Meeting business climate risk management disclosure requirements
Published 13 July 2021
Climate resilience is a catchword of recent times, and the 2021 Federal Budget assigning $1.2 billion in funding to building resilience in Australia. But what does climate resilience mean in practical terms for Australian businesses and how can directors and boards address climate risks proactively? We examine the factors involved in a structured approach to meeting climate risk management reporting and disclosure requirements.
A climate resilience focus involves businesses looking at both their own performance, and the exposures associated with their suppliers and customers or clients. It requires internal examination of how your business is engaging with climate policy, either directly or through peak organisations lobbying on your behalf, and whether you could be exposed to the potential risk of litigation.
Kenneth Hayne, former high court judge and royal commissioner, warned company directors they have a legal obligation to act on climate change risk, include it in corporate strategies and report on it to shareholders. Hayne was speaking in relation to the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD)recommendations for businesses, regarded as the gold standard for reporting on climate risk and carbon emissions reduction.
“In Australia, a director acting in the best interests of the company must take account of and the board must report publicly on climate-related risks and issues relevant to the entity. Boards must ask at least two questions: What is the potential financial impact of climate-related issues? What is now, and what will be, our strategic response?”
Reinforcing the weight of this duty for company boards, the Verisk Maplecroft 2021 Climate Litigation Index, finds that businesses operating in developed economies – especially the United States, United Kingdom, European Union and Australia – face the highest threat of legal action.
Business reporting of climate related risks is key
Many businesses are taking a proactive approach to climate-related governance, risk management, strategy, metrics and targets. Australia’s top 100 companies are ahead of the world’s largest 250 firms in terms of good climate risk reporting, KPMG international and Australian analysis reports.
A study setting out 12 best practice standards for climate risk disclosures found less than half of G250 companies currently meet those benchmarks or are following TCFD recommendations, but 58% of Australia’s top 100 companies have done – up from just 16% three years ago.
In Australia the mining sector, financial services, construction and materials are the most conscious of climate change as a financial threat, but only 20% of ASX100 companies use the recommended analysis to model the impacts of climate change on their business. Approximately 50‒60% of banks and the electricity and construction and materials sectors currently conduct scenario analysis and forward projections.
An organisation’s climate-related risk and risk management is important information for investors and by extension, insurers. Businesses evaluating their climate risk need to undertake detailed risk analysis, including industry-specific impacts, with metrics to evaluate these risks. The international Sustainability Accounting Standards Board (SASB) standards cover a range of climate impacts at industry level, including physical impacts, climate regulation and transition to a low-carbon, resilient economy.
The Australian Securities and Investment Commission (ASIC) states that disclosing and managing climate-related risk is a key director responsibility and its focus is on ensuring listed companies have appropriate governance structures in place to manage this issue, as well as providing the market with reliable and useful information on their exposure to material climate-related risks and opportunities. In ASIC’s interpretation, if climate risk has the potential to affect a company’s financial performance the law requires disclosure of relevant operating and financial reporting information.
Basis for establishing a climate risk reporting framework
Just as existing risks need to be continually reassessed in both the short and the longer term, so should emerging climate risks, with the potential effects projected in terms of
financial or economic impacts
outputs, service or product delivery
regulatory or ethical compliance
image, reputation and public relations.
To support this boards should consider the level of oversight and governance structure required to assess, manage and report on climate risks. These should be aligned to the regulatory requirements for making operational and financial review disclosures in annual reports according the Corporations Act. Challenges involved in preparing climate risk disclosure reports may include
developing scenario analysis that has relevance and a degree of uniformity across industry sectors, locations and circumstances
aligning financial values with assessment, management and mitigation of your business’s physical risks from climate change in terms of scientific information
integrating climate change risk management and necessary resources with broader risk management processes
assigning priority to risks and responses: avoidance, structural and technical adaptation and spreading risk, either geographically or through insurance.
What to expect from the insurance market
Increasingly insurers will want to see documentation of climate risk assessment, governance and reporting at board level when providing liability insurance for businesses and their executive managers, and this can be regarded as an essential requisite if the company is publicly listed.
Discussing how to best present your business’s climate risk response and management with your broker will help you prepare to meet insurer expectations around reporting compliance.
Gallagher provides insurance, risk management and benefits consulting services for clients in response to both known and unknown risk exposures. When providing analysis and recommendations regarding potential insurance coverage, potential claims and/or operational strategy in response to national emergencies (including health crises), we do so from an insurance and/or risk management perspective.