Market Forces has released a study: Investing in the dark: Australian companies are failing to properly disclose climate risk, that has found that climate risk disclosure among ASX 100 companies in sectors facing the highest levels of climate risk is inadequate. This inadequacy is indicative, according to Market Forces, of a 'failure in the current corporate regulatory system'. On this basis, Market Forces has called on regulators (ASIC and APRA) to implement a mandatory, Task Force on Climate-related Financial Disclosures (TCFD) aligned disclosure framework to address the issue. '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' Market Forces argues.

About the study: The study is based on an analysis of public disclosures 73 ASX100 companies in sectors identified by Market Forces as facing the highest levels of climate risk.

Key Findings

  • Less than half (49%) 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.

  • 16% of companies do not include climate risk in annual financial reporting: 16% of companies define climate risk as an 'emerging risk', an 'ESG risk', or a "sustainability risk", often in the Sustainability Report rather than the Annual Report. The TCFD recommends that climate risk be disclosed as part of mainstream annual financial reporting.

  • 25% of companies provide a detailed discussion of climate risks and opportunities in mainstream annual reporting. 19% provide a limited discussion, while 29% do not disclose any discussion of the risks and opportunities posed by climate change.

  • 22% of companies do not disclose responsibility for climate risk: At 73% of companies, the Board has overall responsibility for managing climate risk. A further 5% of companies placed this responsibility with another (ie non-Board level) executive. 22% of companies did not disclose any such responsibility.

  • 84% of companies do not incentivise executives to reduce greenhouse gas (GHG) emissions: According to Market Forces, only 16% of companies remunerate executives to reduce GHG emissions. Market Forces argues that this indicates that 'broadly speaking, Australia’s corporate executives are not being incentivised to tackle climate change'.

  • 14% of companies have disclosed some form of scenario analysis – 8% of these could be considered detailed, while a further 5% have disclosed limited scenario analysis. 88% of companies have not produced analysis of how their business is expected to fare under different climate change scenarios.

  • 16% of companies have disclosed a plan to reduce their carbon emissions while 84% of companies have not produced a plan.

  • 26% of companies have set absolute emissions reduction targets, a further 14% have set emissions intensity targets. In many cases, the latter allows for overall emissions to increase, provided emissions per unit of production decrease. 38% of companies disclose Scope 1+2+3 emissions. 41% disclose Scope 1+2 only, while a further 3% disclose their emissions only in response to the CDP.

  • 35% of companies are not clear in their language on climate or have not formally acknowledged the science of climate change: According to Market Forces, while 66% of companies have unequivocally accepted climate science, 21% of companies are unclear in their language. The remaining 14% have not formally acknowledged the science of climate change.

Recommendations: Market Forces argues that these findings are indicative of a 'systemic lack of climate risk disclosure' and suggestive of a 'failure in the current corporate regulatory system'. Market Forces makes three recommendations to address this:

  1. That regulators (APRA and ASIC) should mandate a comprehensive universal climate risk disclosure framework ie the TCFD recommendations: More particularly, Market Forces calls for ASIC to provide guidance clearly stating that companies exposed to climate change risks are legally required to disclose those risks as part of their financial reporting obligations and a mandate for TCFD-compliant climate risk reporting for all companies operating in ‘high risk’ sectors, as well as financial institutions.

[Note: On 2 February 2016, the Senate referred an inquiry into carbon risk disclosure to the Senate Economics References Committee. The committee report, released on 21 April 2017, recommended among other things that ASIC review its guidance to directors on meeting their disclosure obligations in the context of climate risk and that the ASX Corporate Governance Council review guidance material regarding the circumstances in which a listed entity's exposure to carbon risk requires disclosure under Recommendation 7.4 of the Australian Stock Exchange Corporate Governance Principles. The Government response to the report, released on 7 March, expressed 'agreement in principle' with both of these recommendations. See: Governance News 12/03/2018.]

  1. That investors should hold companies accountable and escalate climate risk disclosure in their engagement programs.

[Note: ASIC's report on the 2017 AGM season: Report 564 Annual general meeting season 2017 identifies growing concern among investors around diversity and ESG issues including climate risk (as evidenced by what ASICcharacterises as high levels of shareholder engagement as a key trend. See: Governance News 02/02/2018]

  1. That companies should educate themselves about the need to take action and improve disclosure.