This article was written by Erin Eckhoff with contributions from Daisy Mallett, Will Heath, Emma Newnham and Sati Nagra.
In a world first, New Zealand has introduced a Bill requiring companies in the financial sector to disclose the impact of climate change on their businesses and how they will manage climate-related risks and opportunities. The Financial Sector (Climate-related Disclosure and Other Matters) Amendment Bill (the Bill) will receive its first reading this week and could influence law-makers here, across the ditch. If the law is passed, disclosures will be mandatory for financial years starting in 2022 for most listed issuers, large banks, licensed insurers and managers of investment schemes.
In a press release on 13 April 2021, Commerce and Consumer Affairs Minister David Clark said “Becoming the first country in the world to introduce a law like this means we have an opportunity to show real leadership and pave the way for other countries to make climate-related disclosures mandatory.” There are four main elements to the Bill:
- It introduces mandatory climate-related disclosures for most listed issuers, along with large registered banks, licensed insurers and registered managers of investment schemes.
- It requires the disclosures to be made in accordance with climate standards that will be issued by the External Reporting Board.
- The NZ Financial Markets Authority will be responsible for the independent monitoring and enforcement of the relevant reporting entities’ compliance with the new reporting standards.
- The External Reporting Board will be able to issue guidance material on environmental, social and governance reporting and other wider aspects of non-financial reporting.
The Australian Position
The Bill currently before the New Zealand Parliament is consistent with the trend we are seeing here in Australia towards legal and regulator expectations regarding climate related risk disclosures. While New Zealand has been the first to act, this is not an Australasian phenomenon. There is a global move towards mandatory climate disclosures by listed corporations and/or financial institutions. For example, the UK, US and EU have each announced an intention to enact similar legislation or are already consulting on the same. There will therefore be greater international pressure for Australia to follow suit. Indeed, recent comments by the Prime Minister Scott Morrison indicate a federal intention to adopt a policy of achieving net zero emissions by 2050, which would be a key step towards legislating on corporate climate disclosure obligations in Australia.
Although litigation in Australia to date has been focused on claims against companies, litigants and indeed regulators could equally seek to take action against directors and officers on the basis of specific obligations (e.g. continuous disclosure) and/ or general obligations (e.g. the statutory duty to act with reasonable care and diligence, as we have noted previously).
Under current regulations in Australia, climate impact disclosure is voluntary for Australian companies. ASIC provided guidance in 2019 on climate change-related disclosure and over 2019 and 2020 began to survey several large listed companies spanning a range of industries including energy, financials, industrials, property and consumer discretionary. In an article dated 1 February 2021, ASIC reported that it “considers that the law requires an operating and financial review to include a discussion of climate risk when it is a material risk that could affect the company’s achievement of its financial performance.” In the same article, ASIC provides helpful climate change risk guidance for directors:
- Consider climate risk - Directors and officers of listed companies need to understand and continually reassess existing and emerging risks that may be applicable to the company’s business, including climate risk. This should extend to both short- and long-term risks. Boards should ask if they have considered climate risk in their decision-making process.
- Develop and maintain strong and effective corporate governance - Strong governance facilitates better information flows within a company and facilitates active and informed engagement and oversight by the board in identifying and managing risk. Boards should consider if they are comfortable with the level of oversight they maintain over climate risks and opportunities and the governance structures in place to assess, manage and disclose these risks and opportunities.
- Comply with the law - Directors of listed companies should carefully consider the requirements relating to operating and financial review (OFR) disclosures in annual reports under s299(1)(a)(c) of the Corporations Act 2001. ASIC considers that the law requires an OFR to include a discussion of climate risk when it is a material risk that could affect the company’s achievement of its financial performance. Depending on the circumstances, disclosure of climate risk may also be required by the law in other contexts, such as a prospectus or continuous disclosure announcement. Boards should ask if material climate-related disclosures have been made and updated where necessary and appropriate.
- Disclose useful information to investors - The voluntary disclosure recommendations issued by the TCFD are specifically designed to help companies produce information useful for investors. ASIC recommends listed companies with material exposure to climate risk consider reporting under the TCFD framework.
Our analysis of public disclosures by the ASX50 in 2020 shows the vast majority of these entities included discussion of climate change risk in their OFRs, and reported under the TCFD framework. Many also reported under other global frameworks such as the sustainability standards of the Global Reporting Initiative, CDP (formerly the Carbon Disclosure Project) and, to a lesser degree, the industry-specific standards of the Sustainability Accounting Standards Board.
ASIC’s position together with increasing pressure from litigants, international and national politics may prompt similar obligations to those before the New Zealand House to be adopted in Australia. Relevantly, the latest development in Australian climate change litigation involved climate change disclosure obligations. The McVeigh v Rest11 dispute was brought by a university student against his superannuation fund, Rest, alleging a breach of corporate law and trustee obligations to adequately disclose climate risk in its investments. The case settled in February 2021, with Rest releasing a media statement detailing that “climate change is a material, direct and current financial risk to the superannuation fund” and committing to specific initiatives to manage and address the financial risks of climate change on behalf of its members.12
Australian businesses should ensure that they properly assess their climate change risks and disclose that risk where necessary, and should be prepared for further pressure from regulators and law makers demanding disclosures.