A crisis of the magnitude of COVID-19 is not only one of the greatest disruptors most business leaders will ever face, it can also distract investors and other market observers from aspects of performance that are sub-par, such as the poor disclosure by the ASX 300 on their climate change risk.
Legal and consulting firm MinterEllison’s analysis of FY19 annual reports indicates that only 21 (seven per cent) of ASX 300 companies had “meaningful” climate change risk disclosures, compared with 137 (45.5 per cent) of reports containing little or none.
The companies doing exemplary work on disclosing climate change risk are, in the main, larger organisations, with 17 of the 21 companies that had meaningful disclosure in the ASX 100 – leaving just four mid- to small-cap companies (that rank between 200 and 300 on the ASX) having provided meaningful climate risk disclosure.
Despite COVID-19, climate change remained an institutional priority in the 2020 reporting season and this will continue into 2021. Pressure will come from:
- Mainstream investors: Institutional investor expectations on corporate climate-related strategy and risk management accelerated sharply in FY2019–20 and, having done so, are unlikely to regress.
- Net zero strategy: Both activist investors and, increasingly, mainstream institutional investors continue to place pressure on companies exposed to the economic transition to articulate their
strategy for continuing to create value in a “net zero emissions” world.
- Regulators: While central banks and financial regulators are moderating direct corporate engagement during the pandemic, their oversight of climate risk impacts and disclosures is continuing. Guidance from regulators — the ASX, Australian Securities and Investments Commission, Australian Prudential Regulation Authority, and Australian Accounting Standards Board (AASB) — points to the recommendations of the G20 Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD) report.
- Narrative reports: Regulatory disclosure requirements for narrative financial report components continue to apply. As an economic black swan event, COVID-19 illustrates the role of stress testing and scenario planning as a risk management tool — itself a central plank of the TCFD recommendations.
- Financial statements: Recent joint guidance issued by the AASB and Auditing and Assurance Standards Board makes clear that the reasonable and consistent application of material climate-related financial assumptions in financial statement accounting estimates is squarely relevant to financial reporting and audit.
Only seven per cent of ASX 300 companies had “meaningful” climate change risk disclosures. The companies doing exemplary work are, in the main, larger organisations.
There is significant scope for companies to improve their disclosure on climate change risk and compelling reasons to do so. The analysis suggests that the quality of disclosures from FY19 was not uniform across, or within, sectors. For example, more than 70 per cent of “meaningful” disclosures were represented by companies in just four sectors: energy, materials, financial services and real estate. Conversely, nearly 40 per cent of companies with little or no disclosure fell into just two sectors: consumer discretionary and materials.
The following framework is useful for companies to consider as they work to improve their governance on climate risk. The top five areas for consideration by corporate boards are:
- Narrative disclosures — TCFD-aligned disclosures, including stress testing and scenario planning across the plausible range of climate futures, moves from gold standard to base expectation.
- Strategic positioning for the transition to a “net zero emissions” global economy prior to 2050, consistent with targets set out under the Paris Agreement.
- A roadmap for corporate emissions reductions goals over short- and medium-term time horizons, in pursuit of the longer-term “net zero emissions” target.
- Valuation and impairment — relevance of climate change-related assumptions to financial reporting and audit.
- Governance, executive remuneration and their relationship with climate change strategy.
Our analysis into climate risk disclosures in 2019 is a wake-up call for companies that have not improved their disclosures in 2020.
Sarah Barker is a special counsel with MinterEllison.