companies responsible for significant greenhouse emissions. APRA, the Australian Prudential Regulation Authority, further declared that there are climate risks that are “distinctly financial in nature”. Australian companies must now review their responses to climate change and consider emissions reduction targets, climate risk management governance and disclosure activities.

Developing risk disclosure guidance with broad relevance and value

The TCFD recognises that climate-related risks are complex, impacting businesses, sectors and geographies differently. The inter-relationships between these impacts are difficult to understand evaluate. Likewise the responses from countries and jurisdictions to climate change are wide and varied.

The TCFD recommendations are applicable to all organisations globally. They focus on relevant information, scalable to any business’ level of sophistication and should be addressed in financial filings. The core recommendations focus on:

  • Governance - Disclose the organisation’s governance around climate-related risks and opportunities
  • Strategy - Disclose the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning
  • Risk - Disclose how the organisation identifies, assesses, and manages climate-related risks
  • Metrics and targets - Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities.

Dealing with complexity – a focus on scenario analysis

Forward looking analysis is recommended to help investors and the financial sector understand and assess climate related risks and opportunities.  Scenario analysis is proposed by the task force as a useful tool to understand these issues.  It requires a business to develop a number of divergent but plausible global scenarios over the medium to long term. Businesses and investors can then assess and explain how resilient they are to future climate and economic scenarios and change their strategy where relevant. Clear definitions and assumptions provide investors with an understanding of how robust businesses are to future challenges.

Benefits in moving early

We anticipate that the financial sector will continue to seek information to price climate-related risks for investment decision making and to disclose carbon exposure within their portfolios. However there are clear benefits for companies who outline to the market their resilience under different low and high emissions futures. These benefits include:

  • Demonstrating the ability to incorporate climate related financial risks into corporate strategy and potentially capitalise on competitive advantage
  • Reduced risk of mispricing of their equity
  • Potential opportunities to attract debt financing and/or insurance at lower cost.

Companies actively improving and disclosing their response to climate change can also mitigate legal risks. A recent legal opinion from Minter Ellison  concluded that Australian company directors “who fail to consider ‘climate change risks’ now could be found liable for breaching their duty of care and diligence in the future”.

First steps

  • Understand the gaps between the TCFD recommendations and your current climate related disclosures
  • Identify and assess transition and physical climate change risks to your business, suppliers and markets
  • Develop qualitative and quantitative scenarios, including identifying trigger points which may indicate that certain scenarios are more likely to occur, and understanding potential financial impacts and implications for business strategy
  • Develop greenhouse gas abatement targets and identify opportunities to reduce emissions.

Global developments

Changing investment trends

In less than two years since COP21, the Montreal Carbon Pledge has been signed by investors controlling more than US$10 trillion in assets. The pledge requires large investors to commit to measuring and reporting the carbon footprint of their portfolios.

Iconic businesses setting aggressive climate targets

COP21 saw iconic businesses commit to renewable energy and climate action through mechanisms such as RE100.   During the Paris negotiations, more than 50 iconic brands pledged to go 100% renewable including Google, Adobe, BMW Group and Coca-Cola.

We Mean Business, a coalition through which 590 companies and investors have now committed to solid climate actions including science-based emissions reductions.  The group represents $US20.7 trillion in assets under management. Australia's Origin Energy became the world’s first energy company to sign up to all seven commitments. Other Australian companies include AGL, Westpac, ANZ Bank and nab.

293 large corporations pledged to reduce emissions in accordance with the 2℃ objective. Ikea, Coca-Cola, Dell, General Mills, Kellogg, NRG Energy, Procter & Gamble, Sony and Wal-Mart are signatories and are implementing plans. Dell, for example, has pledged to reduce emissions from its facilities and logistics operations by 50% by 2020 (relative to 2011 levels), and to reduce the energy intensity of its product portfolio by 80% by 2020. Australian companies include Origin Energy, Westpac and Australian Ethical Investment.

 

Resources

  • climate-action-in-2017png
    Climate Action in 2017
    Issued: August 2017

    Sustainable Business Australia (SBA) released a report for C-Suite executives to assist with business in becoming more transparent with their investors about climate-related financial risks and opportunities, transitioning to a zero-carbon economy. 

    The report 'Climate Action in 2017 - Insights into the readiness of Australian business to disclose climate-related financial risks and opportunities' is based on research by SBA using the CDP climate disclosures from the ASX200 and analysis and insights from Energetics.

    Click here to download a pdf version of the guide.

  • australian-ceo-guide-to-climate-changepng
    Australian CEO Guide to Climate Change
    Issued: November 2015

    Australia's CEO Guide to climate action was developed by Sustainable Business Australia (SBA) in collaboration with Energetics. The Australian guide is an addendum to the global CEO Guide developed by the World Business Council for Sustainable Development. It is intended to provide business leaders with insights into the latest climate science and the likely impacts on Australia, as well as outline key actions business can take to address climate change within their business strategy. The actions are both broad and scalable.

    Click here to download a pdf version of the guide.