Frameworks for reporting carbon risk in Australia
3.1 There is no single framework governing the
disclosure of carbon risk in Australia. Some mandatory reporting requirements
are established in corporations legislation and regulations. For certain firms,
these provisions are supplemented by rules set by supervisory bodies such as the
Australian Prudential regulation Authority (APRA) and the Australian Securities
Exchange (ASX). Many firms also choose to sign up for voluntary disclosure
frameworks. This chapter sets out these respective frameworks, before
considering the position in other jurisdictions, as well as multilateral
efforts to conclude a standardised framework for reporting carbon risk.
Generally applicable provisions
The National Greenhouse and Energy
As part of its environment policy, the Australian Government has, since
2007, under the National Greenhouse and Energy Reporting Scheme (NGERS), required
disclosure by entities producing high quantities of carbon emissions of a range
of information including greenhouse gas emissions and energy production and
consumption. Administered by the Clean Energy Regulator, NGERS requires
reporting of emissions from activities under the operational control of the
entity—Scope 1 or direct emissions and Scope 2 or indirect emissions such as
those from consuming purchased energy or heat. Reporting of Scope 3 emissions,
indirect emissions from such activities as transport not controlled by the
company or from outsourced activities or waste disposal, is not required.
Disclosure of greenhouse emissions is primarily designed to inform
government policy and international reporting rather than to inform investors
or ensure financial stability. Nonetheless this information can assist
investors to gauge for themselves the degree of direct carbon risk the company
is exposed to.
The Corporations Act 2001 contains general disclosure provisions
for the contents of annual reports that arguably require disclosure of carbon
Section 299(1) requires entities to prepare an annual financial report
and a directors' report:
The directors' report for a financial year must:
- contain a review of
operations during the year of the entity reported on and the results of those
- give details of any significant
changes in the entity's state of affairs during the year; and
- state the entity's principal
activities during the year and any significant changes in the nature of those
activities during the year; and
- give details of any matter or
circumstance that has arisen since the end of the year that has significantly
affected, or may significantly affect:
the entity's operations in future financial years; or
the results of those operations in future financial years; or
the entity's state of affairs in future financial years; and
- refer to likely developments
in the entity's operations in future financial years and the expected results
of those operations; and
- if the entity's operations
are subject to any particular and significant environmental regulation under a
law of the Commonwealth or of a State or Territory—give details of the entity's
performance in relation to environmental regulation.
This requirement is added to for listed entities by Section 299A(1),
which provides for an operating and financial review (OFR):
- The directors' report for a financial year for a
company, registered scheme or disclosing entity that is listed must also
contain information that members of the listed entity would reasonably require
to make an informed assessment of:
- the operations of the entity
reported on; and
- the financial position of the
entity reported on; and
- the business strategies, and
prospects for future financial years, of the entity reported on.
As the relevant regulator, the Australian Securities and Investments
Commission (ASIC) is responsible for providing guidance as to the operation of
these provisions. The evidence to the committee was that in the case of carbon
risk disclosure, this guidance was limited.
ASIC's Report 469, for example, included the following, with a reference
to Regulatory Guide 247:
We note the recent international focus on environmental and
sustainability reporting and the increasing focus on integrated reporting. We
would like to remind companies of the importance of including considered risk
disclosure in the operating and financial review (OFR) of a directors' report,
including about environmental, social and governance issues.
Regulatory Guide 247 (paragraph 63) says:
An OFR should include a discussion of environmental and other
sustainability risks where those risks could affect the entity's achievement of
its financial performance or outcomes disclosed, taking into account the nature
and business of the entity and its business strategy.
However, the paragraph goes on to say
For example, environmental risks that may affect an entity's
achievement of its financial prospects would be more likely for an industrial
entity than for a financial services entity.
Company directors have broad duties arising under the Corporations
Act 2001 and general law. A recent legal opinion by Noel Hutley SC and
Sebastian Hartford‑Davis, obtained by the Centre for Policy
Development, found that company directors who fail to consider and disclose
foreseeable carbon risks to their business could be held to be in breach of
their duty of due care and diligence.
The opinion concluded:
There is certainly no legal obstacle to Australian directors
taking into account climate changes and other sustainability risks where those
risks are, or may be, material to the interests of the company.
