On 20 September, the Australian Securities and Investments Commission (ASIC) released: Report 593 Climate risk disclosure by Australia’s listed companies setting out ASIC’s high-level findings and recommendations for listed companies, following an ASIC review of disclosure practices in the market. 

Overall, ASIC found that outside of companies in the ASX 200, there was very limited climate risk disclosure by listed companies and that in some cases, the disclosure was non-specific and therefore of limited value to investors. The report also includes four high level recommendations relating to the consideration and disclosure of climate risk. 

Key findings in Report 593 Climate risk disclosure by Australia’s listed companies

Larger companies were more likely to disclose climate risk across all forms of disclosure reviewed, including in annual reports, than smaller companies. 

• Among the ASX 1-100: 40% of companies disclose climate risk as a material risk in the Operating and Financial Review (OFR) and 80% included it in their annual report.
• For ASX 101-200 companies this dropped to 5% of companies including climate risk as a material risk in the OFR and 35% including it in their annual report.
• For ASX 201-300 companies, 5% included climate as a material risk in the OFR and 30% included it in their annual report.

Companies appear less likely now, than in 2011, to include climate change content: The report found that the percentage of annual reports containing 'climate change content' for the period 2011 to 2017 has actually decreased from 22% in 2011 to 14% in 2017.  ASIC suggests that the 'higher rates of inclusion of "climate change content" in annual reports in the earlier part of this decade may be because of transition climate risk at that time in the form of legislative change under the Clean Energy Act 2011 (Cth)'.

Non-specific disclosure: In relation to prospectuses ASIC found limited examples of companies explicitly citing and disclosing climate risk (either physical or transition) as a relevant risk factor.  

• In 'the majority of prospectuses reviewed' though both environmental and regulatory risks were generally cited as risks to the business model of the relevant company, 'there was insufficient detail disclosed to enable an investor to determine if climate risk formed part of those broader risk categories, and, if so, how and to what extent'.
• None of the prospectuses reviewed expressly identified any physical climate risks.
• One prospectus cited transition climate risk as a key risk, highlighting public concern around the issue of climate change and the possible impact of regulatory responses as a risk to the relevant company’s business model. The relevant disclosure also explained how different regulatory responses may affect the company’s operating and financial performance.

'Fragmented climate risk disclosure practices': ASIC observed that lack of standard/consistent climate risk disclosure practices across the sample of disclosures reviewed, 'make comparisons difficult'. Fragmented climate risk disclosure practices make comparisons difficult

ASIC also observed that a number listed companies intend to adopt the recommendations (either in full or in part) of the Task Force on Climate-related Financial Disclosures (TCFD).

Commenting on the report findings, ASIC commissioner John Price said: ‘Climate change is a foreseeable risk facing many listed companies in the Australian market in a range of different industries. Directors and officers of listed companies need to understand and continually reassess existing and emerging risks (including climate risk) that may affect the company’s business – for better or for worse…We intend to monitor market practice as it continues to evolve and develop in this area.'

Key recommendations

Consider climate (and consider the TCFD final report): 'Directors and senior managers 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' ASIC writes. In relation to the adoption of the TCFD recommendations, ASIC states that 'Regardless of whether a company follows the disclosure recommendations of the TCFD, we recommend that directors and senior managers consider the TCFD’s final report which serves as a useful reference for climate risk and its assessment, governance and management'.

Develop and maintain strong and effective corporate governance: 'Strong and effective corporate governance helps in identifying, assessing and managing material risks. Strong corporate governance facilitates better information flow within a company and facilitates active and informed engagement and oversight by the board in identifying and managing risk. Transparency is one of the fundamental tenets of strong corporate governance. When climate risk is material, consideration should be given to disclosing the company’s governance and risk management practices around climate risk' ASIC states.

'Comply with the law'

• Directors of listed companies should carefully consider the requirements relating to OFR disclosure under s299A(1)(c) Corporations Act 2001 (Cth) ASIC writes. 'We consider that the law requires an OFR to include a discussion of climate risk when it could affect the entity’s achievement of its financial performance or disclosed outcomes' the report states. In addition, referencing Regulatory Guide 247: Effective disclosure in an operating and financial review (Para 64) ASIC writes that 'directors should also consider the requirement to include any relevant analytical comments and specify how risk factors that are within the control of management will be managed'.
• Preparers of disclosure documents should consider, ASIC writes, the relevant issuing company’s exposure to climate risk as part of any due diligence process and, 'when that risk is material, the prospectus should disclose it in a clear, concise and effective way' (s710 Corporations Act 2001 (Cth) and Regulatory Guide 228: Prospectuses: effective disclosure for retail investors).

Disclose useful information to investors — 'consider' adopting the TCFD framework: ASIC states that the voluntary disclosure recommendations issued by the Task Force on Climate-related Financial Disclosures (TCFD) are 'specifically designed to help companies produce information that is useful for investors'. ASIC adds that 'We do not consider there is any legal or policy impediment to listed companies reporting under the TCFD recommendations provided that the disclosure is not misleading or deceptive. We recommend that listed companies with material exposure to climate risk consider reporting under the TCFD framework'. ASIC goes on to say that regardless of whether the TCFD framework is adopted, its recommended that 'where appropriate, listed companies assess and disclose climate risk with reference to the broad categories formulated by the TCFD: physical and transition risk' and 'also recommend that listed companies consider disclosing climate separately to other general risk categories, such as environmental or regulatory risk, and focus on ensuring risk disclosure is sufficiently clear and specific'.

IGCC has welcomed the release of the report

Investor Group of Climate Change (IGCC) issued a statement welcoming the release of ASIC's report.  IGCC CEO Emma Herd said: 'Financial regulators are clearly telling corporate Australia that they must report on climate change risk with the same level of rigour as any other financial risk. This report finds that currently they are not…Australian companies must lift their game when it comes to reporting on climate change risks, or they risk losing access to capital…This report shows that Australian companies have the policy and accounting frameworks they need to report on climate change risks in a meaningful way. With ASIC, APRA and the market calling for better reporting on climate change, it’s time for Australia companies to step up.' 

Context

• Climate disclosure is a strategic priority for ASIC: This review of climate disclosure was flagged in ASIC's latest report on Corporate Finance Regulation (ASIC Report 589) which identified climate as an area of focus (among others) for the regulator over the next six months, despite current regulatory uncertainty.
• Review of regulatory guidance planned: Report 589 also flagged that a review of relevant regulatory guidance is planned for release by the end of the year (see: ASIC report on corporate finance regulation H1 2018). In terms of the scope of the review of ASIC guidance, ASIC's strategic plan identifies the review of existing guidance in Regulatory Guide 170 Prospective Financial Information and Regulatory Guide 247 Effective disclosure in an operational and financial review. In addition, the strategic plan identifies as 'engagement with Treasury' on 'ASIC actions to address the government's response to the recommendations of the senate economics references committee report: Carbon Risk: A burning issue as areas of focus.

[Note: MinterEllison has prepared a guide on climate risk disclosure to assist boards and their committees: The climate risk reporting journey: a corporate governance primer.  See: ASIC's new focus on climate change risk disclosure - what does it mean for corporate boards?]