As companies, investors and many countries set net-zero targets for 2050, there’s growing pressure on companies to better report their exposure to risks of climate change, and for regulators to set an even playing field.
The Investor Group on Climate Change (IGCC), and a group of global investor networks, have released a plan for Australia to adopt mandatory disclosure of TCFD climate change risks.
The plan is called, Confusion to clarity: A plan for mandatory TCFD-aligned disclosure in Australia, the IGCC says it has the potential to cut red tape for business and protect national economic stability.
It’s argued that a mandatory regime won’t necessarily increase the burden on companies as it will clarify and unify the rules that already exist. It will fill gaps between voluntary programs, and align the Australian system with a growing suite of international frameworks.
“The reduction in red tape aims to reduce the complexity that businesses and investors face when thinking about climate related disclosures. Without clear guidelines from the regulators and the relevant bodies they face an alphabet soup of different measures, metrics, targets and scenarios.” says Erwin Jackson, IGCC Director of Policy. “So that basically means we’re not fully pricing climate risk into the market, which means decision-making by companies and investors will be inefficient, and probably rather expensive in the future.”
The other investor networks involved are the CDP, and the Principles for Responsible Investment (PRI). As a group, they’re calling for regulatory bodies like ASIC and APRA, and institutions such as the ASX, to issue clearer guidance on TCFD-aligned disclosures and set mandatory expectations.
It follows recommendations from G7 Finance Ministers and Central Bank Governors to make TCFD reporting mandatory. Essentially any delay by Australia, in keeping up with regulatory norms, has the potential to make local companies less competitive when selling into foreign markets.
“Internationally we’re seeing a proliferation of these schemes that have emerged very rapidly across a number of Australia’s major markets, ranging from EU Hong Kong, Singapore, the US, the UK, and New Zealand. And the more prepared we are for that kind of environment, where companies are going to be covered by these schemes in different jurisdictions, the better placed we’ll be.” Jackson says.
The recommendations are essentially focussed on accounting rules, and while there are global accounting standards that all listed companies follow in relation to financial disclosures, there’s no such consistently mandated rule around climate risk reporting. But this is set to change.
The International Financial Reporting Standards (IFRS) Foundation (the world’s key accounting authority) is developing a Sustainability Standards Board to develop a climate disclosure standard.
“Regulatory certainty is key in accelerating the ability of the real economy and the financial sector to understand and address the inevitable and rising risks caused by the climate emergency. To ensure the ongoing stability of the financial system and to remain competitive with global counterparts, Australia should be developing its own mandatory regime as a matter of priority.” says Paul Simpson, CEO of CDP.
The recommendations are thorough, they define a clear pathway towards rules being in place by 2024, they seek to cover all companies in the ASX300 as well the largest unlisted companies, and they seek an incremental increase in standards over time.
TCFD adoption, and a general acceptance of the grave risks inherent in the climate crisis, seems to be reaching a tipping point of corporate recognition. And it’s at this point that a mandatory regime makes sense. As more companies seek to engage, it is more efficient to have one set of rules and metrics.