This article forms part of CAER’s ‘Responsible Investment Agenda 2019 – A Work Plan for Australian and New Zealand Investors’ Report
In June 2017, the Taskforce on Climate Related Financial Disclosures (TCFD) published a comprehensive set of recommendations for companies to assess and disclose climate risk analysis within their financial reports. The recommendations while voluntary are significant due to the initiative being industry led as well as informed by companies that report their financial data and the groups using that data for financial decision making related to investment, lending and insurance.
A core component of the recommendations set out by the TCFD is climate scenario analysis aligned with the two degree warming target set by the Paris Accord. This target received overwhelming support at COP21 with 195 member countries supporting a global action plan for putting the world on track to avoid dangerous climate change by limiting global warming to 2°C.
Across government, regulators, financial institutions and civil society, the need to manage climate risk in line with the Paris Accord has become a mainstream societal issue, as well as a financial one.
Investors are committed to a carbon-free future
Investors recognise that climate change is not only an environmental problem; it‘s a business one as well. The implications of decisions made by companies today are going to impact generations to come, and given the current focus on long-term climate analysis, navigating the intersection between climate-related financial disclosures and responsible investment is essential.
In December 2018 at COP24 in Katowice Poland, 420 investors with over US $32 trillion in assets under management signed a statement urging world governments to support the TCFD recommendations to:
- Commit to achieve the Paris Agreement
- Accelerate private sector investment into low carbon transition
- Commit to improve climate-related financial reporting as per the TCFD recommendations
This statement has been developed by the Asia Investor Group on Climate Change, CDP, Ceres, Investor Group on Climate Change, Institutional Investors Group on Climate Change, Principles for Responsible Investment, and the UN Environment Finance Initiative.
In Australia, investors have demonstrated a commitment to developing a Sustainable Finance Roadmap that encourages long-term investment solutions to facilitate the shift to a sustainable economy. It also recognises that leadership from the finance community is necessary, especially while there is a lag in the implementation of necessary regulatory and reporting steps by government, regulators and corporations. While key components of progressing the TCFD guidance are taking place, there is still significant headway to be made.
Questions raised in early scenario analysis
The TCFD recommends that both transition and physical risks are considered in climate scenario analysis. Transition risks involve changes in law, policy, technology and markets and are related to the transition to a lower-carbon energy supply. Physical risks from climate change may be acute or chronic and include, for example, damages to fixed assets or supply chain disruptions caused by extreme weather events, and changes in water availability.
Early results from companies that are reporting on TCFD recommendations are limited. Of the companies that do report, very few are yet fulfilling the full TCFD recommendations. They instead report either partially on their business operations or partially against the four key disclosure recommendations in the TCFD guidance: Governance; Risk Management; Strategy; Metrics and Targets.
Analysis carried out by Market Forces on ASX 100 listed companies identifies that as of December 2018, 57% of the top listed entities publicly recognise climate change as a material business risk while just three companies disclose in line with all of the TCFD recommendations.
The focus of companies publishing climate risk and scenario analysis reports in these early pilots has thus far been largely on transition risks – how policy drivers will change and what the market will demand. This makes sense; finance is more readily focused on rates of change in the demand for activities. Physical risks however are more difficult to predict and long-term forecasting isn’t an exact science.
Given the scope of risks that the TCFD expects companies to consider, it’s unlikely that many businesses will have the skills internally to assess the range of risks, particularly if these businesses operate globally and across a diverse range of business activities. Climate risk scenario analysis could quickly become an affordability issue for smaller organization’s that don’t house those expertise internally.
The Investor Group on Climate Change (IGCC)
report Investing in Resilience
includes tools and frameworks for managing physical climate risk specific to
Australia – particularly in relation to property, infrastructure and due
diligence. This, combined with the work of the National Resilience taskforce, combining data on climate related
disasters and vulnerable communities, give investors a set of comprehensive
tools for structuring the analysis on long-term physical risks as well as
capturing the additional societal impacts that climate-related disasters will
social aspects of climate risk need to be identified in the outcomes that
companies consider – there is likely to be significant backlash from
communities if skills, resources and employment are not effectively accounted
for as part of a transition to a low carbon economy. Responsible investors
should be asking questions about the type of scenario analysis companies undertake,
which external sources of information and third party providers they are
working with, the underlying assumptions of the scenarios, and the ESG issues
that have been taken into consideration in the process.
How good is reporting?
Climate scenario analysis is still in its pilot stage with companies beginning to provide analysis on their transition to a low carbon economy as well as the physical risks of climate change that are likely to impact on their business. In this respect it is fair that the extent to which this analysis is readily available and reported on is limited. However, there are already established mechanisms for reporting that indicate the extent to which companies are prepared to report, and their willingness to do so without a mandated disclosure requirement in place.