Provisions applicable to particular
types of companies
Banks and other financial bodies, superannuation funds and insurance
providers are also subject to supervision by APRA. These entities are arguably
the ones most exposed to transition risks.
In a recent speech, an Executive Board Member of APRA, Mr Geoff
Summerhayes, noted that some climate risks are financial in nature, and that
many such risks are 'foreseeable, material and actionable now'.
Further, they have potential system wide implications. Mr Summerhayes said that
a comprehensive understanding of system-wide risks can only be made if entities
are disclosing their own risks. Investors and markets require disclosure in
order to respond appropriately to risk. Climate risks would become a more
important and explicit part of APRA's thinking.
In testimony before the committee, Mr Summerhayes explained the
rationale for the speech:
As relates to risks that APRA regulated entities face, it is
absolutely in APRA's role to highlight those risks and ensure those
conversations and assessments are happening within entities. That was the
primary purpose of the speech some weeks ago—to put a marker down and flag that
we expect entities to be having those conversations. What I would not want to
represent is that APRA is about to roll out any additional prudential
frameworks or guidance around climate related exposures. We see that our
existing risk management frameworks, notably CPS 220, have been the appropriate
lens through which these risks can be assessed. That particular standard calls
about six specific risks: credit risks, market investment risks, liquidity
risks, insurance risks, operational risks, and strategic objectives and
business plans. Climate risks potentially impact every one of those...
Mr Summerhayes also explained how APRA perceived its role in regulating
compliance with frameworks such as CPS 220:
APRA is predominantly a supervisory biased regulator, so
while we absolutely put out prudential frameworks and standards, the majority
of what we do is supervise entities through reviews of those entities,
conversations with boards of those entities and with senior executives, and
then we do thematic reviews on specific issues in those entities. So, if we
went into an entity, as we do on a regular basis, and were to do a risk review
on that entity, we would want to see, as it relates to climate, if we thought
that was something appropriate for that entity—that that entity had in fact
considered those risks as part of their broader risk management framework.
Listed entities are also subject to additional requirements by the ASX.
The Australian Stock Exchange Corporate Governance Principles and
A listed entity should disclose whether it has any material
exposure to economic, environmental and social sustainability risks and, if it
does, how it manages or intends to manage those risks.
There is a large variety of voluntary reporting frameworks. These
frameworks are used to varying degrees by Australian companies. Although most
are international in origin, a few are locally founded, for instance the Asset
Owners Disclosure Project. There are other local initiatives such as the
Australian Portfolio Carbon Working Group, an informal collaboration of the
four major Australian banks.
A number of these voluntary reporting frameworks are set out below.
The Carbon Disclosure Project
The most widely used reporting framework now is that of CDP. It was
formerly the Carbon Disclosure Project, and is a UK based firm which requests
information from companies. It has been operating since 2000, with the initial
goal of reducing emissions and therefore climate risk. In 2015 CDP collected
data on 5500 companies, 300 cities and 40 sub-national governments. As well as
collecting data, it scores and benchmarks the companies' performance. It works
on behalf of institutional investors and large purchasing companies, who need
the information to make efficient decisions.
CDP requests information by way of a standardised questionnaire. It
collects data on emissions, on performance in reducing emissions, and on
climate change related risks and opportunities that could change a business's
operations, revenue or expenditure. It also asks whether the risks and opportunities
are physical risks, or related to changes in regulation or other
It has been estimated that CDP's data covers nearly 60 per cent of
global market capitalisation and 25 per cent of global emissions.
Other international frameworks
The Global Reporting Initiative developed the G4 Sustainability
Reporting Guidelines which are used by 9000 organisations.
The Climate Disclosure Standards Board works to standardise climate risk
reporting and helps organisations to evaluate the impacts of climate change on
their operations and to incorporate them in their mainstream reporting. It is a
consortium of business and environmental groups formed at the World Economic
Forum in 2007.
The Greenhouse Gas Protocol, convened in 1998 by the World Resources
Institute and the World Business Council for Sustainable Development, brings
together industry, governments and non-government organisations to develop
reporting frameworks and standards. It is still the default standard in countries
that have not developed their own accounting systems for greenhouse gases.
The United Nations Principles for Responsible Investment or PRI,
launched in 2006, refers both to the principles and to the network of 300 asset
owners and 1000 investment managers who are signatories to the principles.
