Climate risk takes a seat at the board table

As we prepare for the end of financial year, and the flurry of annual reporting that it brings, many investors are eagerly anticipating a new flavour to be added to this year’s reports. This is the first full year cycle of June year-end reporting since the Taskforce for Climate-Related Financial Disclosure (TCFD) released its recommendations in late June 2017, and for many, these will be welcomed with open arms.

There have been over 330 companies sign up as TCFD supporters, as at May 2018[1], including many of the world’s heavyweight financial institutions. Although adoption and disclosure is voluntary, the recommended approach is to include information in respect of the TCFD within the company’s mainstream financial filings- the annual report, or the annual Operating & Financial Review equivalent.

Including disclosures around an organisation’s evaluation of climate-related risks and opportunities, and the potential financial implications, within the mainstream annual report – rather than sitting alongside other non-financial metrics in the separate sustainability report – reflects the increasing importance of climate-related issues and a maturity in risk management. This will however, require directors to ensure that they understand climate-related risks and opportunities and their impact on their organisation in more detail than ever before – elevating these risks to the audit committee, and giving climate-related risk a seat at the boardroom table.

This is important for two main reasons- firstly, the TCFD recommendations require those charged with governance to take accountability for ensuring climate-related risks are appropriately considered and managed on an ongoing basis. The recent proliferation of shareholder resolutions on climate change in Australia, and overseas underscore this point. Secondly, the evolution of auditing and financial reporting standards has led to a coinciding greater focus on Other Information[2], and a longer term focus in considering impairment of assets[3].

The confluence of these items is a critical consideration, particular in the current regulatory climate. Importantly, any new information contained in its Annual Report relating to climate change, will be considered ‘Other Information’ for the auditors, who will be required to assess this information for contradictory statements with the information contained in the Financial Statements1. Similarly, the recently released International Financial Reporting Standard 9: ‘Financial Instruments’, compels reporters to consider lifetime expected credit losses, and any significant uplift in credit risk that has occurred during the period2. Depending on your specific organisational circumstances, the physical and transition climate-related risks, may impact impairment considerations for certain categories of assets, which must be reflected in the positions taken in the Financial Statements where material.

In understanding these implications, it is evident that reporting on climate-related risks is not a one-person job, and will require an integrated effort across the company. In particular, this task should see the Sustainability team collaborating closely with Risk Management, and Finance with appropriate oversight from the board. Climate-related risks and opportunities are complex and manifest over a multiple horizons and understanding their impacts will evolve over time. The implementation of the TCFD recommendations is therefore not a one-off exercise but is expected to take some time as organisational approaches to climate-risks mature and are embedded into business-as-usual decision making.

We welcome the coming TCFD disclosures and hope that they enhance the ability of investors to understand climate risk impacts on the organisations they invest in. We also expect that organisations don’t have all the answers and many will not be disclosing on all aspects of the TCFD as they are in various stages of implementation. We encourage all organisations, no matter where they are on the TCFD implementation journey, to improve the dialogue on the impacts of climate-related risks and opportunities and demonstrate this on an ongoing basis – the coming 30 June reporting period will be the first real test on whether climate-risk is being heard at the board table.

Supporting footnotes

[1]https://www.fsb-tcfd.org/tcfd-supporters-may-2018/

[2]http://www.auasb.gov.au/admin/file/content102/c3/ASA_720_2015.pdf

[3]https://www.iasplus.com/en/standards/ifrs/ifrs9


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