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Climate disclosure – more green tape or a driver of real change?

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Climate change, as a global systemic risk, is impacting our economies, societies and our physical environment more than ever before. And the world is increasingly looking towards the institutional investment community as having the collective power to make real and valuable change. In good news, mandatory climate risk disclosure – critical to ensuring companies report and act on climate risks – is gaining momentum globally. Across the world, there are more than 2,300 pieces of climate policy and legislation in force.

Claire Tan

In Australia, however, many investors are feeling disclosure fatigue. A tightening regulatory environment has meant compliance and disclosure obligations have created a long list of administrative burdens. So, is climate disclosure another one for the list; another box to tick? 

Progress and purpose around the world

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A recent meeting of G7 nations saw the seven most advanced economies in the world commit to mandating climate disclosure in line with the recommendations of the Taskforce on Climate Related Financial Disclosures (TCFD). New Zealand has also taken the necessary steps, with the government announcing last year a mandatory climate-related financial disclosure regime. One of their main goals is for this to lead to more efficient allocation of capital, and help smoothen the transition to a more sustainable, low emissions economy. The US Securities and Exchange Commission (SEC) is also broadly in favour of introducing climate rules, with three-quarters of respondents to the SEC’s call for public input in favour of mandatory corporate climate disclosures.

Governments that have made climate disclosure mandatory have the following aims:

  1. To provide more clarity around industry expectations and global standards (e.g., TCFD);

  2. To reduce operational burdens by streamlining operating processes and enterprise risk management;

  3. To ensure that climate risks, both physical and transition related, are properly priced into market valuations;

  4. To support companies and investors in managing climate-related risks and opportunities and making climate-aware investment decisions; and

  5. To enable economy-wide progress on climate transition across major financial institutions and corporates.

Where does Australia stand?

Australia, however, remains comparatively silent on the issue of mandatory disclosure. And, with COP26 coming up in November which will seek to put the goals of the Paris Agreement in closer reach, the pressure is on. 

What we have seen domestically, in response to the heightened focus on climate risk management and disclosure, is the draft Prudential Practice Guide (PPG) on Climate Change Financial Risks, recently issued by the Australian Prudential Regulation Authority (APRA). The guide, known as CPG 229, aims to inform institutions across banking, insurance and superannuation on the best practice when it comes to financial risk management relating to climate change. It focuses on risk disclosure, governance and management of climate change financial risks. CPG 229 is a positive step in that it signals a path towards establishing a recognised industry reporting standard in Australia.

But with APRA overseeing roughly $7.7 trillion in assets, there is a good argument for the regulator to take a firmer stance by making disclosure mandatory rather than voluntary.

Despite a lack of climate-related regulatory requirements in Australia, a number of leading superannuation funds and insurers locally have published TCFD-aligned climate change reports and committed to net-zero portfolio emissions by 2050, including all Mercer assets in Australia and New Zealand and for all discretionary assets in Europe, Asia, Middle East and Africa. And many funds offer sustainable equity options to members that take into consideration ESG and climate transition criteria.

It’s action that matters

Mercer believes that climate disclosure, built upon a consistent global framework, has the potential to drive real change on climate transition and foster sustainable growth across the economy. Reporting on financial risks from climate change in line with the recommendations of the TCFD will mean that companies, financial institutions and investors have access to meaningful and relevant information for investment decision-making. This will enable financial markets to properly price and act on the risks of climate change in order to preserve capital. We believe that climate disclosure will play a key role in safeguarding the global financial system from climate-related shocks, leading to better risk adjusted returns for investors.

However, in order for this to eventuate, there needs to be coordinated effort across all sectors of the economy in ensuring that quality, decision-useful disclosures are produced. And, more importantly, is that plans are then developed to manage climate-related risk and opportunity, enabling an economy-wide transition to a more sustainable, low carbon future. Otherwise, these disclosure requirements are only going to end up being more green tape not leading to any meaningful action or outcomes.

Claire Tan is senior consultant for sustainable investment and Alexis Cheang is a partner, responsible investment, at Mercer.

 

Climate disclosure – more green tape or a driver of real change?

Climate change, as a global systemic risk, is impacting our economies, societies and our physical environment more than ever before. And the world is increasingly looking towards the institutional investment community as having the collective power to make real and valuable change. In good news, mandatory climate risk disclosure – critical to ensuring companies report and act on climate risks – is gaining momentum globally. Across the world, there are more than 2,300 pieces of climate policy and legislation in force.

Claire Tan
Claire Tan
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Neil Griffiths

Neil Griffiths

Neil is the Deputy Editor of the wealth titles, including ifa and InvestorDaily. 

Neil is also the host of the ifa show podcast.

 

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