ASIC moves the dial on climate change

In August the Australian Securities and Investment Commission - ASIC, enhanced its guidance to listed businesses on the need to consider the impact of climate change on their financial reports, including the annual report, and in the prospectus when seeking an IPO.

By upping the ante on climate risk in this way and explicitly embedding it within its broader disclosure framework guidance, climate change is now recognised an important and relevant risk for investors and stakeholders.

As organisations review their current and future performance, whether from a new investor perspective (in the case of RG 228 dealing with prospectuses) or for existing investors via annual reporting (in the case of RG 247 for the Operational & Financial Review (OFR) guidance), climate risk needs to be considered and appropriate disclosures made, which is an important shift in ASIC’s approach to this issue. 

Through updating its existing guidance to incorporate climate change, ASIC is calling it out as a mainstream risk that needs consideration just like many other risks. 

The OFR guidance highlights the fact that climate change is a systemic risk that could impact an organisation's future operations. The types of climate risk identified in the Taskforce on Climate-Related Financial Disclosures (TCFD) (being transition and physical climate risk) have been incorporated in the prospectus guidance.

Overall this means that organisations will have to consider climate change proactively, and disclose the risks and opportunities where relevant and material, to enable investors and other stakeholders to make more informed decisions. 

Significant

This announcement is significant in that to date there has been limited and often inconsistent disclosure of climate-related risks and opportunities in OFRs and this will push organisations to be more explicit in how they have considered this issue. 

Importantly the guidance also highlights that ASIC expects consistency between disclosures in the OFR, the Annual Report and/or Sustainability Report where reference is made to the TCFD or climate change. 

For example, organisations shouldn’t talk about climate change as a material risk in one disclosure, yet make no reference to it in the OFR. 

There is an increased onus on management and the Board to consider climate risk, disclose material risks and opportunities and any related financial consequences.

Auditing

Auditors will also need to take greater consideration of how climate-related risks impact the balances within the financial statements and assess the relevant disclosures and impacts. 

The TCFD disclosures do not require auditing, but where impacts are identified that have financial consequences that flow into the financial statements, these will require audit. 

The AASB/AuASB Joint Bulletin: Climate-related and other emerging risks disclosures first published in December 2018, reinforced the view that climate change may impact financial statements and encouraged organisations to explicitly consider these impacts and where material disclosure this information.

Business is also ramping up

Businesses across all industries are very aware of the TCFD recommendations with many adopting them and making disclosures in their Annual or Sustainability reports. This is the second June year-end since the TCFD recommendations were released, and many companies are looking to demonstrate their progress in implementing the recommendations this reporting season. 

More businesses are embedding more aspects of the TCFD into their organisations, and in particular, more are conducting and looking to report on the scenario analysis recommendation this year compared with last. We expect this to continue.

Impacts

The impacts are broad. Depending on the industry, some are more material than others and focused assessments and understanding of the impacts on assets and portfolios is required. Some examples include:

• Infrastructure - The physical impacts of climate change on roads, rail, ports, bridges, and communication networks will need to be managed, including the need to develop new designs, materials and resilience to withstand more frequent or intense weather events;
• Energy sector will need to transition from high carbon to low carbon emissions, including dealing with the social and transitional issues while also considering new opportunities in areas such as hydrogen 
• Supply chain challenges to all sectors from climate change impacts on their supply-chains and the ability to obtain and move raw materials and goods to where they are needed will expose weak links and require innovative responses. For example food supply will be impacted by more intense or frequent weather events which highlights the need for better planning for alternate sources into the future. 

Where are the risks and opportunities for Financial Services?

The financial services sector has a crucial role to play. Climate risk is a systemic risk to the financial system and financial services organisations must not only consider the impact on their own operations but consider the impacts on the assets they hold, loans they have made and investments they have made for their customers over the longer term. 

• Banks will need to continue to understand the impact of physical and transition risks on their own operations and importantly on their lending and asset their portfolios. They have started but the work must be continually refined as more data on potential impacts becomes available. 
• Similarly, Insurers will need to continue to understand the impacts of extreme weather on customers, price their products accordingly and also consider the impact on their investments 
• Investment managers and superannuation funds where much money is invested to support long term retirement needs must constantly consider the impact that climate change has on the long term security of returns 

Social License – Financial services organisations have a key role to play to assist their customers understand potential climate impacts given the reach of the financial services sector across the Australian community. They can partner with local community organisations to build resilience, for example in cyclone-prone areas insurers and banks can work together with different partners to help residents and businesses become more resilient e.g. types of roofing, tying roofs down, not issuing building permits for flood prone areas etc.

ASIC, and the financial services regulator, APRA are watching and will want to ensure that financial services organisations are giving climate change appropriate consideration by the Board and management and disclosing relevant information to investors and stakeholders, now and into the future.