Context: Reporting under the ASX Corporate Governance Principles and Recommendations
Recommendation 7.4 of the ASX Corporate Governance Council’s Principles encourages entities to consider and to report upon any material exposure to environmental or social risks (including climate change risk) and how it manages/intends to manage those risks.
The commentary accompanying the recommendation explicitly identifies risks associated with the following as particular sources of climate risk: a) risks related to the transition to a lower-carbon economy, including policy and legal risks, technology risk, market risk and reputation risk; and b) physical risks, such as changes in water availability, sourcing, and quality; food security; and extreme temperature changes affecting an organisation’s premises, operations, supply chains, transport needs, and employee safety.
The commentary also 'encourages' entities to consider 'whether they have a material exposure to climate change risk by reference to the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) and, if they do, to consider making the disclosures recommended by the TCFD'.
The Governance Institute's guide is aimed at assisting ASX listed entities and others to identify and report climate change risks in line with Corporate Governance Council's recommendation.
A question of managing the financial risks and opportunities associated with climate change
In his foreword to the Guide, Australian Prudential Regulation Authority (APRA) member Geoff Summerhayes emphasises the need for business to manage the financial risks/opportunities associated with climate change. 'The impacts of a changing climate have proven to be foundational drivers of both risk and opportunity, affecting structural change within the global economy. The 4th edition of the ASX’s Corporate Governance Council’s Corporate Governance Principles and Recommendations represent another important step in the increasing national and international recognition of these material risks and opportunities that must be carefully considered and evaluated by businesses' he writes.
[Note: APRA recently published two information papers setting out the regulator's policy and supervision priorities for the next 12-18 months. APRA identifies climate risk as one of its key focus areas. APRA has said that by the end of the year it will publish a new prudential practice guide to encourage regulated entities to better prepare for climate risks and clarify regulatory expectations. The regulator has also said that 'a key supervisory initiative for 2020 is to develop a climate change stress test'. The expected commencement date is 2021. A summary of APRA's supervisory and regulatory priorities is included in the 12 February issue of Governance News.
In a statement announcing the release of the Guide, the Governance Institute frames the need for entities to understand climate risk as a question of long-term sustainability and competitiveness. 'You need to understand climate change risks affecting your businesses to remain competitive. With stakeholders more focused than ever before on climate change and sustainability, if you fail to address these issues, the market will pass you by' the Governance Institute states.
What's in the guide?
- Chapter 2 provides an introduction to climate change concepts including the TCFD framework. It also gives an overview of the drivers behind increased reporting on climate change risk in Australia including, increased regulatory oversight and increasing investor and community interest. Page 7 of the report sets out a detailed timeline of relevant climate developments.
- Chapter 3 provides a break-down of the TCFD recommendations, an explanations of key concepts, and guidance on the requirements. It also highlights some of the challenges that have been identified in adopting the framework and some of the tools available to assist in meeting these challenges.
- Chapter 4 provides a concise summary of existing Australian climate reporting requirements, as well as practical guidance on reporting against the TCFD framework.
- Chapter 5 provides practical guidance including examples from Australian-listed entities and others on how they have approached climate change disclosure.
Practical steps entities can take to start reporting against the TCFD framework
The Climate Disclosure Standards Board (CDSB) and the Sustainability Accounting Standards Board (SASB) released the TCFD implementation guide in May 2019. This sets out eleven steps for getting started on TCFD reporting. The governance institute supplements this guidance, by suggesting a number of activities for Australian entities under each step. This is summarised below.
Step 1 - CDSB/SASB guidance:
Secure the support of your board of directors and executive leadership team.
The Governance Institute suggests that this could involve: a) briefing the board and executive team around climate-related risk, the TCFD and the potential risks to the business; b)engaging with the Audit, Risk or Sustainability Committee to assist in promoting board support; c) giving presentations to the board on particular areas of climate-related risk as part of executive and board ongoing strategic discussions.
The Governance Institute observes that some boards have undergone training on climate change and climate risks to help them understand the issues and potential areas of interest and questions from investors.
Step 2 - CDSB/SASB guidance:
Integrate climate change into key governance processes, enhancing board-level oversight through audit and risk committees.
