TCFD: linking economic and environmental policy

In September 2018, the TCFD emphasised that “while the TCFD remains a voluntary initiative, support from governments can help develop a holistic approach to improving climate-related financial disclosures”. In relation to Australia, the TCFD specifically mentioned the support coming from financial regulators.

As a voluntary framework promoted by a taskforce formed under the umbrella of central banks, international financial institutions and international standard-setting bodies (including the International Accounting Standards Board (IASB)), the TCFD recommendations cannot force Australian legislators to enact rules of disclosure.

However, the recommendations have given impetus to developments in the Australian regulatory environment around both heightened expectation and recognition of the adaptability of existing disclosure frameworks. INTHEBLACK’s May policy update focused on the joint guidance issued in December 2018 by the Australian Accounting Standards Board (AASB) and Auditing and Assurance Standards Board (AUASB) titled Climate related and other emerging risks disclosures: assessing financial statement materiality using AASB Practice Statement 2.

The willingness of Australian financial regulatory bodies to engage in and promote debate about the market integrity and governance challenges of climate change continues.

Building on earlier remarks from Australian Securities and Investments Commission (ASIC) commissioner John Price and Australian Prudential Regulation Authority (APRA) executive board member Geoff Summerhayes, the Reserve Bank of Australia deputy governor Guy Debelle referenced the TCFD as a key component linking financial stability to an orderly transition away from fossil fuel dependency in Australia and globally.

Elsewhere, the Australian Securities Exchange (ASX) Corporate Governance Council took the significant step of referring to the TCFD as both a method for determining material exposure, and disclosure in its revised principles and recommendations.

These statements follow at least 10 years of climate change policy uncertainty and factional warring at the national political level. The earlier public policy mechanisms intervene, the greater the chances of avoiding abrupt economic adjustment and associated social upheaval.

Existing standards and guidance suggest auditors should ask clients whether climate-related risks have been considered in preparing the financial statements, including fair value estimates, impairment of assets, expected credit losses and provisions, and that the underlying assumptions used for estimates and impairments are disclosed.

I want to further consider impairment in the context of the transitioning to a low-carbon global economy. IASB chair Hans Hoogervost has drawn a link between what happens when costs from “smokestack” industries are not recognised, because their impact is indirect, say, in the case of pollution that affects nearby residents.

He says if these costs make an activity unfeasible, for example forcing a factory to close, the impairment of the business and its assets would be shown in the financial statements.

“Financial reporting and sustainability reporting would be one and the same,” he says.

What, then, is the key international public policy mechanism designed to drive atmospheric decarbonisation and arrest runaway global warming, and how does this translate to market response at a national level?

The Paris Agreement on climate change is an international treaty to which there are 195 parties, including Australia. It aims to strengthen measures limiting the global average atmospheric temperature to 1.5°C above pre-industrial levels. The international agreement translates to national actions in which each country sets a target of emissions reductions, with 2030 set as a critical assessment point for halving global emissions before reaching net-zero by 2050.

Disregarding short-term (quarterly) variations, Australia’s emissions have increased, and international agency and Department of the Environment and Energy analysis indicates a substantial likely shortfall in meeting, by 2030, the 26 per cent to 28 per cent target reduction below 2005 levels.

Clearly, as the window of opportunity narrows ahead of 2030, it is likely that governments will be pressured to adopt tougher measures to reach the target.

The later this happens, the greater the circumstances warned of by Debelle, that “could precipitate sharp adjustments in asset prices, which would have consequences for financial stability”.

The regulators’ tough words have been a welcome aspect of the transition to a low-emissions economy, although it probably won’t be enough given the scale of the challenge.

It will take government action – the earlier the better – to enable a smooth transition and avoid economic shocks and social upheaval.

National governments will avoid the mistakes of the past with an appropriately targeted, suitably articulated emission reduction policy.

This will signal change is happening.

CPA Australia has, through several avenues, stressed to successive governments the policy significance of Australia’s Paris Agreement emissions reductions commitments, not only as a feature of international public law, but also as a basis to overcome the long legacy of a disconnect between economic and environmental policy.

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