Episode 43: Climate risk disclosure

ASIC Commissioner John Price joins the podcast to discuss ASIC’s review of climate risk disclosure by listed companies in Australia.

You can read the full transcipt below.

TRANSCRIPT

HOST: Hello, and welcome to the official podcast of the Australian Securities and Investments Commission.

In today's episode, we'll be discussing ASIC’s review of climate risk disclosure by listed companies in Australia.

My name is HOST Heilbuth and with me this time around is ASIC Commissioner, John Price. John, thanks for your time.

JOHN: Thanks very much.

HOST: Before we talk about ASIC’s report, can you define what we mean by climate risk?

JOHN: A global Task Force on Climate-related Financial Disclosures puts climate-related risks into two main categories.
The first is risks related to the transition to a lower-carbon economy. The transition includes policy, legal, technology and market changes – and this presents a number of risks to Australian companies.
The second is a series of risks related to the physical impacts that result from climate change. This can be extreme weather and shifts in climate patterns, such as sea level rises and sustained higher temperatures.

HOST: What role does ASIC play in this space?

JOHN: Firstly, we are very focussed on encouraging strong and effective corporate governance. We consider the management of issues such as climate change begins with good corporate governance. Within listed companies, this should be led by directors and senior management. Companies that have effective corporate governance practices are better equipped to develop and implement effective strategies to manage risks and opportunities, and that of course includes climate risk.
Secondly, we are also focussed on disclosure. Where the law requires it, ASIC is focussed on making sure that companies disclose material climate change risks. Disclosure of risks – like climate change and other risks – helps investors to be better informed when they make their important investment decisions.

HOST: ASIC’s surveillance project examined how listed companies disclose climate risk. What did ASIC find?

JOHN: What we found is that listed companies need to do more to comply with their disclosure obligations, especially outside of the top-200 listed companies.

Of the 60 listed companies in our ASX 300 sample, when we did our work around climate change, 17% identified climate risks as material risk to their business.

While most of the reviewed ASX 100 entities had considered climate change risk to the company’s business, at least to some extent, disclosure practices were fragmented, inconsistent and patchy.

As part of our surveillance, it was often difficult to know whether general references to climate change risk related to physical or transition climate risks, or both.

These fragmented climate risk disclosure practices, we think, make it difficult for investors to compare between companies.

HOST: What can listed companies do to properly disclose climate risks? What do we expect to see from business?

JOHN: We recognise that climate risk disclosure practices are still evolving (not only here in Australia but internationally). What we do recommend is that directors and advisers of listed companies consider climate risk both as a short-term and a long-term risk, and directors and officers also continually reassess existing and emerging risks and how they apply to the company’s business.
Also, listed companies need strong and effective corporate governance. This includes active and informed engagement by the board. Boards play a critical role to identify and manage risk.
And finally, it goes without saying that listed companies must comply with the law. Directors of listed companies should carefully consider the requirements relating to operating and financial review – or the OFR as it’s commonly called – as it prescribes certain disclosures under the Corporations Act.
In fact, the law requires an OFR to include a discussion of climate risk when it could affect a company’s achievement of its financial performance or desired outcomes. Depending on the circumstances, disclosure of climate risk may also be required by the law in other circumstances, such as in a fundraising document like a prospectus or in a continuous disclosure announcement.

HOST: And John, can you tell us what type of information must be disclosed to investors?

JOHN: Listed companies should disclose useful information to investors – that’s the first rule of thumb. The voluntary disclosure recommendations issued by a body called the TCFD are specifically designed to help companies produce information that is useful for investors.
We do not consider there is any legal or policy impediment to listed companies reporting under TCFD recommendations provided that the disclosure is not misleading or deceptive and is based on appropriate evidence available at that time.
We also recommend that listed companies with material exposure to climate risk consider reporting under the TCFD framework. In March 2018, the Australian Government released its response to a 2017 report on Carbon Risk issued by the Senate Economics References Committee.
The Government, in that response, encouraged stakeholders to consider the final TCFD report and its various recommendations.
ASIC is closely monitoring developments and we will continue to look at this closely as market practice develops over time.

HOST: Where can listeners find more information?

JOHN: I’d strongly encourage people to refer to ASIC’s REPORT 593 on Climate risk disclosure by Australia’s listed companies can be downloaded from our website – asic.gov.au

HOST: Thanks John. And we’ll be back with another episode of ASIC’s podcast shortly.