A part of the PRI work program is the development of assessment
methodologies and reports. However, the assessments are not public. PRI, along with the United Nations
Environment Programme Finance Initiative (UNEPFI), has developed a global
statement on investor obligations and duties and a series of 'roadmaps' of
Fiduciary Duty in the 21st century.
PRI has also developed a Global Guide to Responsible Investment Regulation.
PRI and UNEPFI have sponsored the Montreal Pledge, a framework for
voluntary reporting under which the 120 signatories—asset owners and investment
managers managing $10 trillion in assets—measure and publicly disclose the
carbon footprint of their investment portfolios.
The Asset Owners Disclosure Project works with major investors such as
pension funds, insurance companies, sovereign wealth funds and universities to
improve the level of disclosure in order to protect long term investments including
The International Integrated Reporting Council has developed a reporting
framework which aims to integrate sustainability factors into financial
Other international approaches
Some other countries have adopted a more comprehensive approach towards
regulating for the disclosure of carbon risks.
The United States
The United States Securities and Exchange Commission issued guidance in
2010 on how its existing general disclosure requirements should apply to
climate change matters.
The status quo was that disclosure was required for material matters, and the
standard for materiality was 'if there is a substantial likelihood that a
reasonable investor would consider it important in deciding how to vote or make
an investment decision'. This was already taken to include the costs of
complying with environmental laws and any impending environmental litigation,
and to include disclosure of risks.
The 2010 guidance makes explicit that the costs of complying with local and
overseas regulation should be disclosed, and includes not only those directly
affected but also users of the products of those companies, the prices of which
might rise. It also points to changes in markets, which may present new risks
and opportunities; reputational risk; and the risk of actual physical damage.
These provisions apply to public companies.
The Energy and Ecology Transition Law of 2015 requires listed companies
and institutional investors to disclose not only their carbon emissions but
also their exposure to carbon risk. The legislation sets emissions targets, and
listed companies have to include in their annual reports the impact on climate
change of their activities and the impact the consumption or use of their
products will have, and their exposure to transitional risks, for example in
their supply chains or changes in international regulation. Institutional
investors have to report on their contribution to meeting French and
international emissions targets, which may include changes in their activities
or divestment of certain assets. They also have to report on the exposure of
their assets to carbon risk, both physical and transitional, and detail the
stress testing they have undertaken to assess their portfolio risk.
The United Kingdom
In 2013 new regulations under the Companies Act provided for large and
medium-sized listed companies to publish a strategic report which reports, to
the extent necessary for an understanding of the company's operations, on
environmental matters (among others), including the impact of the company's
operations on the environment.
It also requires a directors' report which includes disclosure of greenhouse
emissions including emissions from both direct activities and the purchase of
electricity, heat, steam or cooling. As well as describing the methodologies
used, the report 'must state at least one ratio which expresses the quoted
company's annual emissions in relation to a quantifiable factor associated with
the company's activities'—that is, it must give some basis for comparison of
The European Union
In 2014 the European Parliament strengthened the disclosure requirements
applying to companies and other 'public interest entities' with 500 or more
employees. They are now required to disclose policies, risks and outcomes
related to environmental matters including greenhouse gas emissions (among
other social and governance matters).
National governments are required to put in place regulatory regimes to ensure
consistent reporting requirements.
The Task Force on Climate-related Financial Disclosures
In April 2015 the G20 group of nations requested the Financial Stability
Board to review how the financial sector can take account of climate-related
The Financial Stability Board is an international organisation whose
goal is to promote world financial stability. It works with financial
authorities and standard-setting bodies to achieve strong supervisory and
regulatory policies and consistent implementation of those policies. In
response to the G20's request, it identified the need for better information to
support informed investment, lending and insurance underwriting decisions.
In late 2015, it established a Task Force on Climate-related Financial
Disclosures (the Task Force):
The Task Force will consider the physical, liability and
transition risks associated with climate change and what constitutes effective
financial disclosures in this area. It will seek to develop a set of
recommendations for consistent, comparable, reliable, clear and efficient
The Task Force was chaired by Michael R Bloomberg, chief executive of a
global financial services company. Its membership comprised:
four vice-chairs, respectively from a bank, an insurance company,
a manufacturer and a stock exchange;
12 'data users', from the investment industry including banks and
seven 'data preparers', from companies with significant
seven 'other experts', from consulting companies and ratings
a 'special advisor' from HSBC.
