The case for change
This chapter sets out the evidence regarding the operation of the carbon
risk disclosure frameworks set out in Chapter 3, before considering options for
The state of carbon risk reporting in Australia
The evidence to this committee was that carbon risk reporting was not
sufficiently prevalent amongst Australian firms, and that when information was
provided it was often of variable quality.
One submitter summarises the situation as follows:
Research by myself and others suggests that Australian
companies are currently lagging behind competitors and trading partners in
their treatment and response to carbon and climate risk. For Australian large
companies reporting gaps include scale, coverage, completeness, materiality,
relevancy and currency...
The prevalence of reporting
WWF–Australia notes in its submission that its 2015 comparison of the
top three Australian insurance companies with three global peers found that the
Australian insurers made disclosures that were less specific than the overseas
insurers and less linked to mainstream reporting. They were also less likely to
mention a 2°C scenario; and they were less likely to include goals for reducing
exposure to climate risk.
Likewise, a 2015 study by Ernst and Young which found that all of the
ASX 100 companies were reporting on sustainability, but only 50 were assessing
the materiality of the factors they reported on. Only two companies assessed in
that study, BHP Billiton and AGL, appear to have disclosed the results of
In addition, several companies have incorporated some version of a carbon price
in their calculations for the future, though this is not necessarily disclosed
in company reports.
Market Forces assessed 25 listed Australian fossil fuel companies and
found that 10 of the 25 failed to address the science of climate change at all,
and only six acknowledged climate change as a material business risk.
This is consistent with an earlier study of companies in the Australian
resources sector which found that only 13 per cent had policies, plans or
practices in place to assess or manage climate risk.
Market Forces tracks disclosure by superannuation funds. It found that
the median fund discloses only 50 per cent of its equities holdings and less
than 20 per cent of their entire portfolio. Further, only six
superannuation funds (representing 10 per cent of superannuation assets) have
committed to the Montreal Pledge, and only two actually disclose their carbon
footprint in their annual report.
Analysis undertaken in 2014 by Net Balance Foundation of disclosures by
ASX 200 companies found that the amount and detail of climate risk disclosures
made through CDP is far greater than through mainstream company reports. Net Balance
suggested that differences between CDP reporting and mainstream reporting may
indicate that companies do not regard climate risk as material risk. The
analysis also found that, while the findings for Australian companies were
similar to the UK and the US, fewer Australian companies identify supply chain
risks, although they are probably just as great as elsewhere.
The National Greenhouse and Energy
Under NGERS, entities producing more than 25,000 tonnes of carbon
dioxide equivalent from a facility, or 50,000 tonnes from a corporation, have
to report their emissions. In 2015, 400 corporations reported around 322
million tonnes of carbon dioxide. At present around 60 per cent of Australia's
recorded emissions are captured.
The scheme does not include emissions from the agricultural or household
sectors or transport emissions from private vehicles, nor emissions via equity
ownership (Scope 3 emissions).
Further, it has been argued that current thresholds for reporting mean that
emissions which may have material financial implications are excluded.
In 2015, 390 companies operating in Australia, including 94 ASX 200
companies, reported greenhouse emissions and other climate change information
through CDP. Of the ASX 200 companies, 85 per cent reported regulatory risk, 76 per cent
reported physical risk, and 73 per cent reported other risk. Of the reporting
companies, 28 of the 94 were financial companies, and 23 were in materials.
The proportion of Australian companies reporting through CDP
is lower than in Europe or the US.
There has been no increase in the number of companies reporting since 2010, and
an actual fall (from 103 in 2014 to 90 in 2015) in the number of ASX 200
The quality of reporting
A large number of submissions suggested that carbon risk reporting in
Australia was inadequate, especially in the light of the growing demand for
good information among asset owners such as superannuation funds.
As the Investor Group on Climate Change says:
For investors assessing company performance, key dimensions
of carbon risk are chronically underreported, ill-defined, incomplete,
immaterial, out of date, or inconsistently disclosed.
Current disclosures are not considered sufficient. 350.org observed:
The institutions that we work with repeatedly cite barriers
to reducing their exposure to climate investment risks due to the wider
financial community's lack of disclosure, awareness and appreciation of
unburnable carbon as a measurable and serious investment risk.
The submission by ANZ notes that:
...for reporting to be useful, disclosure frameworks must
generate comparable and consistent reporting. At present, there is no single
framework being used by companies to report their carbon risks...Rather, carbon
risk reporting varies in its scope between companies, making it difficult for
stakeholders to undertake peer assessments.
