- Our economy needs to adapt and contain climate change
- APRA, ASIC and now the RBA have all highlighted the potential risks of climate change
- New guidance on materiality for climate-related risks published by AASB and AuASB
Climate Change and the Economy
The last twelve months has seen a major shift in the way that Australian regulators view the impacts of climate change and the risks to the economy. The Australian Prudential Regulatory Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia (RBA) have all publicly issued statements illustrating the risks, the concerns and the opportunities.
The recent Bureau of Meteorology (BoM) and CSIRO report, State of the Climate, notes that Australia’s climate has warmed by just over 1 degrees C since 1910 with this small rise has already had a significant effect with the frequency of extreme heat events increasing from 2% to 12.5%, and it is expected that there will be further warming over the next decade.
In his recent speech to the Centre for Policy Development, Guy Debelle, Deputy Governor of the Reserve Bank of Australia noted that ‘The policy environment has a key effect as well as the climatic environment. It is worth noting that the effect on the Australian economy is not just a function of the domestic political environment, but also that of other countries, most notably our trading partners.’He also stated that ‘Financial stability is also a core part of the Reserve Bank's mandate. Challenges for financial stability may arise from both physical and transition risks of climate change.’
Debelle then explains that the RBA has taken steps by talking to businesses (through their business liaison program) and with climate modellers to translate the effect of climate change into economic models and frameworks that inform Australia’s monetary policy decision-making. In 2018, the RBA also joined the Network for Greening the Financial System (NGFS), a group of central banks that are examining climate issues.
Climate-related financial disclosures
Findings from ASIC’s recent report 593 demonstrate that many Australian listed companies have provided voluntary climate risk and climate-changed-related disclosure to the market. However ASIC found that many disclosures were too general and not comprehensive enough to be useful to investors. The findings also state that 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. This extends to both short-term and long-term risks.
In a joint bulletin issued in December 2018, the AUASB and the AASB address climate-related and other emerging risk disclosures in the context of financial statement materiality. The bulletin, ‘Climate-related and other emerging risks disclosures: assessing financial statement materiality using AASB Practice Statement 2’ puts entities operating in industries impacted by climate-related risks on notice stating that ‘your financial reporting considerations have now changed as a result of your investors publicly stating that their decisions are being impacted by climate-related risks.’
Although the guide is not mandatory, the two bodies have warned that it represents the IASB’s best practice interpretation of materiality and entities in Australia are already being subject to law suits regarding lack of disclosure. The bulletin states that:.. the impact of the materiality definition and AASB Practice Statement 2 Making Materiality Judgements is that entities can no longer treat climate-related risks as merely a matter of corporate social responsibility and should consider them also in the context of their financial statements.’
Kris Peach, chair of AASB recently commented that "It's been very important that we help companies, and particularly directors and CEOs, start to think about the impact of climate risk and other emerging risks in their financial statements. That's the real purpose for us – you need to have a very broad conversation when you're starting to think about these risks,"
Extreme weather and rising sea levels will have financial impacts. Here’s what you need to know about disclosing the risks.Find out more