Australian companies are expected to come under greater pressure from major investors, including Australian super funds, to move towards global standard reporting of ESG issues including emissions data.
This is despite the Morrison Government’s rejection of moves to further mandate carbon and emission reporting beyond the current requirements on the biggest emitters in the country.
“Climate change is a significant challenge for Australian companies and investors, including superannuation funds,” Louise Davidson, the chief executive of the Australian Council of Superannuation Investors (ACSI) told Investment Magazine.
“Investors need access to reliable information to understand companies’ exposure to physical and transitional risks,” she said.
Global trend to improve standards
Davidson said a recent announcement by the US Securities and Exchange Commission (SEC) that it was considering mandating higher levels of disclosure from all listed companies reflected “a global trend to improve climate disclosure standards for investors”.
“This global move is important for superannuation funds seeking to price climate-related risks in their portfolios,” she said.
“We expect the focus on climate-related financial reporting to continue, with the UK, US and New Zealand moving towards mandatory reporting standards.”
Davidson said companies which had material exposures to climate risk were now increasingly using the Taskforce on Climate-related Financial Disclosure (TCFD) framework.
She said the focus on climate reporting would also accelerate with the work of the International Sustainability Standards Board (ISSB).
Davidson said climate change risks were “deeply embedded across our economy and distinctly financial in nature”.
Reporting “varied wildly”
She said the current lack of a standardised approach to climate change and emissions reporting around the world meant that “the current quality of reporting varies wildly across companies”.
“Greater consistency and comparability in reporting will support investors in understanding risks in their portfolios, all working towards the best financial interests of their beneficiaries,” she said.
The US SEC recently proposed changes to its rules for listed companies to introduce mandatory reporting on their exposure to climate change risks including their own greenhouse gas emissions.
SEC chair Gary Gensler said the proposed disclosure requirements “would provide consistent and clear reporting obligations for issuers”.
He said “investors representing tens of trillions of dollars” supported climate change related disclosures “because they recognise that climate risks can pose significant financial risks to companies”.
“Investors need reliable information about climate risks to make informed investment decisions,” he said.
He said companies and investors would benefit from the “clear rules of the road” outlined on disclosure.
The proposed US rule changes would require a company to disclose information about the company’s governance and risk management processes for handling climate change and how any climate related risks could affect their business.
They would also require the companies to disclose their direct greenhouse gas emissions and indirect emissions from any energy it uses.
At the moment, only the largest emitters are required by law in Australia to report their emissions, a process overseen by the Clean Energy Regulator (CER).
Asked to comment on the US move, which could take in all US listed companies, Federal Energy Minister Angus Taylor declared that any further regulation would be too much “red tape.”
But the Labor Party, has indicated it could take a tougher look.
Possibility of mandatory reporting
Reserve Bank governor Phil Lowe, whose deputy Guy Debelle, recently resigned to join Fortescue Future Industries, the green energy arm of Andrew Forrest’s Fortescue Metals Group, also said publicly that he expected there would be a move in Australia towards mandatory climate change reporting.
Lowe said that the RBA and the Australian Securities and Investments Commission (ASIC) were involved with discussions with groups overseas to help develop international standards for the disclosure of climate change risks.
“There is discussion here about whether it will be mandatory,” he said.
“In time it will be mandatory, just like the accounting standards are mandatory.”
“We are not there yet, but I think it will happen over time.”
In a report issued last December, law firm Corrs Chambers Westgarth said it expected that mandatory ESG reporting requirements would “soon be a reality for Australian companies.”
It said there was “increasing concern that current voluntary reporting regimes are inadequate, particularly in respect of climate-related risks and opportunities”.
“Recent developments in climate-related and ESG reporting requirements around the world highlight a growing momentum in favour of mandatory ESG disclosure,” it said.
“Despite the ESG reporting regime currently being voluntary in Australia, it is clear that mandatory reporting requirements are on the horizon.”
It warned its client that “companies who do not rise to meet demands for ESG accountability and transparency with adequate reporting face a risk of shareholder and employee activism, investor divestment and future regulatory action”.
At the CFA Australian Investment Conference last October, the then deputy RBA governor Guy Debelle, said there was tension between the exiting disclosure laws in Australia and global momentum for higher levels of climate reporting.
He said the debate was being answered by investors who were increasingly demanding climate related disclosures by proposing “say on climate” resolutions at corporate annual meetings.
