It’s that time of year, when annual reports start flying in, thick and fast. And with regulators and investors having ramped up the pressure on climate-change risk, we can expect plenty of scrutiny around the way companies are treating an issue widely regarded as one of the biggest financial risks of our time.
A study by environmental finance group Market Forces reveals Australia’s biggest and most climate risk-exposed companies are progressing towards climate risk disclosure, albeit at a glacial pace.
Reporting to date has been largely bereft of the level of strategic detail called for by the Financial Stability Board’s standard-setting Task Force on Climate-related Financial Disclosures (TCFD).
Put simply, companies are waking up to the need to discuss the physical and transitional risks climate change poses to their business but very few are disclosing strategies to reduce exposure to those risks.
Updating our Investing in the Dark study from March this year, Market Forces analysed the public disclosures of the 74 ASX 100 companies that operate in TCFD-defined ‘high-risk’ sectors.
Since March, we’ve seen significant improvements in companies’ climate-risk governance processes. At 85 per cent of the companies studied, the board now has ultimate responsibility for managing climate risk, a 12 percentage-point jump from the March results.
Even more impressive has been the 15 percentage-point increase, since March, in companies encouraging emissions reductions through remuneration packages, with almost a third of companies studied now offering such incentives.
But the good news stops there.
Investors left in the dark
Companies have largely failed to undertake the more difficult next steps towards comprehensive climate-risk disclosure along the lines the TCFD has recommended.
Particularly glaring is the lack of movement on perhaps the most important TCFD recommendation: scenario analysis. Just 12 per cent of the companies studied provide detailed analysis of how their business is expected to fare under different scenarios of climate-change action.
This information is integral for investors determining whether a company has a future in a world where global warming is held well below 2 degrees. Without it, investors are left in the dark about how best to allocate capital in line with the international policy signal that the Paris climate change agreement provides.
Analysis of the physical risks associated with scenarios in which warming exceeds 2 degrees is equally important to demonstrate the devastating impacts these outcomes would have, both financially and socially.
QBE a laggard
A few companies are leading the way on physical risk disclosure. Commonwealth Bank’s latest annual report included estimates of increasing losses in its mortgage-lending business due to climate effects, including flood, bushfire and inundation.
Others should be doing much more; for example, QBE made unprecedented natural disaster payouts last year, but has so far failed to disclose detailed information about the physical risks it faces under different climate scenarios.
We’ve also observed a concerning reluctance to set absolute emissions reduction targets and detailed plans to reduce emissions in line with the Paris climate goals. Only a fifth of companies studied provide each of these TCFD-recommended disclosures, with the numbers almost stagnant since March. It’s perhaps unsurprising then that 40 per cent of the companies that disclose greenhouse-gas output increased their emissions year on year.
Less of the superficial, more action
Clearly, more concrete action must be taken to enforce climate-risk disclosure and management throughout Australia’s heavily carbon-exposed market.
Investors must escalate such disclosure in their engagement programs. They must demand companies demonstrate that their business strategies align with the Paris climate goals and divest from companies that are unable or unwilling to do so.
Regulators need to turn rhetoric and scrutiny into action, mandating and enforcing a comprehensive, universal climate-risk disclosure framework in line with the TCFD recommendations.
Without this escalation of pressure, we will probably see more of the same superficial climate-risk disclosure throughout the coming reporting season and investors will be left in the dark as to the amount of climate risk they’re holding.
Will van de Pol is a legal analyst at Market Forces