INVESTING IN THE DARK
August 2018 Update
Australian companies still failing to properly disclose climate riskTake action
Australia’s largest companies are making painfully slow progress towards climate risk disclosure, demonstrating a need for increased action from investors and regulators.
Since March, while companies’ reporting on climate risk governance has significantly improved, very little movement has occurred on some of the integral ‘strategy’ elements of climate risk disclosure.
The results show companies are becoming more aware of the need to disclose climate risk. But the majority are failing to demonstrate strategies to bring their business models into line with the Paris climate goals.
We need investors to demand this of the companies they own, and divest from companies that are unable or unwilling to align with the global commitment to hold global warming well below 2°C.
To complete this research, Market Forces analysed the public disclosures of the 74 ASX100 companies (as of July 2018) that operate in sectors highlighted by the TCFD as facing the highest levels of climate risk.
Research current as of 22 August 2018.
Proportion of ASX100 companies with high climate risk exposure that…
Identify climate change as a material business risk
Detail climate risks & opportunities in mainstream reporting
Disclose detailed climate change scenario analysis
Disclose an emissions reduction plan
Have set an absolute emissions reduction target
For the vast majority of companies studied (85%), the Board has ultimate responsibility for managing climate risk. A third of companies now explicitly encourage emissions reductions through executive or director bonuses, with that number doubling since March.
Companies are also now disclosing more detailed discussions of the risks and opportunities they face from climate change.
However, just 12% of companies have disclosed detailed analyses showing how they will fare in different climate change scenarios, while even fewer have a clear plan to reduce their emissions.
Significantly, only three companies – South32, AGL and Stockland – disclose in line with all recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Commonwealth Bank, BHP, Westpac and ANZ each come close to fully satisfying the recommendations while Macquarie and Mirvac are among the companies that have committed to addressing all recommendations in their 2019 reporting.
- Investors should escalate climate risk disclosure in their engagement programs, demand companies demonstrate alignment with the Paris climate goals, and divest from companies that are unable or unwilling to do so;
- Regulators should mandate a comprehensive, universal climate risk disclosure framework, i.e. TCFD recommendations;
- Companies should adopt all relevant TCFD recommendations, and reduce their exposure to climate risk by bringing their business operations and strategies into line with the global commitment to keep global warming well below 2°C.
While 65% of companies have unequivocally accepted climate science, 27% are unclear in their language. The remaining 8% have not formally acknowledged the science of climate change.
Acknowledgement of climate science demonstrates that a company’s board and senior executives understand the need to decarbonise the economy, and have considered the implications this may have on their business.
Methodology: to demonstrate acceptance of climate science, the company must unequivocally acknowledge the aims of the Paris Agreement or the need to decarbonise by the second half of the century; simply mentioning climate change is not sufficient.
Metrics and Targets
= Limited / Unclear
|Company||Sector||Climate science||Remuneration||Material risk||Risk description||Scenario analysis||Emissions reduction plan||Emissions reduction target|
|Commonwealth Bank of Australia||Financials||
|BHP Billiton Ltd||Materials|
|Westpac Banking Corporation*||Financials|
|Australia and New Zealand Banking Group Ltd||Financials|
|National Australia Bank Ltd||Financials|
|Wesfarmers Ltd||Consumer Staples|
|Macquarie Group Ltd*||Financials|
|Woolworths Group Ltd||Consumer Staples|
|Rio Tinto Ltd||Materials||
|Woodside Petroleum Ltd||Energy||
|Scentre Group||Real Estate|
|Insurance Australia Group Ltd||Financials|
|Suncorp Group Ltd||Financials|
|Origin Energy Ltd||Energy|
|Goodman Group||Real Estate|
|Newcrest Mining Ltd||Materials|
|AGL Energy Ltd||Utilities|
|Cimic Group Ltd||Industrials|
|Fortescue Metals Group||Materials||
|Oil Search Ltd||Energy|
|QBE Insurance Group Ltd||Financials|
|Treasury Wine Estates||Consumer Staples|
|Lend Lease Group||Real Estate||
|Qantas Airways Ltd||Industrials|
|James Hardie Industries Plc||Materials|
|Vicinity Centres||Real Estate|
|Bluescope Steel Ltd||Materials|
|GPT Group||Real Estate|
|Aurizon Holdings Ltd||Industrials||
|Caltex Australia Ltd||Energy|
|Medibank Private Ltd||Financials|
|Mirvac Group*||Real Estate|
|The A2 Milk Company Ltd||Consumer Staples|
|Coca-Cola Amatil Ltd||Consumer Staples||
|Evolution Mining Ltd||Materials|
|Whitehaven Coal Ltd||Materials|
|Ausnet Services Ltd||Utilities|
|Bendigo And Adelaide Bank Ltd||Financials|
|Iluka Resources Ltd||Materials|
|Adelaide Brighton Ltd||Materials|
|Northern Star Resources Ltd||Materials|
|Magellan Financial Group Ltd||Financials|
|Bank Of Queensland Ltd||Financials|
|Downer EDI Ltd||Industrials|
|Qube Holdings Ltd||Industrials|
|Spark Infrastructure Trust||Utilities|
|Investa Office Fund||Real Estate|
|IOOF Holdings Ltd||Financials|
|Janus Henderson Group Plc||Financials|
|Pendal Group Ltd||Financials|
|Charter Hall Group||Real Estate|
|OZ Minerals Ltd||Materials|
* Committed to disclosing against all relevant TCFD recommendations in 2019
† Emissions intensity target only
‡ Detailed risk description in CDP response only
What is the TCFD?
