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Are financial firms well placed to meet mandatory climate disclosures?

By Rhea Nath
4 minute read

With firms on the cusp of a fundamental change in financial reporting, new research suggests parts of Australia’s financial sector are less prepared to meet these necessary obligations.

An assessment of more than 100 Australian financial services firms’ climate disclosures has raised questions about the sector’s preparedness to meet imminent regulatory obligations.

A number of major companies have been reporting on their emissions and climate risk for years as part of their wider corporate responsibility and sustainability reporting, with one of the main drivers for enhanced climate reporting being regulatory frameworks like the Taskforce for Climate-related Financial Disclosures (TCFD).

However, regulatory requirements have been mounting, with the new International Sustainability Standards Board (ISSB) sustainability disclosures, which build on the TCFD, beginning to be made mandatory in jurisdictions across the globe.

Additionally, since it was announced last year, the Australian Treasury and the Australian Accounting Standards Board (AASB) have been working together to create and legislate new rules to introduce mandatory requirements for large businesses and financial institutions to disclose their climate-related risks and opportunities.

Noting this remains “a lot of acronyms for compliance teams to get across”, global consulting firm Baringa observed these new standards are starting to “drive a fundamental change in financial reporting”.

Its latest Beyond box ticking report assessed the disclosures of a number of Australian financial firms, including 20 banks, 19 asset managers, and 18 superannuation funds, to gauge the preparedness of the sector.

It found widespread disclosure among Australia’s largest financial services firms, particularly Australia’s biggest banks, all of which sit within the ASX 20. However, the breadth of disclosure significantly drops off outside the ASX 100.

“Governance and risk management-related disclosure is consistently high, predominantly due to existing regulation in Australia, such as CPG 229, focusing on strengthening entities in this regard,” the report stated.

“However, outside the ASX 100, demonstration of climate-risk governance is patchy, indicating potential legal, financial, and strategic climate risks within these businesses.”

Additionally, coverage of climate disclosure requirements varies considerably across organisations, with banks displaying more consistency.

“Australia’s large banks demonstrate a robust understanding and management of climate-related risks and opportunities,” Baringa observed.

“They engage in diverse climate scenario analyses, assess strategy resilience to these scenarios, and disclose emissions baselines for scopes 1 and 2. Some banks are also setting targets including operational and financed emissions, but for most, coverage is incomplete.”

It added these institutions have begun developing climate-related transition plans and have established governance structures at both board and executive management levels.

On the other end of the spectrum, asset managers were found to display the largest variability in breadth of disclosures.

“This lag is attributed to several factors, including quantification of emissions, net zero portfolio strategy and target setting,” Baringa explained.

Additionally, only a handful of insurers and super funds in Australia are disclosing detailed transition plans, it said, while limitations regarding target setting guidance, a lack of high-quality scenario analysis, and poor integration of climate into strategic planning makes linking climate risks to financial impact more challenging.

The consultancy noted that of all the capabilities required for credible climate disclosures, performing quantitative financial impact analysis, remains the most challenging for financial institutions, followed by establishing transition plans (strategy and decision making) and setting comprehensive net zero targets.

According to the benchmarking analysis, while firms are expanding their climate reporting to meet evolving demands from regulators, banks, and investors, they are “significantly underprepared” to credibly disclose against future requirements.

“The analysis found just two companies are meeting all disclosure requirements – that is, they are addressing every line item in international sustainability disclosure standards. However, analysis of their capability found significant gaps in the depth and quality of those disclosures,” Baringa elaborated.

“This lack of depth and quality should not be seen as a failure; rather as a demonstration of the highly technical nature of climate analysis and integration, and room for further improvement in the integration of climate change risk and strategy throughout business’ operations, strategy, risk, and financial reporting.”

Other common hurdles coming in the way of meeting AASB requirements include necessary data infrastructure to collect and analyse climate-related information; internal alignment on climate strategy and the right training at firms across departments; and budget, business case development, and strategic prioritisation.

Baringa added: “There is a noticeable shortage of climate-related expertise within these organisations. This lack of knowledge and understanding of climate science, regulatory requirements, and risk management strategies makes it challenging to address climate disclosures effectively.”