Letter to The Treasurer and RBA on Climate Disclosures

7 November 2022

An coalition representing investors with $100 trillion under management has urged the Australian Government to join global efforts to require internationally consistent mandatory TCFD-aligned disclosures adopting the standards issued by the International Sustainability Standards Board.

The recent Australian Federal budget allocated $6.2m for Treasury and the Australian Accounting Standards Board to “develop and introduce climate reporting standards for large businesses and financial institutions”.

Our letter to Australian Treasurer and Governor of the Reserve Bank of Australia notes that globally consistent, comparable and decision-useful public disclosures by firms of their climate-related financial risks is a critical priority in the governments’s development and introduction of reporting standards.

The preferred approach would have four main benefits:

  • This approach to reporting would keep Australian companies competitive, given the demands of international capital markets.
  • This approach promotes the efficient allocation of the billions of dollars that will be invested in Australia’s transition to a net zero economy.
  • For companies, having a mandatory and standard disclosure regime makes reporting much more efficient (in that it avoids having to disclose against different standards for different markets).
  • This level of reporting will support all stakeholders, including the businesses themselves, investors, governments, in developing a reliable and comprehensive understanding of where overall economic risks and opportunities lie.

The coalition of investor networks:

  • Investor Group on Climate Change (Representing investors in Australia and New Zealand)
  • Ceres, (representing USA investors)
  • IIGCC (representing UK and European Investors)
  • The Asia Investor Group on Climate Change (representing investors in 11 Asian markets)
  • CDP (active internationally)
  • PRI (active internationally)

The text of the letter follows:

Dear Treasurer Chalmers and Governor Lowe,

We are writing to propose the Australian Government take steps to promote its objectives of supporting financial stability and achieving net zero emissions. Specifically, we urge the Australian Government to join global efforts to require internationally consistent mandatory TCFD-aligned disclosures adopting the standards issued by the International Sustainability Standards Board.

As an international set of investor networks collectively representing over two-thirds of Australia’s investment industry and over AU$100 trillion in assets under management globally, we engage with climate change risks and opportunities daily, and provide support to investors and governments as we work towards achieving our shared goal of decarbonising the economy through an orderly and equitable transition to net zero.

Alongside our international investor network peers, we recently issued the 2022 Global Investor Statement to Governments on the Climate Crisis. This is the strongest ever call by global investors for governments to raise the credibility of their decarbonisation policies to support investment in climate change solutions. To date, around 40 per cent of global assets under management, 532 institutional investors with over US$39 trillion AUM, have called on all governments to undertake five priority actions in 2022.

Investors have identified that globally consistent, comparable and decision-useful public disclosures by firms of their climate-related financial risks is a critical priority. This is the focus of this letter.

Effective disclosure is critical to managing the systemic financial risks and opportunities associated with climate change.

We welcome your recent comments made at the G20 Finance Ministers and Central Bank Governors Meeting (July), including that a “key priority for the new Australian government is introducing clear and globally aligned climate reporting requirements for large businesses and financial institutions”(AFR). On behalf of institutional investors, we are pleased and supportive of your intentions to develop “stronger requirements for disclosure of climate risks and opportunities”(AFR) in Australia.

The quantity and quality of disclosures is currently inadequate for investors to effectively respond to material climate risks and opportunities, and for governments and financial regulators to address systemic risks to financial stability. As documented in CDP’s 2019 climate change report, voluntary climate disclosures from 96 Australia-based companies identified AU$79.4 billion in climate-related risks and AU$113 billion in potential opportunities. While these figures are already significant, the real risks and opportunities are likely much higher. Thus, the existing voluntary approach to climate-related financial disclosure in Australia has proven to be insufficient.

Credible climate risk disclosures are important for investors in managing long-term financial risk by ensuring sufficient data and information is available for them to effectively and efficiently manage and price climate risks across their portfolios. Disclosures can also be a central tool for regulators to inform monetary policy, supervision, and financial stability, by improving visibility of the system-wide implications of decarbonisation and climate change. Investors with trillions of dollars in assets seek to manage risk and impacts and invest in low and zero carbon investment solutions in globally competitive markets. This cannot be accomplished without sufficient climate-related risk disclosures.

Central banks, including the Bank of England, Banco Central do Brasil, and Banque de France are increasingly issuing their own TCFD-aligned climate risk disclosures to emulate sound disclosure practice and inform better risk management and decision making. We welcome the RBA’s commitment to “exploring which climate-related financial disclosures it could publish, drawing on the recommendations of the Task Force on Climate-related FinancialDisclosures” (RBA 2022). We urge the RBA to start issuing annual climate risk disclosure consistent with international frameworks and standards, and emerging guidance for reporting by central banks.