The Task Force on Climate-related Financial Disclosures (TCFD) was a initiative of the G20 Financial Stability Board (FSB), which was set up in the wake of the 2008 financial crisis to try to avoid similar market shocks.
In a landmark 2015 speech, FSB Chair Mark Carney stated ” Shifts in our climate bring potentially profound implications for… financial stability and the economy.” The European Systemic Risk Board has warned that climate change could wreak havoc on financial markets.
In response to these kinds of warnings, the TCFD was tasked with considering the physical, liability and transition risks posed by climate change, and developing a consistent framework for companies to disclose those climate-related financial risks to investors, lenders, insurers, and other stakeholders.
The Task Force released its draft recommendations in December 2016, and the final version in June 2017. The framework has attracted the support of over 240 organisations, including 150 financial institutions that manage a combined AU$100 trillion.
Importantly, the TCFD recommendations identified a number of ‘high risk’ sectors, for which it suggested more robust reporting. These were: Finance; Energy; Transportation; Material and Building; and Agriculture, Food and Forest Products.
What does the TCFD mean for investors and companies?
The TCFD recommendations give investors a consistent comprehensive framework through which they can analyse the climate risk exposure of the companies they invest in, or those they are considering investing in.
With this increased understanding of risk, investors are able to make more informed decisions about capital allocation.
In turn, companies are incentivised to better consider and reduce the risks posed to their business by climate change. Companies that can’t demonstrate how they plan to survive in a carbon-constrained economy risk facing decisive action from investors, including divestment.
“Increasing transparency makes markets more efficient, and economies more stable and resilient.”Michael R. Bloomberg, TCFD Chair
How does the TCFD compare to the Carbon Disclosure Project?
The TCFD framework recommends companies incorporate climate risk disclosures into mainstream annual financial reporting.
Financial reports are treated as formal disclosures to the sharemarket, meaning the company is accountable to the accuracy of any claims made therein.
This is an important development to the CDP system, which asks companies to respond directly to questions put the CDP.
Despite having had 15 years to get on board, less than 40% of ASX200 companies responded to the CDP in 2017. Clearly, companies are failing to self-drive a culture of comprehensive disclosure.
As shown by our research, voluntary reporting following the TCFD framework has also had little take up amongst Australian companies.
Regulatory guidance (or lack thereof…)
Australian regulators ASIC, APRA and ASX Corporate Governance Council have all stepped up their public rhetoric on the issue, and are taking steps to ramp up guidance and scrutiny around climate risk disclosure.
This is perhaps unsurprising, given legal warnings that companies and their directors must consider climate change risks and disclose all material business risks. But regulators are yet to clarify what specific climate-related disclosures are required of companies operating in even the most exposed sectors.
What we need from regulators
- Guidance clearly stating that companies exposed to climate change risks are legally required to disclose those risks as part of their financial reporting obligations
- A mandate for TCFD-compliant climate risk reporting for all companies operating in ‘high risk’ sectors, as well as financial institutions
“Some climate risks are distinctly ‘financial’ in nature. Many of these risks are foreseeable, material and actionable now.”Geoff Summerhayes, APRA Executive Board Member
Investor group action, but room for improvement
Investors are calling for robust climate risk disclosure from the markets they invest in. Over 150 financial institutions from around the world, representing around AU$100 trillion in investments, have publicly supported the TCFD reporting framework.
Over 250 institutional investors, managing over AU$35 trillion, are driving the Climate Action 100+ initiative. The project aims to “engage with the world’s largest corporate greenhouse gas emitters to improve governance on climate change, curb emissions and strengthen climate-related financial disclosures.”
The world’s biggest investor, BlackRock, has taken some small steps towards climate action. In December 2017 BlackRock sent letters to 120 companies, urging them to adopt the TCFD recommendations. Earlier last year, BlackRock voted in favour of shareholder resolutions calling for climate risk disclosure from Exxon Mobil and Occidental Petroleum. However, it must be noted that BlackRock’s efforts have been relatively minimal, with the investor having regularly failed to support other climate-related shareholder resolutions, not wielding its considerable power to shift recalcitrant companies.
The Exxon resolution was the first of its kind to pass, attracting 62% of the vote despite Exxon’s board recommending shareholders vote against it. In Australia, six shareholder resolutions calling for improved climate risk disclosure have been lodged since May 2017.
Clearly, investors are beginning to act on the massive threat climate change poses to the future viability of many companies. Universal, comprehensive and comparable climate risk disclosure can arm investors with the information they need to allocate capital in a way that drives the transition to a low carbon economy.
While these large scale investor groups are important, they cannot replace the need for individual investors to engage directly with the companies they own to ensure they are appropriately managing climate risk. Importantly, investor groups’ asks generally fall short of demanding companies operate in line with a Paris-aligned climate scenario.
“As institutional investors and consistent with our fiduciary duty to our beneficiaries, we will work with the companies in which we invest to ensure that they are minimising and disclosing the risks and maximizing the opportunities presented by climate change and climate policy.”Global Investor Statement on Climate Change