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Focus: FSB Task Force reports on climate-related disclosures

16 December 2016

In brief: New recommendations have been released that aim to provide guidance to companies regarding the making of climate-related disclosures in public fundraising documents. Allens Climate Change group members Partner Andrew Mansour (view CV), Senior Associate Emily Gerrard and Lawyer Dale Straughen provide an overview of key recommendations and findings of the task force's report.

 
 

How does it affect you?

  • The Task Force on Climate-Related Financial Disclosures' (the Task Force) most recent report builds on its phase one report in March this year, which noted the role for climate-related financial disclosures in accurate market pricing and avoiding investor uncertainty.
  • The Task Force's recommendations follow recent media attention relating to legal views around company director's duties and climate risk disclosure requirements in Australia.
  • The Task Force report suggests a singular, accessible framework for climate-related financial disclosure to improve the accuracy and timeliness of disclosure of current and past operating and financial results.
  • The Task Force recommendations will be of assistance to Australian companies, including as an additional resource in current reporting initiatives and in considering how to manage existing disclosure requirements relating to financial information and the environment under the Corporations Act 2001 (Cth) and to the ASX.

Standards and key recommendations

The Task Force was established by the Financial Stability Board (FSB) and chaired by Michael Bloomberg and comprises members who use and prepare disclosures across different financial markets and economic sectors. The Task Force has been established to develop uniform recommendations for disclosing the likely impact of climate change on companies' finances in public fundraising documents.

The report structures its recommendations around four thematic areas representing the core elements of how organisations operate – governance, strategy, risk management, and metrics and targets. A standardised framework is outlined for assessing how climate-related risks and opportunities may affect an organisation's future balance sheet and cash flows.

The key recommendations of the report are that all organisations with public debt or equity should ensure that their public disclosures include:

  • the organisation's governance structure for dealing with climate-related risk;
  • the potential impacts of climate-related risks on the organisation's strategy and financial planning;
  • how the organisation identifies and manages climate-related risks; and
  • the metrics used to analyse climate-related risks and opportunities.

The report sets out a common standardised framework for categorising climate-related risks and opportunities and connecting these to a financial impact.

This framework divides climate-related risks into transition risks (being risks arising from the policy, legal, technological and market changes being made to address climate change) and physical risks (from both acute catastrophic events and chronic shifts in climate patterns).

Climate-related opportunities are then divided into the categories of resource efficiency, energy sources, new products and services, emerging markets and overall resilience. The Task Force suggests distilling these risks and opportunities into a clear financial impact. This common framework is intended to allow for better comparison across different companies, with the explicit focus on financial impacts intended to ensure that the underlying purpose of disclosure is fulfilled.

Other key recommendations and findings include:

  • that preparers of climate-related financial disclosures provide such disclosures in their mainstream (public) financial filings, so that the governance processes for these disclosures would be similar to those used for existing public financial disclosures and would likely involve internal review by the chief financial officer and audit committee, as appropriate;
  • that organisations exposed to climate-related risks consider using scenario analysis (including a 2° Celsius scenario, the maximum end of the Paris Agreement requirement) to inform strategic and financial planning processes and disclosing the potential impacts identified, as well as responses to these impacts; and
  • provision of seven principles for effective disclosure, to help guide current and future developments in climate-related financial reporting.

More detail on these general recommendations, and more tailored recommendations for specific industries, can be found in the report.

Climate change-related disclosure in Australia

These recommendations will be of assistance to Australian companies making climate-related disclosures. Periodic disclosure of matters required for an informed assessment of a company is already required under the Corporations Act, and disclosure of matters expected to have a material effect on share prices is generally required under the ASX's continuous disclosure obligations. Climate-based financial risks are likely to be increasingly a larger component of these disclosure considerations.

In addition to compliance considerations, conformity with the Task Force recommendations is also likely to place a company on the right side of market expectations. A number of companies, including Woodside, Rio Tinto and BHP Billiton, are already specifically referencing climate change and sustainability in their reporting on financial risk. Implementing reporting processes sooner rather than later will ensure that companies aren't caught out by changes in reporting trends and investor expectations.

Further work

The Task Force acknowledges that further work is needed to encourage adoption of a common framework for climate-related risk disclosures. The recommendations of the Task Force are intended to provide a foundation for these efforts. The Task Force has also opened a 60-day public consultation period to receive views on the report's recommendations. Submissions will be published in March 2017, with an updated report delivered in June 2017.

 

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