Climate change risk

Extreme weather and rising sea levels will have financial impacts. Here’s what you need to know about disclosing the risks.

In brief

  • Climate change is a business risk, not just an environmental, social and governance issue.
  • A Financial Stability Board task force has developed climate-related financial risk disclosures.
  • Under the Paris Agreement, Australia and New Zealand must take steps to curb limit their emissions.

Understanding and reporting financial risks of climate change

The catastrophic impacts of climate change are "imposing a cost on future generations that the current generation has no direct incentive to fix," warns Mark Carney, governor of the Bank of England and chair of the international Financial Stability Board (FSB).

What are the risks?

These climate-related risks need to be considered:

  • physical risks - eg damage to property and disruption to trade caused by floods and storms
  • transition risks - eg adapting to legislative and technological changes as we shift to a lower-carbon economy

Disclosure of climate change risk

Chartered Accountants Australia and New Zealand has advocated for appropriate disclosures of climate risk. Material risks must be disclosed in financial reports in Australia and New Zealand.

The Task Force on Climate-related Financial Disclosures (TCFD) was set up by the FSB in 2015. It is, chaired by US businessman Michael Bloomberg and, comprises representatives from industry, data users and data preparers. In June 2017, the TCFD released its recommendations for climate-related financial disclosures. These are voluntary but provide guidance for appropriate climate-related financial disclosures. In 2018 the Task Force published a status report to provide an overview of current disclosure practices related to core elements of the TCFD recommendations. The Task Force noted that:

  • The majority of companies disclosure some climate-related information.
  • Financial implications are often not disclosed.
  • Information on strategy resilience under different climate related scenarios is limited.
  • Disclosures vary across industries and regions.
  • Disclosures are often made in multiple reports.

In Australia, the proposed 4th edition of the ASX Corporate Governance Council’s Principles and Recommendations notes that greater guidance on disclosure of carbon risk is required as boards are increasingly being called upon to address new or emerging issues which include sustainability and climate change. It has been suggested that if entities believe that they don’t have any material exposure to environmental and social risks that they carefully consider the basis for their belief and benchmark against their peers.

The Australian Securities and Investments Commission (ASIC) recently published "Climate risk disclosure by Australia’s listed companies" a report summarising their findings and high level recommendations for listed companies and their directors and advisers on climate risk disclosure. The report found that many disclosures were too general and not comprehensive enough to be useful for investors and that directors and officers (of listed companies) should adopt a probative and proactive approach to emerging risks, including climate risk. ASIC recommends that listed companies need to consider climate risk in their corporate governance, when comply with the law (Section s99A (1) (c) and in their disclosures to investors.

New Zealand

As a member of the Sustainable Stock Exchange (SSE), New Zealand's Stock Exchange (NZX) promotes the disclosure of relevant ESG (Environmental, Social and Governance Criteria) matters by issuers. In December 2017, NZX released the ESG Guidance Note which supports NZX listed issuers that are considering the disclosure of ESG factors under the NZX Code. This guidance includes practical key factors such as determining relevance to an entity's corporate governance and how an entity can approach reporting on ESG and also references the TCFD recommendations.

Policy impacts

Australia and New Zealand were among 195 countries that signed the Paris Agreement after the 2015 UN Conference on Climate Change. They agreed to:

"Aim to reach global peaking of greenhouse gas emissions as soon as possible... and to undertake rapid reductions thereafter in accordance with best available science."
Paris Agreement, UN Conference on Climate Change

The agreement's goal is to limit global warming to well below 2°C hotter than pre-industrial levels. Signatories are further encouraged to try to limit the temperature increase to 1.5°C.

In 2018, New Zealand consulted on the Zero Carbon Bill which proposes the introduction of new 2050 emissions reduction targets to provide greater certainty about the direction to transition to a low emissions, climate-resilient economy. New Zealand has already made commitments to reduce emissions to 5 per cent below 1990 levels in 2020, 11 per cent below 1990 levels by 2030 and 50 per cent below 1990 levels by 2050. The Act will be effective from July 2019.

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