The best data available is that collected under the NGERS. It was
pointed out that reporting of carbon emissions is not the same as reporting
exposure to carbon risk.
There is also concern that the information there is does not map to financial
There is no shortage of information on individual company
emissions available to stakeholders. However, it is the application of this
information to financial metrics that has resulted in significant confusion
and, in some cases, misleading conclusions. Analysis of climate change risk is
often presented in ways which allow for easy, but meaningless, comparisons
between companies and sectors.
Further, the data that is provided is incomplete:
BHP, and other ASX listed companies, provide information on
its Scope 1 and 2 carbon emissions. However, the real risk in terms of stranded
assets relates to the extent of Scope 3 emissions, being emissions that are
produced from burning fossil fuels extracted by the reporting company.
The data is not comparable across companies:
Whilst the majority of ASX 200 companies provide some detail
on the scope 1 and 2 emissions profile of the business there is too often
little discussion on the broader implications of this for the business, for
instance, the company's ability to decarbonise and over what timeframe relative
to the transition of the broader economy and with sufficient urgency given the
There were concerns about the quality of some of the data. The Investor
Group on Climate Change noted shortcomings with timeliness, and also with a
lack of detail which would make it possible to draw conclusions about a
particular facility such as a mine. It also noted that current reporting
focuses on historical performance data rather than being forward looking.
The committee's view
The committee agrees with submitters that there are significant
opportunities to improve carbon reporting, and that improved reporting would
benefit businesses, investors and the economy. There should be better
disclosure of carbon risks by more Australian firms.
The committee believes that the best way to achieve this is building on
the existing regulatory framework governing corporate disclosures. Carbon risk
is a business risk, and it is important for it to be treated as such.
Consideration of a firm's carbon emissions is not just a question of ethics—it
is a question of good business judgment.
As such, although organisations such as CDP have done good work in
laying the groundwork for wider disclosure, the committee does not believe that
it is appropriate for carbon disclosure to be undertaken on an exclusively voluntary
basis. A voluntary disclosure regime would not be accepted for firms exposed to
significant sovereign risk, or currency risk. It should not be accepted for
firms exposed to climate change.
Likewise, the committee does not believe it would be appropriate to
extend the operation of NGERS to capture carbon risk more broadly. NGERS was
designed for a very different purpose. Accounting for the risk arising from
carbon is categorically different from the accounting of carbon emissions
themselves. There is no compelling reason to exempt carbon risk from the
network of reporting obligations and responsibilities that the law imposes on
corporations and those who run them.
The question, accordingly, is how to refine the existing financial
disclosure system to improve the disclosure of carbon risk by Australian firms.
Further guidance from regulators
The committee notes the legal opinion by Noel Hutley SC and
Sebastian Hartford-Davis that directors may be liable for failure to consider
and disclose foreseeable climate risks. Based on the evidence provided to the
committee, some Australian companies may not be adequately responding to this
aspect of their responsibilities. The committee believes this gap is
attributable in part to the need for more guidance from the financial
As one witness told the committee:
So under the Corporations Act and under the ASX there are
requirements to report material ESG risks—environment, social and governance
risks—for company performance, but there is very little guidance or clarity as
to how that pertains specifically to the issue of climate change and climate
risk from a financial perspective.
Another witness asserted that
...we know from our own research that the vast majority of
Australian companies and superannuation trustees do not recognise climate change
as a material business risk.
As Mr Summerhayes noted in his speech, '...while climate risks have been
broadly recognised, they have often been seen as a future problem or a non-financial
The requirements for disclosure under ss299(1) and 299A of the
Corporations Act 2001 are broad. The committee believes clearer guidance from
ASIC is needed for the requirements to have practical force for many companies.
The existing guidance (such as INFO 203 regarding impairment of non-financial
assets) is incomplete or out of date.
That the Australian Securities and Investments Commission review its
guidance to directors to ensure that it provides a proper understanding of the
manifestations of carbon risk, and reflects evolving asset measurement
implications of carbon risk.
The committee notes the comments by APRA at the public hearing, and
considers that its stated approach to addressing the issue of carbon risk with
its regulated entities is both appropriate and in line with its prior practice.
The committee considers, however, that there is scope for the ASX to
provide further guidance to listed entities.
That the Australian Stock Exchange provide guidance regarding the
circumstances in which a listed entity's exposure to carbon risk requires
disclosure under Recommendation 7.4 of the Australian Stock Exchange Corporate
Governance Principles and Recommendations.
