Disclosing climate risk
John Price discusses key findings by ASIC on climate risk disclosures and what listed entities can do better.
John Price, Commissioner
This article was submitted to Listed@ASX magazine for publication in the November 2018 edition
The management and disclosure of climate change risk or “climate risk” is an increasingly topical issue for listed companies and investors. Climate change is a foreseeable risk facing many listed companies in the Australian market in a range of different industries.
This is highlighted by the ASX Corporate Governance Council’s consultation draft of the fourth edition of its Corporate Governance Principles and Recommendations which includes a proposal to incorporate more guidance on the disclosure of climate risk and suggests that listed companies with material exposure implement the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
ASIC’s Report 593 Climate risk disclosure by Australia’s listed companies (September 2018) sets out our findings and high-level recommendations following a review of climate risk disclosures:
- by 60 listed companies in the ASX 300;
- in 25 recent initial public offering prospectuses;
- across 15,000 annual reports.
Key findings of the report were:
- 17% of listed companies in our sample identified climate risk as a material risk in their operating and financial reviews;
- general (as opposed to specific) risk disclosure is not useful for assessing climate risk exposures;
- the majority of the ASX 100 companies in our sample had, to some extent, considered climate risk to the company’s business; and
- a number of listed companies in our sample intend to adopt the recommendations (either in full or in part) of the TCFD.
We also found that many listed companies provide climate risk disclosure that is too fragmented, general or not comprehensive enough to be useful for investors. In the case of companies outside the ASX 200, we found that relatively few companies provide any climate risk disclosure at all.
While we recognise that climate risk disclosure practices are still evolving (not only in Australia but internationally), we recommend directors and advisers of listed companies:
- Consider climate risk – directors and officers of listed companies need to understand and continually reassess existing and emerging risks that may be applicable to the company’s business, including climate risk. This should extend to both short-term and long-term risks.
- Develop and maintain strong and effective corporate governance – strong governance facilitates better information flows within a company and facilitates active and informed engagement and oversight by the board in identifying and managing risk.
- Comply with the law – directors of listed companies should carefully consider the requirements relating to operating and financial review (OFR) disclosures under s299(1)(a)(c) of the Corporations Act 2001. The law requires an OFR to include a discussion of climate risk when it could affect the company’s achievement of it financial performance or disclosed outcomes. Depending on the circumstances, disclosure of climate risk may also be required by the law in other contexts, such as a prospectus or continuous disclosure announcement.
- Disclose useful information to investors – the voluntary disclosure recommendations issued by the TCFD are specifically designed to help companies produce information that is useful for investors (amongst others). We do not consider there is any legal or policy impediment to listed companies reporting under TCFD recommendations provided that the disclosure is not misleading or deceptive and is based on appropriate evidence available at that time. We recommend that listed companies with material exposure to climate risk consider reporting under the TCFD framework.
In June 2017, the G20 Financial Stability Board’s TCFD released its final report, providing a framework for a set of voluntary, consistent climate related financial disclosures for use by investors, lenders and the market generally in assessing and pricing climate-related risks and opportunities.
In March 2018, the Australian Government released its response to a 2017 report on Carbon Risk issued by the Senate Economics References Committee. The Government, in that response, encouraged stakeholders to consider the final report and recommendations of the TCFD.
ASIC is closely monitoring developments in this regard and we have been and intend to continue engaging with key stakeholders on this issue as market practice develops over time, having regard to the TCFD framework.
Find out more on asic.gov.au