Australian corporations are facing increasing pressure to disclose their exposure to climate-related risk in their public reports and to catch up with the EU, who are embracing mandatory environmental and climate risk reporting.
Pressure is building for Australian corporate entities to improve their identification and reporting of the risks climate change poses to their financial position and business operations, but Australia still lags behind other developed countries when it comes to environmental reporting (according to the Organisation for Economic Co-operation and Development).
As the Commonwealth Government remains hesitant to implement a comprehensive policy strategy to achieve emissions reductions in line with the "2 degree" goal of the Paris Agreement, various environmental organisations, regulatory bodies, investors and shareholders have taken the lead in driving change.
Australian regulatory landscape for reporting climate change risks
Reporting on climate change and its associated risks is currently not mandatory in Australia, and there has been little suggestion from the Commonwealth Government that mandatory corporate environment and climate risk reporting is on the horizon.
The Corporations Act 2001 (Cth) outlines requirements for corporate reporting, but they don't include the disclosure of climate risks. The last time corporate law expanded its reach into environmental reporting was by the addition of section 299(1)(f) in 1998; this requires all corporations that are subject to environmental laws or regulations, such as pollution licences, to disclose their performance under such regulations in the director's report. The uncertainty surrounding what this provision actually requires has led to inconsistent corporate reporting on environmental compliance.
The response of Australian regulators and others to climate risk reporting
Even if environmental and climate risk reporting does not become mandatory in Australia anytime soon, there is a compelling case developing, reflected in the opinion of industry regulators, that corporations should look to address environmental change risk more proactively. This includes public disclosure of their likely exposure to climate risk, in order to reduce potential exposure to investors and liability of directors.
In 2014, after mounting public awareness of corporate social responsibility, the ASX published Corporate Governance Principles and Recommendations which suggest listed entities disclose any environmental risks and how they manage or intend to manage those risks, for the purposes of transparency and good governance practices. ASIC similarly recommends that a corporation should discuss environmental and sustainability risks in their annual report, however only if the risks could affect financial performance. In a speech given in 2017, APRA Executive Board Member Geoff Summerhayes warned of the potential serious legal consequences facing directors who continue to ignore climate risk obligations in the future. Most recently, the Reserve Bank governor Dr Philip Lowe has described the guidance given by the Financial Stability Board's Task Force on Climate-related Financial Disclosures as "exactly the right direction to be heading".
Numerous industry bodies such as the Governance Institute of Australia and the Australian Institute of Company Directors have put company directors' potential liability for climate risks into focus, while the Australian Council of Superannuation Investors released updated governance guidelines for companies, including detailed information about expectations on climate risk disclosure, in November 2017.
If that was not enough, interest groups have increasingly begun to look to the courts for clarification on whether a corporation's obligation to ensure its annual report presents a "true and fair view" of the financial position and performance of the company extends to require the disclosure of assessment to climate related risks.
International landscape: mandatory environmental reporting and shareholder activism
Since 2015, the European Union has enforced mandatory environmental reporting for corporations with 500+ employees. Across Europe, the Directive affects approximately 8000 large public companies and requires them to disclose information about their social and environmental impacts, including the use of renewable and non-renewable energy, greenhouse gas emissions, water and land use, pollution and material usage, as well as climate change associated risks. The information must be published in a management report or a separate sustainability report based on a national, European Union or international reporting framework. The majority of Europe has embraced the requirement, with the offence of the publication of a misleading report punishable by up to two years' imprisonment in Norway, or a fine of €50,000 to €150,000 in Italy.
International industry bodies as well as shareholders in multinational corporations are similarly embracing climate risk disclosure:
- shareholders in ExxonMobil and Santos Limited have used shareholder resolutions to influence boards to consider climate risks;
- the Financial Stability Board released "Recommendations of the Task Force on Climate-related Financial Disclosures" which outlined information and guidance for businesses to pursue voluntary, practical climate risk disclosures (TFCFD); and
- the Global Reporting Initiative has released its fourth edition of official global standards for sustainability and climate reporting, which are recognised as current best practice guidelines.
What can Australian corporations do to get ahead in reporting climate risk?
A number of Australian corporations have already commenced voluntary climate risk related disclosure, including scenario analysis of the kind recommended in the TFCFD of what the 2 degree goal of the Paris Agreement means for their business. Corporations can anticipate increasing scrutiny and move towards disclosing climate risks in their reports, with the EU approach a readily adaptable model.
The first step in mitigating corporate risk is for corporations to analyse their current exposure to climate risks. This includes understanding the risk profile of specific business practices and investigating and documenting any risks along the whole supply chain, such as:
- assessing the physical risks of climate change, such as droughts, floods and other extreme weather;
- assessing transition risks such as loss of access to resources including water and waste disposal;
- conducting scenario analyses of climate risks specific to certain industries and sectors;
- adapting strategy and risk management processes to address identified risks;
- using guidelines such as those published by the Global Reporting Initiative or the TFCFD;
- implementing good corporate governance principles and business judgment to avoid potential litigation; and
- pursuing further investigations or obtaining expert advice for identified risks.
By assessing risk exposure and documenting the corporation's response to it, Australian corporations will be better placed to respond to increasing public and regulator calls for more transparency, as well as mitigate potential legal risks. Given that the World Economic Forum identified eight global risks in their 2018 Global Risks Report and seven of these risks are climate change-related, assessing the implications of climate risk to business is likely to be an important task that corporates will need to address.
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.