Phasing in TCFD-aligned disclosure requirements in Australia

In 2021, investor groups representing the majority of Australian and global AUM released a Plan supporting the implementation of mandatory TCFD-aligned reporting in Australia, which built on the Australian Sustainable Finance Roadmap recommendations. The absence of a mandated disclosure framework is causing companies and investors to unnecessarily spend significant resources on climate-related reporting due to lack of clarity. There is a significant advantage to more precise guidance on climate-related disclosures in Australia. Currently, companies and investor directors and trustees are spending excessive resources going back and forth trying to reach best practice in companies’ disclosure. TCFD-aligned reporting will ultimately cut red tape and lower the reporting burden, along with litigation and regulatory compliance risk, by removing uncertainty and offering necessary guidance on practice.

International Sustainability Standards Board disclosure standards

Investor groups and Australian regulators have welcomed the establishment of the International Sustainability Standards Board. The objective of the Board is to deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’sustainability-related risks and opportunities to help them make informed decisions.

There are certain areas of the standards that are critical to make the implementation of these standards sufficient for Australian investors.

These areas include the following:

  • Climate-risk disclosure must be mandatoryIn a world of competing priorities, businesses find it challenging to prioritise investing sufficient resources and attention towards voluntary reporting. Making climate disclosures only voluntary sends a message to executives that climate disclosures should not be prioritised. Ensuring clear, mandatory requirements will help to align regulation with industry expectations and global standards and reduce existing burdens by reducing and streamlining decision-making by detailing what needs to be done. For more information on voluntary vs mandatory disclosure, read IGCC’s report on the subject.
  • Inclusion of scope 3 emissions
    Effective risk management requires understanding and addressing risks throughout the company value chain, including upstream and downstream. Therefore, investors expect companies to understand and report on relevant categories of scope 3 emissions, where these emissions are a significant part of total company emissions across the company value chain, and/or where those emissions are central to the companies’ portfolio. Analysis by CDP has shown that on average, a company’s scope 3 emissions are 11.4 times greater than its direct emissions. This ratio is higher in some sectors, including retail, hospitality, and manufacturing, energy, and utilities.
  • Disclosure of transition plans
    Investors expect to understand companies’ time-bound action plans to pivot their existing assets, operations, and entire business model to align with a 2050 net-zero trajectory. Accordingly, investors require companies to disclose credible transition plans which lay out actionable plans and serve as a strong mechanism for accountability and transparency. Plans should include emission reduction targets, interim milestones and KPIs, business strategies and actions to include those KPIs, as well as the structures responsible for successfully implementing this plan. These disclosures should include actions to align industry and public sector engagement and lobbying activities with their transition strategy.
  • Inclusion of sector metrics
    From a climate target-setting perspective, sector targets are the most relevant means for financial institutions to achieve real-world emissions reductions, incentivising and pivoting capital support to companies with best carbonperformances within their sector, and financing the global economy’s transition to net zero. Therefore, the disclosure of industry metrics and corresponding targets for the 12 most energy-intensive sectors, at static, 5-year, and 10-year intervals, would be relevant for investors.
  • Inclusion of robust scenario analysis
    In order to reduce information barriers as to how climate scenario analysis should be disclosed, guidance from regulators is recommended. Disclosures should include robust scenario analysis to ensure that sufficient detail is provided on the analytical methodology and inputs used, the financial impacts at both company and project levels, and the strategic responses to results. While some entities may not have the skills and capacity to accurately provide forward-looking information, including scenario analysis, regulators can set out minimum baseline and guidance to enable compliance. Disclosure from climate scenario analysis could also be narrative based and set in motion a learning process to build understanding of how climate-related risks and opportunities could evolve over time, which eventually will include quantitative information with greater sophistication and rigour.
  • In line with global best practice
    Regulatory frameworks for financial institution and company climate-related disclosures are emerging rapidly around the world. While jurisdictional reporting requirements may vary in the specifics that they ask for, Australia should be aligning with best practice in overarching consistency on risk definitions, reporting expectations and benchmarking. This will also support the implementation of globally consistent frameworks within the same institutions and the necessary cross- border flow of capital to support transition and sustainable financing.

Just transition principles must underpin these plans to ensure the transition to a net zero emissions economy is fair and inclusive.

Climate represents a first order risk to the Australian economy, the financial system, and investors. We support the Paris Agreement and its objective to consider the needs of a just transition, while achieving a net zero emissions economy and resilient Australia. The transition to net zero emissions by 2050 is happening and presents huge opportunities to create new jobs and boost economic growth for countries that get ahead of the curve. But governments, companies, investors, and all stakeholders must act, including to minimise hardship for affected workers in fossil fuel sectors and communities where jobs are lost. Prioritising a just and orderly transition now will determine whether Australia fulfils its potential to emerge a winner in the global race to net zero. To avoid large-scale financial risks from a disorderly transition to net zero emissions and the physical impacts of climate change, clear and comparable disclosure of climate related information is one of the foundational building blocks of a well-functioning global financial system.