Australia is waking up to the financial risks of climate change

As Australia’s Senate, Prudential Regulator and Department of Environment and Energy have all looked at climate risk disclosure in the past months, Mardi McBrien shares her views on why climate risk is high on the country’s agenda and what can be done to take it to common market practice.

This article first appeared on Responsible Investor

When Geoff Summerhayes, board member of the Australian Prudential Regulation Authority (APRA) gave his speech to the Insurance Council of Australia Forum on climate change challenges and prudential risk, he did something extraordinary. In a time of uncertainty for the climate movement, when the road to a “low-carbon world” seems bumpier than ever, he showed that a top financial player can change its position on climate change and decide the time to act is right.

“To begin with a generalisation, while climate risks have been broadly recognised, they have often been seen as a future problem or a non-financial problem”, he said. “The key point I want to make today, and that APRA wants to be explicit about, is that this is no longer the case. Climate risks also have potential system-wide implications that APRA and other regulators here and abroad are paying much closer attention to.”

The message was very different from the one the same authority put forward exactly one year before. So, what has happened in the past 12 months to change their minds?

Task Force on Climate-related Financial Disclosures and directors’ duties

Although not finalised yet, the work of the Task Force on Climate-related Financial Disclosures (TCFD) has already achieved what we at the Climate Disclosure Standards Board and many others have been saying for years: climate change poses material financial risks to business and countries across the world, and the solution is therefore to communicate its financial impacts in annual reports. 

We knew already that we needed to take the climate issue away from the niche sustainability teams and bring it to the board level. But we didn’t know – at least not everyone knew – what this would entail. 

To take only two examples, how do accountants and report preparers fit this whole new set of information into their well-structured financial filings? Are CEOs liable for not taking into account what climate change would mean for their business in the long term?

Last year, the answer to the latter came loud and clear from the influential Australian barrister Noel Hutley. As the legal opinion focused on Australia’s Corporations Act, the author stated that it is “only a matter of time” before cases start being filed against companies’ directors for failing to take into account and disclose what their climate-related financial risks are. 

Senate Committee on carbon risk disclosure

These two publications sparked a great deal of interest on the other side of the pond. The Australian Securities and Investments Commission (ASIC) was one of the many organisations to tell a Senate Committee hearing on carbon risk disclosure that it agrees with this legal view on directors’ duties, making it clear that companies need guidance to disclose climate risks within the existing reporting environment. 

This Senate Committee on carbon risk disclosure has gone on to issue a set of 6 recommendations, which state that the Government commits to implementing the TCFD recommendations, that both ASIC and ASX review their guidance and that Government end the uncertainty regarding climate change policy, and develop a stable and consistent policy. 

Being always a step ahead of the game, last month the investor groups IGCC and AIGCC released an investor guide of the TCFD recommendations. The report constitutes a practical framework for investor disclosure, aligned with the recommendations, and designed to inform investors and other stakeholders about “how climate change risks and opportunities are being tackled by the institutional investment community”. The aim is not only to help investors disclosing how exposed their portfolios are to climate change, it also helps users of this type of information, be it other investors, regulators or beneficiaries, understand how to act on it.

Consultation of Australia’s Department of Environment and Energy on climate risk

Following the noise around climate risk, Australia’s Department of Environment and Energy opened their review of climate change policies for a public consultation. CDSB responded earlier this month, and we highlighted three key things that Australia’s policies should include:

  • Reporting of climate-related risks and opportunities, as outlined in the TCFD recommendations, should become a central feature of the climate policy landscape and 2017 review;
  • Understand that reporting has different purposes. The new policies should go beyond simply tracking progress against targets, whether they are Nationally Determined Contributions, Paris Agreement or SDGs. Australia should look at both the existing regulatory and market-based mechanisms to understand which ones are most appropriate to facilitate investors allocating capital based on an understanding of climate risks and opportunities;
  • In 2016, the Investor Group on Climate Change (IGCC) submitted a list of ten areas that the Australian government should look at to improve the quality of carbon risk disclosure, which are all still valid. These include engaging with industry to develop and promote a standard of definition for ‘carbon risk’ and encouraging business to include contextual and future-focused carbon narrative, alongside historical emissions performance data, as a key part of effective financial disclosure.

No matter what the reaction will be to the final TCFD report, it is undeniable that there is a strong case for companies and governments to wake up to the fact that climate change could cause the next big financial systemic crisis. 

Australia has a mixed history with climate change policy, at the moment business activity is leading the way. Despite its past, we might be witnessing an unprecedented evolution that has the potential to evolve Australia’s markets to be at the forefront of climate resilience. We are excited to witness this change and look forward to supporting this transition.