The Governance Institute suggests a number of ways in which climate change could be integrated into governance processes. These include: a)conducting a gap analysis using a framework such as TCFD; b) identifying the board and management level committees and executives with specific responsibilities and clearly identify and document those responsibilities, information flows, and how overlapping responsibilities and accountabilities are to be managed; c)including regular reporting in board and committee calendars; and d)ensuring integration into internal assurance processes and scheduling.
Step 3 - CDSB/SASB guidance:
Bring together sustainability, governance, finance, and compliance to agree on roles.
The Governance Institute says that entities could consider: a) identification of key role(s) in each area to be a climate change/sustainability sponsor with accountability for liaising on climate issues across business functions; b) establishing a management level climate change/ sustainability committee; c) the impact on management reporting.
Step 4 - CDSB/SASB guidance:
Look specifically at the financial impacts of climate risk and how it relates to revenues, expenditures, assets, liabilities, and financial impact.
The Governance Institute says that this will involve mapping physical and transitional risks.
Physical risks being event driven risks eg increased severity of extreme weather events or the risks of rising sea levels caused by increased temperatures.
Transition risks being the risks relating to the transition to a lower carbon economy eg policy and legal risk, technology risk, market risk and reputational risks.
Step 5 - CDSB/SASB guidance:
Assess your business against at least two scenarios.
The Governance Institute suggests that this could be carried out by using the principles and guidance on scenario planning in the TCFD guidance. This will include, at a minimum, a 2°C or lower scenario and further considering using an additional two or three scenarios that are most relevant to the entity’s circumstances.
Step 6 - CDSB/SASB guidance:
Adapt existing enterprise-level and other risk management processes to take account of climate risk.
The Governance Institute suggests that this could involve adapting the entity’s existing risk management processes and would also include integrating climate related transition and physical risks.
Step 7 - CDSB/SASB guidance:
Solicit feedback from engaged investors about what information they need to know about climate-related risks and opportunities.
The Governance Institute suggests that entities should consider:
- Reviewing key investors’ and investor representative bodies', public statements and publications about climate-related risk.
- Engaging in discussions with key investors’ and investor representative bodies to understand their drivers and expectations.
Step 8 - CDSB/SASB guidance:
Look at existing tools you may already use to help you collect and report climate-related financial information such as the CDP Questionnaire (aligned to the TCFD since 2018), the CDSB Framework, and the SASB Standards.
The Governance Institute suggests entities should engage with their Sustainability team to understand the drivers for the entity.
The Governance Institute also suggests that in addition to reviewing existing tools and information, entities should consider looking at disclosures by entities in similar industries. Chapter 5 of the Guide includes examples of the approach taken by a number of entities in a range of sectors.
Step 9 - CDSB/SASB guidance:
Plan to use the same quality assurance and compliance approaches for climate-related financial information as for finance, management, and governance disclosures.
The Governance Institute suggests that entities consider: a) adapting existing internal and external assurance processes to cover climate-related disclosures; and b) pending adaptation of external assurance processes, take into account ASX Corporate Governance Council recommendation 4.3. ‘A listed entity should disclose its process to verify the integrity of any periodic corporate report it releases to the market that is not audited or reviewed by an external auditor'.
Step 10 - CDSB/SASB guidance:
Prepare the information you report as if it were going to be assured, even if you decide not to do so right now.
The Governance institute suggests that entities consider the impact of adapting existing internal and external assurance processes on timelines and processes for production and assurance of reports.
Step 11 -CDSB/SASB guidance:
Look at the existing structure of your annual report and think about how you can incorporate the recommendations into your discussion of risks, management’s discussion and analysis, and the governance section
The Governance institute draws attention to the TCFD's emphasis that the annual report should tell a clear and coherent story, and guide the report user, making the connections between governance, strategy, risk management, target-setting, and performance.
Climate Change Risk Review and Governance issues to watch in 2020
MinterEllison has released a report outlining developments in climate change risk across five key areas - climate risk disclosure and reporting, directors' duties, equity markets, debt finance and emissions reductions policies - and flagging developments to watch in 2020.
