In brief 9 min read
The need for companies to manage and report on climate-change risks is gaining momentum in Australia. This is part of a global trend, as investors and governing bodies increasingly expect companies to integrate climate risks into their strategy and reporting – yet, tools for monitoring and disclosing climate-change risks are at a relatively early stage. Partner Jillian Button, Senior Overseas Practitioner Emily Turnbull and Lawyer Maddy Foote look at the state of play in Australia and abroad, and at the direction of travel in 2019.
Climate change is emerging as an area of risk for Australian companies and their directors.
'Climate-change risk' relates to:
- direct physical risk of damage to assets and property, caused by impacts of climate change such as flooding and rising sea levels;
- indirect financial risk arising from the process of adjusting to a low-carbon economy (sometimes referred to as 'transition risk'); and
- litigation risk, as those who suffer damage caused by climate change (or a failure to address climate change) seek redress from companies and/or their directors.
Litigation risk, in particular, is becoming a focus, due to the breadth of actions companies face in multiple jurisdictions:
- Shareholder and investor actions Various actions have been brought in the United States against ExxonMobil, alleging failures in its disclosure of climate-change risks, and consequent mispricing of the company's securities. So far, ExxonMobil has been unsuccessful in seeking to have these claims struck out. In Australia, in 2017, Environmental Justice Australia issued a proceeding on behalf of shareholders against a large Australian bank, alleging a failure to adequately disclose the risks posed by climate change to the business. More recently, a proceeding has been commenced against an Australian superannuation fund by one of its members, alleging failure to assess and manage the risks climate change poses to the super fund's investments, and for failing to disclose adequately how it is managing these risks.
- Regulatory investigations ExxonMobil is also facing investigations in New York and Massachusetts, relating to aspects of the company's climate-change risk disclosures.
- Shareholder activism Environmental advocacy groups in Australia have sought to table resolutions, at company AGMs, seeking annual reporting on climate-change risks.
- Non-judicial complaints In May 2017, a group of Dutch NGOs made a complaint to the Netherlands National Contact Point (NCP) (a non-judicial dispute resolution body) regarding ING Bank’s financing of greenhouse gas emitting industries. The NCP is reported to be working with the parties to reach agreement.
- Human rights claims An action has been brought in Germany by a Peruvian farmer against RWE, for carbon emissions allegedly contributing to global warming and endangering the farmer’s home. In the Philippines, a Commission on Human Rights has been established to hear a petition for relief for victims of alleged human rights violations arising from climate change.
- Community group actions On 8 February 2019, the Land and Environment Court of New South Wales dismissed an appeal by the mining company Global Resources Limited against a decision of the NSW Minister of Planning to refuse consent for an open-cut coal mine in the Upper Hunter Valley. The court found against the mining company, on the basis that the coal the mine produced would contribute to an increase in total global concentrations of greenhouse gases. This unprecedented decision demonstrates the increased litigation risk borne by carbon intensive businesses.
In addition to company time and cost, involvement in these actions can have negative reputational consequences.
In response to these developments, companies should assess the climate-related risks to which their business is exposed, and how best to manage and report on these risks.
Taking a proactive approach to assessing and reporting on climate-related risks may assist in demonstrating compliance with directors' reporting and disclosure obligations. Providing this information may also help to engage stakeholders, and head off potential concerns or disputes.
Reporting is already expressly required in other parts of the world.
At the EU level, the Non-Financial Reporting Directive requires certain large companies to disclose information related to their environmental impacts.
In the UK, it has been mandatory since 2013 for qualifying companies to keep their investors informed of financially impactful climate risks and certain other environmental matters. In June 2018, a UK Parliamentary committee made a formal recommendation for the UK Government to require all listed companies and large asset owners to report on climate-related risks and opportunities by 2022.
In the US, the proposed Climate Risk Disclosure Act would require financial, insurance and oil and gas companies to disclose climate-related risks in their annual reports.
Current obligations for Australian companies and directors
In contrast to the EU and UK, Australian legislation does not expressly deal with climate risk. However, recent legal opinion and regulatory guidance have clarified that directors of Australian companies do have obligations related to the consideration and, in some cases, the disclosure of climate-related financial risks.
In October 2016, barristers Noel Hutley SC and Sebastian Hartford-Davis published a legal opinion that stated:
- under the Australian common law and section180(1) of the Corporations Act 2001 (Cth), directors have a duty to consider climate-change risks; and
- the Corporations Act also requires directors of listed companies to report on material climate-change risks in their annual report.
