Australian companies under pressure to disclose climate risks
A report last week by the Financial Stability Board taskforce on climate-related financial disclosures will demand greater commitment from publicly listed firms to make known how they are engaging with climate-related risks. Large Australian companies, including Woodside, Rio Tinto and Santos are being urged to approach the modelling, planning and disclosure of risk in a more methodical and formalised way. While the financial sector has mainly responded proactively to the taskforce's recommendations, businesses in Australia's oil, gas, coal and iron ore extraction sectors face a challenging turning point, as they attempt to deliver shareholder value in a carbon-constrained future.

Some of Australia’s largest listed companies, including Woodside, Rio Tinto and Santos, are likely to face sweeping changes to the way in which they model, plan for and disclose risk from climate change to investors. How they respond will affect their ability to attract funding from lenders, insurers and superannuation funds who are under pressure to stress-test investments for a carbon-constrained future.

The release last week of a report by the Financial Stability Board’s taskforce on climate-related financial disclosures is expected to add pressure on publicly listed companies to formalise their climate risk disclosure practices – particularly through scenario analysis – or risk investors pulling finance and rating agencies making assumptions about their risk profile.

The taskforce’s purpose is to ensure more methodical, comparable and consistent disclosure on climate-related risks and opportunities. It is also to stave off a global financial crisis-style correction as the financial community manages its exposure to assets which could rapidly become redundant as limits on carbon emissions tighten to 2050, well within the lifetime of most large-scale infrastructure projects. An independent financial thinktank, the Carbon Tracker Initiative, has referred to this as a “carbon bubble”.

“The aim is to enable better decision-making by capital markets and, ultimately, to ensure the financial system is not going to be exposed to the sort of systemic risk or shock that we’ve seen in the past with financial crises,” said Michael Wilkins, S&P’s global representative on the taskforce. “The more information that is out there, the more that it can be incorporated into decision-making and better capital allocation with less risk of systemic shock.”

The taskforce’s recommendations will go to the G20 summit in Hamburg on 6-7 July 2017. More than 100 firms with market capitalisations of more than US$3.3tn and financial firms responsible for assets of more than US$24tn have encouraged the adoption of the taskforce’s recommendations.

“The Paris agreement means much of the world has to achieve net zero emissions by 2050 at the latest and it’s clear that many businesses are not pursuing a strategy that’s consistent with this,” said Kate Mackenzie, head of finance and investment at the now defunct Climate Institute.

“It’s not just the resources sector, but those who invest and finance them, and those who rely upon them. Both the oil industry and the auto industry are right now coming to terms with the prospect that the era of internal combustion engines may be ending much faster than many of us thought.”

In Australia – where carbon-intensive oil, gas, coal and iron ore extraction industries drive trade, economic prosperity and geopolitical influence – many of the largest listed banks, insurers and super funds are heavily invested in these areas and are set to drive further change.

“The financial sector is leading and that’s partly due to the campaigns they’ve faced for lending to fossil fuels and how that fits into their overall portfolios,” said Dan Goucher of the environmental campaign group Market Forces.

A speech given by APRA’s head, Geoff Summerhayes, earlier this year, in which he stressed the need for banks and insurers to act on the taskforce’s recommendations, is widely seen as a turning point for Australia’s financial sector. As a result, institutional investors such as Blackrock, Fidelity and Legal & General Investment Management are voting to support shareholder resolutions on climate risk disclosure. It is a seachange for Australia’s business sector and surpasses any resistance to change at a political level.

But for energy and utility companies – those most affected by the rise of clean technologies, carbon caps and investor pressure to quantify how assets will continue to deliver shareholder value in a carbon-constrained future – progress has been patchy. Oil and gas companies in particular have argued that putting sensitive information on their asset and resource base into the public domain could jeopardise their competitive advantage globally.

“AGL is a leader in terms of climate risk disclosure. They’re one of only two companies which has done scenario analysis publicly. The other is BHP Billiton. Origin has made commitments but hasn’t really delivered in terms of disclosure. The smaller utilities have done very little,” said Goucher.

Although it is a struggle to see how oil and gas companies such as Woodside can transition to a low carbon future beyond deploying gas as a transition fuel, Emma Herd, at the Investors Group on Climate Change, is optimistic: “There is much energy companies can do in the technology space to adapt to new challenges.”

Not long ago investors were encouraged to divest from fossil fuel companies entirely. Instead, such companies called on investors to engage with them about their concerns. This has led to some stakeholder resolutions requiring companies to publish more information on climate risks, the most recent one being at ExxonMobil.

The taskforce’s recommendations go a step further in trying to ensure disclosures are comparable between companies to facilitate more effective engagement on the issue. Photos of green landscapes in annual reports will no longer cut it.

“Disclosure isn’t just about publishing pretty reports any more,” said Mackenzie. “It’s about demonstrating how you are responding to climate change-related risks, and why.”