INVESTING IN THE DARK

At 86% of companies, the Board has overall responsibility for managing climate risk, up from 73% in March 2018. 4% of companies placed this responsibility with a non-Board level executive, while 10% of companies did not disclose any such responsibility.

The TCFD recommends companies "describe the board’s oversight of climate-related risks and opportunities."

Methodology: responsibility for “sustainability” or “environmental, social or governance” (ESG) issues is not sufficient in this context; climate change or climate risk must be explicitly mentioned.

32% of companies remunerate executives to reduce GHG emissions, doubling the 16% identified in March 2018. Remuneration packages are designed to drive behaviour, so more of Australia's corporate executives should be incentivised to tackle emissions and minimise climate risk.

Many companies state in their responses to the CDP (formally Carbon Disclosure Project) that some staff are remunerated for emissions reduction and/or efficiency, but formal Remuneration reports suggest this does not typically extend to senior executives.

Methodology: targets and KPIs described in Remuneration reports contained within Annual Reports were assessed, with further clarity drawn from CDP responses. Remuneration reports typically include senior executives only (Board, CEO and their direct reports).

Just over half (57%) of the companies studied identify climate change as a material business risk, despite all assessed companies operating in sectors determined by the TCFD to be highly exposed to climate risk.

Contrary to the TCFD recommendations, 39% of companies do not clearly define climate as a material business risk in their mainstream financial reporting.

The findings are particularly concerning in light of Noel Hutley SC's 2016 legal opinion, stating "directors certainly can, and in some cases should be considering the impact on their business of climate change risks – and that directors who fail to do so now could be found liable for breaching their duty of care and diligence in the future."

Methodology: climate risk (or the transition/physical impacts of climate change) must be explicitly mentioned as a principal or material risk in the annual report.

Just 32% of companies provide a detailed discussion of climate risks and opportunities in mainstream annual reporting. A further 18% only provide a detailed discussion in their response to the CDP survey.

33% provide a limited discussion, while 17% do not discuss the risks and opportunities posed by climate change.

A key tenet of the TCFD recommendations is that climate risk information be included in mainstream financial reporting, and therefore readily accessible to investors, regulators and the wider public.

Methodology: 'Detailed' disclosure means a discussion of the risks and opportunities posed by climate change, including the expected severity and likelihood of financial impacts, and the timeframe in which these may arise.

Just 8% of companies have disclosed detailed scenario analysis covering their entire business. A further 6% have disclosed detailed analysis, but only applied this to particular elements of the company or its operations.

11% of companies provide a limited discussion of scenario analysis undertaken, while 75% have not produced any analysis of how their business is expected to fare under different climate change scenarios. 

Scenario analysis is perhaps the most important of the TCFD's recommendations, as it can provide clear measures of a company's future viability in situations where the goals of the Paris Agreement are met. This is intended to encourage companies to understand that 'business as usual' is not a sustainable model. In turn, investors are able to determine the most appropriate, sustainable allocation of capital.

Methodology - disclosures were graded as follows:

• Yes - disclosure of scenario analysis that considers a range of scenarios (including a 2°C lower scenario), provides quantitative data, and covers the company's business comprehensively
• Partial - disclosure of scenario analysis that considers a range of scenarios (including a 2°C lower scenario), provides quantitative data, but does not cover the entire business or operations of the company
• Limited discussion - disclosure that provides some description of the exposure to climate risk it faces under different scenarios, but without quantitative information that allows investors to assess the extent of risk faced
• No - where none of the above are met

24% of companies have disclosed a clear plan to reduce their carbon emissions. This is a significant improvement on the 16% that had done so in March 2018, but is still far too low. 

The Paris Agreement requires a carbon-neutral global economy by 2050, and developed economies like Australia will need to decarbonise even sooner. Companies wanting to remain investable must disclose clear plans to reduce scope 1, 2 and 3 emissions in line with the Paris climate goals.

While a number of companies have made ambitious statements along the lines of the Paris Agreement’s aims, these are rarely backed up with concrete commitments and measurable targets.

Methodology: plans should have clear, measurable interim targets, along with detailed descriptions of how those targets will be achieved. In this context, carbon abatement - that is, the purchase of carbon offsets - is not considered an emissions reduction plan.

Along with the 22% of companies that have set absolute emissions reduction targets, a further 25% have set emissions intensity targets. In many cases, the latter allows for overall emissions to increase, provided emissions intensity decreases.

51% of companies studied have not set any clear emissions reduction targets.

With more information available than in March 2018, more companies' emissions targets were found to be based on intensity rather than absolute reductions. Emissions intensity targets, while a useful short-term goal, should be coupled with absolute targets that match the decarbonisation pathway required to meet the Paris climate goals.

Methodology: where companies have set both absolute and intensity reduction targets, we have acknowledged the absolute target.

47% of companies disclose Scope 1+2+3 emissions, while 42% disclose Scope 1+2 only. 11% of companies do not disclose their emissions at all.

Companies should disclose emissions for the current year and at least the previous year (preferably 3-5 years) in mainstream reporting.

Emissions reporting should demonstrate reductions over time, in line with the decarbonisation pathway required to meet the Paris climate goals.

Scope 1 - Direct emissions from company activities

Scope 2 - Indirect emissions from use / consumption of energy etc

Scope 3 - Indirect emissions as a consequence of company's activities, such as extraction and production of materials purchased by the company, transportation of purchased fuels, or use of products and services sold by the company