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.
- So far in 2019, environmental organisation Market Forces, and fund manager Australian Ethical Investments, have sought shareholder debate and votes on action concerning climate change in relation to 10 ASX listed companies.
- 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. For more on that decision, see our Update: NSW Court's ruling on climate change raises concerns for coal industry.
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, 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 section 180(1) of the Corporations Act 2001 (Cth) (the Act), directors have a duty to consider climate-change risks; and
- the 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 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 issued by the regulator in February 2018, and subsequent comments by ASIC Commissioner John Price, confirm 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 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 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.
There now appears to be an unshakable expectation that Australian companies assess and report on their climate risks, as corporate and financial regulators increasingly highlight the need for action.
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 explicit disclosure of climate risk was generally limited, with only 17 per cent of the sample companies identifying climate risk as a material risk in their operating and financial reviews.
Its findings prompted ASIC to recommend directors and senior managers of listed companies consider, assess and disclose climate risk with reference to the TCFD Recommendations.
In February 2019, the 4th edition of the ASX Corporate Governance Principles and Recommendations set out commentary regarding environmental disclosure and, for the first time, provided explicit guidance on climate change risk. The Principles and Recommendations encourage entities with material exposure to climate change risk to consider disclosing in accordance with the TCFD Recommendations.
In March 2019, APRA published the findings of its survey of 38 large entities across the financial services industry to identify trends and issues associated with climate risk awareness, disclosure and management strategies. The survey findings indicated the majority of large entities surveyed have implemented some form of climate risk assessment. APRA confirmed it will continue to supervise the assessment of climate risk by regulated entities.
The APRA survey followed comments by APRA CEO Geoff Summerhayes in November 2017 that the regulator had established a working group to develop the regulator's response to the financial implications of climate change.
The beginning of 2019 has seen further calls for action on climate risk from key regulators. On 12 March, Guy Debelle, Deputy Governor of the Reserve Bank of Australia, delivered a speech entitled 'Climate Change and the Economy'. In the speech, Mr Debelle highlighted the impact of climate change on the Australian economy and financial stability, and the need to engage with businesses and climate modellers to best inform monetary policy decision-making. Further, the Australian Accounting Standards Board, and the Auditing and Assurance Standards Board, released guidance to organisations on their climate-related financial reporting obligations.
The regulatory guidance arrives at a time when current levels of climate reporting appear low. A December 2018 survey by Market Forces found that 57 per cent of ASX 100 companies recognised climate change as a material business risk but that, of these companies, only three had disclosed according to the TCFD Recommendations. A subsequent Market Forces survey of 72 ASX 100 companies, released in February 2019, found that, while 86 per cent of the companies described their board as having oversight of climate-related risks, very few were carrying out TCFD-aligned scenario analysis.
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 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 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.