The audience for the Task Force's work is companies who need to know
what information is wanted by interested parties, including investors, lenders
and insurers, in order to make good decisions. The Task Force aimed to make
recommendations that all organisations would be able to respond to. It should
be possible to incorporate the recommended disclosures in company financial
reporting. The information the recommendations elicited would be
'decision-useful' and forward looking. There would be a strong focus on risks
and opportunities presented by the transition to a low-carbon economy.
Recommendations of the Task Force on Climate-related
The Task Force published its Recommendations Report in December 2016.
The format of the recommendations is four general recommendations, each of
which is followed by a list of recommended disclosures.
The general recommendation on Governance is: Disclose the
organisation's governance around climate-related risks and opportunities. The
recommended disclosures of governance are:
describe the board's oversight of climate-related risks and
describe management's role in assessing and managing
climate-related risks and opportunities.
The general recommendation on Strategy is: Disclose the actual
and potential impacts of climate-related risks and opportunities on the
organisation's businesses, strategy, and financial planning. The recommended
disclosures of strategy are:
describe the climate-related risks and opportunities the organisation
has identified over the short, medium, and long term;
describe the impact of climate-related risks and opportunities on
the organisation's businesses, strategy and financial planning; and
describe the potential impact of different scenarios, including a
2°C scenario, on the organisation's businesses, strategy, and financial
The general recommendation on Risk Management is: Disclose how
the organisation identifies, assesses, and manages climate-related risks. The
recommended disclosures of risk management are:
describe the organisation's processes for identifying and
assessing climate-related risks;
describe the organisation's processes for managing
climate-related risks; and
describe how processes for identifying, assessing, and managing
climate-related risks are integrated into the organisation's overall risk
The general recommendation on Metrics and Targets is: Disclose
the metrics and targets used to assess and manage relevant climate-related
risks and opportunities. The recommended disclosures of metrics and targets
disclose the metrics used by the organisation to assess
climate-related risks and opportunities in line with its strategy and risk
disclose Scope 1, Scope 2, and, if appropriate, Scope 3
greenhouse gas emissions, and the related risks; and
describe the targets used by the organisation to manage
climate-related risks and opportunities and performance against targets.
These recommendations are probably not controversial among those who
have been involved in carbon risk disclosure. The real value of the Task Force
may be in 'awareness-raising for climate-related topics among investors,
government organisations and businesses.'
The Recommendations Report recommends voluntary reporting. However, if
these requirements were included in rules such as stock exchanges' listing
rules, they would in effect become mandatory.
The Recommendations Report is explicit that the recommendations are not
a final answer:
The Task Force's recommendations provide a foundation for
climate-related financial disclosures and aim to be ambitious, but also
practical for near-term adoption. The Task Force expects that reporting of
climate-related risks and opportunities will evolve over time as organizations,
investors, and others contribute to the quality and consistency of the
The Task Force on Climate-related Financial Disclosures
and scenario analysis
A section of the Recommendations Report of the Task Force on Climate-related
Financial Disclosures is devoted to scenario analysis.
As well as the section in the main report, there is a Technical Supplement
which gives more detail.
In particular, the report suggests that organisations should model what
might happen to them in the circumstances where action is taken to limit global
temperature rise to 2°C, that is, the less challenging of the Paris Agreement
While the report says that it is important that all organisations
consider 'a basic level of scenario analysis in their strategic planning and
risk management processes', it also suggests different types of analysis
depending on the kind of exposure and the level of experience in scenario
analysis. Resource intensive organisations with high greenhouse gas emissions
should model their transition risks because of their exposure to policy
actions, subsidies or taxes, and market changes aimed at energy efficiency.
Similarly, organisations exposed to climate change because they have long-lived
fixed assets located in climate sensitive regions or relying on water supply
(or with parts of their value chains so exposed) would do well to model
physical risks. Organisations that are new to scenario analysis may begin with
a qualitative discussion of how the organisation's strategies might change
under various scenarios.
The report suggests that scenario analysis—including a description of
how and why the scenarios have been chosen and developed—should be reported in
the organisation's mainstream financial reporting. This would be a change from
most current reporting practice, which focuses on past performance and short
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