Australian institutional investors have called for reforms to climate risk disclosure from companies, including the reporting of links between climate-related performance and executive remuneration and more extensive transparency on transitional and physical risks.
The calls for changes around corporate climate risk disclosure have come from a new report by the Investor Group for Climate Change (IGCC), representing the views of more than 50 investors from 22 organisations, with more than $1.1 trillion collectively in funds under management.
The review has ruled that significant improvements are needed to make climate risk disclosure more useful for investment decision making, risk assessment, portfolio management and company engagement.
In particular, the investor group has said it wants company reporting through frameworks such as those provided by the Task Force on Climate-related Financial Disclosures (TCFD) to enact a number of changes, including the demonstration of board, director and executive skills and expertise in climate change.
It has also urged for companies to report links between climate-related performance and executive pay, demonstrate links between risks and opportunities and the company’s strategic and operational response, the extension of reporting of emissions metrics and targets.
Reporting on both transitional and physical risks, costs and implications as well as auditing and the assurance of results was also called for.
The report has warned that “a significant gap remains between the information provided by companies and that required by investors” and if “companies do not provide this information themselves, investors are increasingly likely and able to turn to external analysts to obtain it”.
IGCC chief executive Emma Herd said there was a strong view that a consistent approach to climate disclosure and the underpinning scenarios are not going to develop voluntarily.
“Around the world different jurisdictions are working out how to ensure consistent, clear and investable climate risk disclosure that translates to action in capital markets,” Ms Herd said.
“Some markets are using voluntary guidance developed by regulators. Others, like New Zealand and Canada, are moving to mandatory disclosure regimes, something which should now be considered in Australia given the systemic risks climate change poses to our economy.”
Stuart Palmer, head of ethics research at Australian Ethical added improved disclosure is needed as investors manage climate risk across their portfolios and make assessments of the performance and prospects of companies.
“Critically, investors want companies to show not just that climate risk is being assessed but how this is informing and changing their strategies and decision-making from board governance to capital expenditure to future business opportunities,” Mr Palmer said.
The majority of investors surveyed by IGCC in June consider climate change a material financial risk in their investment analysis, while nearly half use climate disclosures on an ad hoc basis and another 40 per cent use them on a daily or weekly basis.
Most investors were said to use disclosures for two overarching purposes – as a basis for engagement with companies (84 per cent) and as part of ESG integration (76 per cent). Some noted their uses of disclosures are in development or are expected to evolve.
“Acceptance of climate science” from company executives and board directors was considered as very important by 68 per cent, and important by another 24 per cent of investors.
Olivia Kember, principal of policy and strategy at Energetics commented investors are said to increase their integration of climate risk into their investment decisions, “judging by the speed of evolution in climate risk analysis”.
“A company that can show a clear pathway from its understanding of climate risk to its strategy and performance presents an increasingly valuable investment proposition,” Ms Kember said.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].