In a recent article in The Age, it was reported that Australian business leaders are becoming increasingly anxious about the threat of climate change. Recent research indicates that Australian business leaders view climate change as the biggest issue facing society.
None of this is surprising.
There is increasing focus by various stakeholders on how businesses are managing climate change risks.
The progress in Australia to manage climate change risks is widely considered to be ineffective. This was particularly evident when the Ndevr Environmental Consultants announced that despite recent record levels of renewable energy usage causing the first drop in Australia's annual greenhouse gas emissions since 2015.
The current rate of decline would mean that Australia’s Paris Agreement pledge would be met 68 years late.
In a financial context, and on a global scale, the International Monetary Fund recently warned that climate change is presenting itself as a very real financial risk that will adversely impact the economy.
In Australia, ASIC is starting to take the impact of climate change seriously. This is evident by their recent regulatory guidance (last updated in August 2019) on the disclosure of climate change-related risks and opportunities. Their advice is provided in two regulatory guides:
Regulatory Guide 228 Prospectuses: Effective disclosure for retail investors
This guide recommends that the prospectus include information about external threats, for example, climate change risk on the business. The guide outlines that in considering the risks, the business discusses the legal, technology and market changes required to move to a lower-carbon economy and the financial implications of these risks.
Regulatory Guide 247 Effective disclosure in an operating and financial review (OFR)
This guide states that when listed entities prepare their OFR, they should provide information that allows the user to determine whether environmental, social and governance risks could affect the entity's achievement of its financial performance or outcomes.
Climate change disclosures are also relevant in the context of financial statement preparation.
The AASB and AUASB published a joint guidance statement in December 2018 on the reporting required in financial statements on the potential impact of climate change.
The joint guidance statement notes that “given investor statements on the importance of climate-related risks to their decision making, the impact …is that entities can no longer treat climate-related risks as merely a matter of corporate social responsibility and should consider them also in the context of their financial statements”.
In December 2019, ASIC said that they have launched a new surveillance program to monitor and ensure Australia’s largest companies are dealing with the risks of climate change.
In a bid to get boards to sit up and take action, ASIC’s move came shortly after former banking royal commission Kenneth Hayne’s warning to company directors that they would face court if they were negligent about climate change risks.
Former High Court chief justice Robert French noted in his address to the Law Society of Western Australia that businesses will likely have to deal with an increased likelihood of being hit by legal challenges linked to climate change policy failures. In Grantham Research Institute on Climate Change and the Environment’s July 2019 report, it found that between May 2018 and May 2019, Australia had 94 cases during this period.
The report provided an example of a litigation case that resulted from a perceived lack of disclosure in relation to climate risk.
The example was the case of McVeigh v REST Superannuation in July 2018.
Mr. McVeigh, a member of REST, filed a lawsuit against REST on the basis that REST’s failure to provide adequate information relating to its exposure to climate-related risks prevented him from making an informed judgment about the management and financial condition of the fund.
It is increasingly clear that climate change risks cannot be ignored by businesses.
Directors and business leaders need to be proactive in ensuring that they are appropriately managing the risks posed by climate change and be ready to report on it.
For more information about climate change risks for your business
If you have any questions or require further information relating to managing climate change, contact your local RSM adviser today.