Reporting on climate change risk: accountants will be needed

By Prue Moodie

In June 2017, the Task Force on Climate-Related Financial Disclosures released a blueprint for corporate disclosure that is destined to define how companies view climate change and inform investors.

“The report is a financial market industry-led framework that gives guidance on information that should be disclosed to provide a true and fair view of the risks associated with climate change,” says Sarah Barker, special counsel at law firm MinterEllison.

The framework is voluntary but Barker says it is as persuasive as a voluntary instrument can be, because it’s prepared under the auspices of the Financial Stability Board.

The task force membership panel is a who’s who of international data providers (companies) and users (investors) and these organisations can be expected to consider the framework when they prepare or consider annual reports.

It expects companies to disclose the information in the mandatory documents that it calls mainstream annual financial filings.

Companies with public debt or equity are the main target of the recommendations, while insurers and investors are expected to be the main users of the information.

A key question is, however, do we need another corporate reporting obligation?

“We live in a complex world,” says CPA Australia policy adviser ESG, Dr John Purcell FCPA.

“Yes, this represents another burden on companies, but companies and their directors need to be proactive about transparency.”

Purcell has written an information paper on the initiative, The Financial Stability Board’s Task Force on Climate-related Financial Disclosures – implications for Australian business and corporate reporting [PDF].

He says the task force’s blueprint is possibly the most comprehensive effort to date to explain and set a path towards enabling organisational transparency and market resilience in the face of climate change.

Climate change myths

The task force says many organisations incorrectly perceive the implications of climate change as long term and not necessarily relevant to decisions made today.

It argues that few companies will be unaffected by government responses to greenhouse gas reduction targets.

This risk of being caught on the wrong side of the transition to a lower-carbon economy drives the task force’s recommendations.

This is exemplified in the case of ExxonMobil, which is under investigation in the US for allegedly not taking future environmental regulations into account when valuing its oil and gas reserves.

“It is our view that appropriate disclosure of risks and opportunities will enable financial markets to more accurately price the risk of a potentially abrupt transition to a lower-carbon economy as a result of regulation, legislation or technology,” says Dr Fiona Wild, BHP Billiton vice president, climate change and sustainability, and a member of the task force panel.

Spotlight on the finance team

Corporate and public practice accountants will find themselves in increasing demand as providers of information to boards and clients about best-practice ways to address the task force’s recommendations.

“It absolutely has to be driven from within the finance team,” says Barker. “Previously, climate change-related information has been viewed through the non-financial lens.”

Wild believes there is already demand from within companies and from investors.

“We have seen growing interest in identification, assessment, management and disclosure of climate-related risks and opportunities, and the potential financial impacts stemming from them.

"What we’ve tried to do is create a framework that makes it easier for companies to do this work,” she says.

Materiality analysis to ease pressure

The task force recommends disclosure under four headings: governance; strategy; risk management; and metrics and targets.

It expects companies to address each category in considerable detail, although disclosures under the strategy, and metrics and targets headings are subject to materiality.

If the company describes the risks as non-material, they need only be included under the governance and risk management sections.

In the case of strategy, the task force recommends focusing on the resilience of an organisation’s strategy by considering different climate-related scenarios.

The scenarios should include a strategy dealing with global warming of 2° Celsius or lower, the Paris Agreement target.

Australian corporate law and climate change forecasts

Australian company directors are concerned about making forward-looking statements because their corporate law does not contain a tested defence if their forecasts are wrong.

Barker dismisses those concerns. “In my opinion, saying nothing is now way more risky. We’re seeing plenty of shareholder litigation in Australia around misleading statements to the market, although not yet against directors on the climate risk point,” she says.

“The law under the Corporations Act says that accounts need to present a true and fair view of a company’s financial standing. What we have now is a way to do it.”

Regulators and climate change disclosure

The Australian Prudential Regulation Authority (APRA) sees climate change as a financial risk issue, APRA member Geoff Summerhayes told the Insurance Council of Australia in February 2017.

“If entities’ internal risk management processes are not starting to include climate risk as something that has to be considered – even if risks are ultimately judged to be minimal or manageable – that seems a pretty reasonable indicator there might be something wrong with the process,” he said, concluding that “you can expect to see us on the front foot on climate risks.”