This followed from a Senate Economics Reference Committee enquiry in mid-2016, which found that the disclosure of material climate-change risks is necessary to ensure investors are sufficiently informed of these risks and to incentivise companies to manage them. The Hutley/Hartford-Davis opinion has been widely followed.
ASIC has since weighed into the discussion. Guidance the regulator issued in February 2018, and subsequent comments by ASIC Commissioner John Price, confirm that ASIC views climate-risk disclosure as forming part of a company's mandatory reporting on environmental and other sustainability risks.
A second legal opinion by Mr Hutley and barrister James Mack, published in June 2017, found that the obligation on superannuation trustees to act in the best financial interests of beneficiaries extends to considering and managing climate-change risks.
There are a number of voluntary frameworks that can assist with risk assessment and reporting. One widely cited framework is the 2017 Recommendations on climate change-related financial disclosures published by the Financial Stability Board's Task Force on Climate-related Financial Disclosures (the TCFD).
The Financial Stability Board established the TCFD in 2015. The Board was concerned that inadequate information about risks could lead to a mispricing of assets and misallocation of capital, and potentially give rise to financial instability, due to market corrections.
The TCFD Recommendations are structured around four thematic areas: governance; strategy; risk management; and metrics and targets.
Each area is supported by recommended disclosures, which require a company to describe the steps it is taking to address a climate-related risk or the impact of a climate-related risk upon it. The Recommendations contain guidance for each recommended disclosure. The TCFD has recommended companies include these disclosures in their public financial filings.
One of the TCFD's key recommended disclosures relates to scenario analysis. It is recommended that companies report on the potential impacts of climate-related risks (and opportunities) on their businesses, strategies and financial planning under different potential future scenarios, including a 2° Celsius scenario.
A number of Australian super funds have expressed their support for the TCFD Recommendations. In October 2018, both UniSuper and VicSuper released their first climate change reports, prepared according to the Recommendations. In addition, Cbus Super and Local Government Super have said publicly they intend to bring their disclosure into line with the Recommendations.
In addition, in December 2018, a number of Australian funds (including Australian Super and First State Super) signed a statement to governments at the Paris Agreement COP24. One of the actions requested from governments in the statement was a commitment to implement the Recommendations in their jurisdictions by 2020.
The expectation that Australian companies assess and report on their climate-change risks seems here to stay.
However, current levels of reporting appear to be low.
An ASIC report published in September 2018 reviewed 60 ASX 300 listed companies to assess the status of climate-risk reporting (eg within company operating and financial reviews and annual reports). The report found that explicit disclosure of climate risk was generally limited. Eg only 17 per cent of the sample companies had identified climate risk as a material risk in their operating and financial reviews.
A December 2018 survey of ASX 100 companies by the not-for-profit Market Forces found that 57 per cent of companies recognised climate change as a material business risk but that, of these companies, only three disclosed according to the Recommendations.
Its findings prompted ASIC to recommend that directors and senior managers of listed companies consider, assess and disclose climate risk with reference to the TCFD Recommendations.
A subsequent survey by Market Forces of 72 ASX 100 companies, released on 18 February 2019, found that, while 86 per cent of the companies described their board as having oversight of climate-related risks, very few are carrying out TCFD-aligned scenario analysis.
In addition, the current draft revised ASX Corporate Governance Principles and Recommendations include a proposal to amend the commentary to suggest that listed entities with material exposure to climate-change risk implement the TCFD Recommendations.
APRA CEO Geoff Summerhayes has separately suggested that APRA-regulated entities use the Recommendations to report on climate-change risks. In a November 2017 address to the Centre for Policy Development, he noted that APRA had established a working group to develop the regulator's response to climate change's financial implications, As part of this initiative, Mr Summerhayes indicated that APRA has engaged with regulated entities to encourage awareness of climate-change risks.
The recent impetus in Australia towards climate-risk reporting is a further step in the shift to greater transparency and reporting (both mandatory and voluntary) of environmental, climate and human rights issues that may affect businesses.
We recommend that companies:
- consider the impact of climate-change risks on their business, and the steps that could be taken to mitigate those risks;
- assess their disclosure obligations and/or whether they should be making voluntary reports using one of the best practice frameworks (eg the TCFD Recommendations);
- consider processes to ensure that the board is informed of climate-change risks, and of the impacts on the company’s business and strategic plans; and
- prepare a strategy for responding to pressures such as shareholder activism, as investors seek tangible ways in which to price potential climate impacts.
If you would like to find out more about how Allens can assist with your climate-risk reporting, please do not hesitate to get in touch.