Clearer requirements to disclose
The committee notes the suggestion from submitters that s299(1)(f)
should be amended to specifically require disclosure of climate-change and
carbon risks. The committee considers that firms are already required to
disclose these risks under the general provisions in ss299(1) and 299A, and
that it now falls to regulators to issue appropriate guidance.
However, the committee notes that the final report from the FSB Task
Force on Climate-related Financial Disclosures is due to be issued this year.
The market would benefit from a coordinated approach between the different
The committee has observed during the course of this inquiry that there
is a lack of clarity about which arm of government should have primary
responsibility for ensuring there is proper disclosure of carbon risk, and
responding to the Task Force's recommendations. The committee notes the
overlapping spheres of responsibility of Treasury, APRA, ASIC, and the Reserve
Bank of Australia.
That the government nominate a single government entity to have primary
responsibility for coordinating the response to the recommendations of the Financial
Stability Board Task Force on Climate-related Financial Disclosures.
That the government commit to implementing the recommendations of the Financial
Stability Board Task Force on Climate-related Financial Disclosures where
appropriate, and undertaking the necessary law reform to give them effect.
Broader financial disclosure
The committee notes the evidence to this committee that aspects of the
existing corporate disclosure framework may be unduly narrow. CPA Australia
gave evidence, for example, that s299A operates:
...very much in financial terms. It looks at prospective events
and future activities and how they may affect financial earnings. What we would
argue is that the language needs to shift away from a concentration on impact
on financial earnings to a more holistic approach as to how director assessment
of future events impacts upon the business model—the viability of the
organisation as a whole.
The committee considers that there is some merit to the proposition that
disclosure should encompass more than immediate financial performance.
Investors would benefit from firms' considering the viability of their business
model, and disclosing how their activities may impact their social licence to
operate. Evidence from CPA Australia suggested that other parts of the Corporations
Act, such as portions of s1013D regarding the contents of a product
disclosure statement, could inform a redrafting of s299A.
The committee notes, however, the evidence from CPA Australia that
although firms are not expressly encouraged to do so at the moment, there is
also no significant impediment.
The committee also notes that any expansion of the obligations under s299A
would have to be accompanied by a consideration of the adequacy of the
protections afforded to directors and officers who make reasonable mistakes
when acting in good faith. The committee notes the evidence of CPA Australia
that the defences at s731 (for due diligence) and s732 (for a reasonable lack
of knowledge) could play a part in ameliorating harsh results for responsible
directors, but considers that these questions of detail are a proper subject
for law reform.
That the government review the Corporations Act 2001 to consider
whether the obligations for financial disclosure should require holistic
consideration of a company's prospects, including the viability of its business
The need for carbon policy certainty
Finally, it is impossible to consider carbon risk without also
considering the current uncertainty regarding climate change policy in
In December 2015, Australia made commitments at the United Nations
Conference of the Parties meeting at Paris to meet certain carbon emission
targets. Present government policy does not provide a clear path to meeting
these targets. The result is confusion and uncertainty for businesses and
investors alike as to what form climate change policy could take, and the
effect it could have on their industries.
The uncertainty created by the government having vacated the field does
not just make it more difficult for companies to disclose carbon risk—the
uncertainty itself is a carbon risk.
Witnesses have told the committee how businesses and investors have been
forced to fill in the gaps left by the government's inaction. As one witness
[The inaction] increases the level of uncertainty associated
with the financial risks attributed to the carbon. You end up with a situation
where, for an investment perspective, investors and often banks are and other
forms of lending are applying their own carbon price anyway, as a
A submission commented:
Despite the Australian government discontinuing its carbon
pricing mechanism, around a quarter of companies use an internally determined
price per tonne of carbon to guide their investment decisions.
The committee believes the government should end the uncertainty by
outlining a clear policy for transitioning Australia to a low carbon future,
such as the adoption of an emissions intensity scheme for the electricity
The committee notes that at the time of writing, notable supporters of
an emissions intensity scheme include Snowy Hydro, the Business Council of
Australia, BHP, AGL, EnergyAustralia, the National Farmers Federation, Origin
Energy, the Australian Energy Markets Commission, the CSIRO, Energy Networks
Australia, the Chief Scientist, the Climate Change Authority, the Clean Energy
Finance Corporation, as well as numerous state and territory governments.
That the government end the uncertainty regarding climate change policy,
and develop a stable and consistent policy (such as an emissions intensity
scheme for the electricity sector).
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