CDP, the established reporting mechanism for Greenhouse Gas Protocol reporting, has been in place since 2002 and provides a globally recognised and standardised questionnaire for reporting on company Scope 1 – direct carbon emissions, and Scope 2 – indirect emissions data.
CDP has committed to aligning its questionnaire with the TCFD recommendations, making the mechanisms for reporting against targets easily accessible., However, there is still limited uptake by companies to disclose emissions data and provide transparency on strategies for managing carbon and energy related risks.
The proportion of ASX listed companies reporting on climate related risks is still very low with less than 50% providing metrics such as Scope 1 and Scope 2 emissions data. According to CDP, in 2017 “more than 200 companies based or listed in Australia were invited to respond to CDP’s environmental information requests. In response, 81 companies disclosed environmental data.”
In addition, when we look at the qualitative disclosures of companies in Australia, the proportion providing information on their strategy for managing energy and climate related risks is relatively low, particularly for Energy and Materials companies – two of the key sectors identified by the TCFD as facing major disruptions in the transition to a low-carbon economy. Looking at company disclosures on systems for managing energy and climate emissions, Australian companies are lagging when compared with global peers.
Disclosure is a key driver in understanding
climate related risks. More emphasis needs to be placed on the importance of
transparency and disclosure from companies.
The Impact on Investment
Investors need to understand the key changes that will take place and the timeframes within which sector activities will face technological and political disruption, which means having access to company information and external sources on climate scenario analysis. There are already good sources of information on scenario analysis provided in the TCFD technical note and in the IPCC working group outputs and, pleasingly, some great resources on Climate risk for Australia and New Zealand in the TCFD Knowledge Hub.
Additionally, investors can use engagement mechanisms to influence company transparency and disclosure on climate-risks – particularly in the sectors identified by the TCFD as facing major disruptions in the transition to a low-carbon economy: Agriculture, Energy, Materials and Transport.
Lastly, responsible investors should consider the external impacts that transition and physical impact scenarios have on societal factors, and ensure that job creation, social well-being and human rights continue to be prioritised. With that in mind, key questions that investors can discuss with companies when engaging on climate risk and scenario analysis are:
- What is the scope of the climate risk analysis applied: does it cover all company operations globally?
- Has the company considered that some (or all) of its business activities may not be relevant in a low carbon economy?
- What impacts do changes to company operations have on human resource factors such as job growth and diversity?
Or continue to explore each issue
Interested in discussing any of these issues further? Feel free to get in touch.
 The Investor Agenda, 2018 Global Investor Statement to Governments on Climate Change (2018): <https://theinvestoragenda.org/wp-content/uploads/2019/02/190205-GISGCC.pdf> [Accessed, 13/02/2019].
 UNEP Finance Initiative, Joint Statement in Support of a Sustainable Financial System for Australia and New Zealand (July 2018): <https://www.unepfi.org/psi/wp-content/uploads/2018/07/Statement-for-a-Sustainable-Finance-Roadmap-July-2018.pdf> [Accessed, 13/02/2019].
 TCFD, Recommendations of the Task Force on Climate-Related Financial Disclosures (June 2017): <https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-2017-TCFD-Report-11052018.pdf> [Accessed, 13/02/2019].
 Market Forces, Investing in the Dark (December 2018): <https://www.marketforces.org.au/info/key-issues/asx100-climate-risk/> [Accessed, 13/02/2019].
 CDP, Technical note on the TCFD: <https://b8f65cb373b1b7b15feb-c70d8ead6ced550b4d987d7c03fcdd1d.ssl.cf3.rackcdn.com/cms/guidance_docs/pdfs/000/001/429/original/CDP-TCFD-technical-note.pdf?1512736184> [Accessed, 13/02/2019].
 CDP, Technical note on scenario analysis: <https://b8f65cb373b1b7b15feb-c70d8ead6ced550b4d987d7c03fcdd1d.ssl.cf3.rackcdn.com/cms/guidance_docs/pdfs/000/001/430/original/CDP-technical-note-scenario-analysis.pdf?1512736385> [Accessed, 13/02/2019].
 CDP, Climate Disclosure gaining momentum across Australia but more needs to be done (December 2017): <https://www.cdp.net/en/articles/media/climate-disclosure-gaining-momentum-across-australia-but-more-needs-to-be-done > [Accessed, 13/02/2019].
 CDP, Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures (June 2017): <https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-TCFD-Annex-062817.pdf> [Accessed, 13/02/2019].