Experts discuss impact of Taskforce on Climate-related Financial Disclosures guidelines

In the wake of public statements by the Australian Prudential Regulation Agency (APRA) regarding stress testing of climate risks by regulated entities, and given the consultation process to develop the draft recommendations by the Taskforce on Climate-related Financial Disclosures (TCFD), companies and stakeholders such as investors should consider the information that should be disclosed to give a view of climate risks and opportunities.

This was the topic of discussion at panel discussion held in Melbourne this week, organised by the Climate Disclosure Standards Board (CDSB) and Sustainable Business Australia (SBA), and hosted by KPMG.

Last month, Geoff Summerhayes, executive board member of APRA, said that the prudential regulator will emphasise to regulated entities that they should conduct stress testing for “organisational and systemic resilience in the face of adverse shocks” from climate risk, as part of APRA’s evolving view on climate risks as part of the agency’s “broader approach to prudential risk management and supervision.”

Australia is being impacted by both domestic and international developments that are guiding the legal views of what fiduciary responsibilities company directors have in disclosure climate risks. In his speech, Summerhayes cited the Paris Agreement, a report by the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures recommending a global framework for improving a wide spectrum of climate-related disclosures, and the legal analysis, Legal Opinion on Climate Change and Directors Duties from the Centre for Policy Development and the Future Business Council opinion on company directors’ legal obligations to consider the impacts of climate change, authored by barrister Noel Hutley SC.

All three of these developments were up for consideration by the panel, which included Sarah Barker, special counsel, Minter Ellison Fiona Wild, vice President, climate change and sustainability, BHP Billiton and data preparer, TCFD, Mardi McBrien, managing director, CDSB, and Chi Woo, partner, sustainability services, KPMG. The panel was moderated by Andrew Petersen, CEO, Sustainable Business Australia.

The legal and regulatory view is that company directors have a fiduciary obligation to consider the impacts of climate change in line with directors duties under the Corporations Act. This is no one way for companies to disclose those risks and opportunities, but the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) has created a series of recommendations to integrate climate information into mainstream financial reporting.

“Corporate reporting of material risks have long been a feature of reporting regimes, but reporting on climate change, which is potentially one of the most misunderstood and potentially significant risks that orgs are exposed to today is often unreliable, non-comparable or incomplete,” said Wild of BHP Billiton. “The Taskforce was established to address of this problem. It was determined that we need to advance the quality and quantity of disclosures and therefore increase transparency in financial markets because without the right information, we think, investors and others might incorrectly price and value assets which could lead to a misallocation of capital.”

The TCFD’s draft recommendations are structured around four themes – governance, strategy, risk management, and metrics and targets and are designed to be adopted by companies across sectors and jurisdictions. They are also designed to be included in mainstream financial filings, to elicit decision-useful, forward-looking information on climate-related financial impacts, to include describing the potential impact of different scenarios (including a 2°C scenario) on the organization’s businesses, strategy, and financial planning and to increase focus on risks and opportunities related to a transition to a lower carbon economy.

The TCFD’s recommendations are voluntary, but Barker of Minter Ellison was firm on the fact that legally, directors have a duty of care to consider climate change impacts on risks and opportunities. Barker was the instructing solicitor on the Climate Change and Directors Duties opinion authored by Hutley.

“The way we constructed the brief, deliberately, and the way the opinion is framed, is that it doesn’t matter what you think about climate change as an issue,” she said. “It doesn’t matter if you think it is a socialist conspiracy or cooked up in China. The fact is, the markets are shifting and this presents stakeholder risks that you need to manage, whether you believe it or not.”

The TCFD’s recommendations have value for directors, Barker said.

“It’s come out and said, ok, if this is the information that you want to disclose, it gives you a bit of a cheat sheet, to work backwards and think, what do we need to think about if we are exercising due care and diligence, what would a reasonable director have regard to,” she said. “It’s a very simple – have regard to this. … If a director now is not actively ensuring that their org is having regard to the TCDF standards … or the GRI … I’m agnostic as to which one you want to pick – you are not exercising due care and diligence because you’re being held to the standard of a reasonable director and a reasonable director would be looking around and thinking, ok, so what do I need to do here, what is the guidance that is being given?”

There is an increasing focus on scenario analysis as a means to evaluate the impacts of climate risks and opportunities for companies, Chi Woo of KPMG said.

“Scenarios are something that is growing fast as a mechanism for exploring impacts, but it is relatively immature,” he said. “Most had learned by internal exploration, they are qualitative in nature, mainly.”

Mardi McBrien, the CDSB managing director, has been in Australia this week and met with officials at the Department of Foreign Affairs and Trade and the Department of Treasury. McBride said that she doesn’t believe that Australia will block discussion of the TCFD recommendations at the next G20 meeting. Wild said she believed that the EU and the UK were most supportive of the TCFD recommendations, with Australian government and stakeholders next most supportive.

Rachel Alembakis is the publisher of The Sustainability Report, a weekly digital publication that provides reporting into Environmental, Social and Governance (ESG) issues related to companies listed on the Australian Stock Exchange.