Eye of the storm for directors

 Andrew Hay, Sam Higgs

26 Oct 2017
2 minutes

With increased governmental and non-governmental input, as well as shareholder activism, directors who fail to consider climate change risks are likely to fall under scrutiny.

The issue of climate change is now squarely one to be actively considered by directors. While some may remain sceptical of the existence of climate change, one thing is clear – change is coming in the form of pressure for directors to take account of the potential financial impact of climate change on their businesses.

Action by ASIC

In its report on the regulation of corporate finance for the period January to June 2017, ASIC focused on the disclosure of climate risk by directors, noting that companies and their boards should proactively consider reporting on climate risk as part of their annual reports, particularly within the operating and financial review sections of the annual report. ASIC said that listed entities should be discussing environmental and other sustainability risks where those risks could affect the entity's achievements of its financial performance or outcomes disclosed, taking into account the nature and business of the entity and its business strategy.

Task Force on Climate-related Financial Disclosures

Perhaps most relevant to the area for directors are the recommendations of the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD), published on 29 June 2017. In April 2015, the G20 group of nations requested the Financial Stability Board to review how the financial sector can take account of climate-related issues. The TCFD was established by that Board and was charged with developing strategies to assist companies understand what financial markets want from disclosure in order to measure and respond to climate change risks, and to encourage firms to align their disclosures with investors' needs.

The TCFD's recommendations have been structured around four thematic areas representing what are identified as the core elements of how companies operate coupled with recommended disclosure in the following key areas:

  1. Governance: the company's governance structure regarding climate-related risks and opportunities.
  2. Strategy: actual and potential impacts of climate-related risks and opportunities for the company's businesses, strategy and financial planning.
  3. Risk management: process by which the company identifies, assesses and manages climate-related risks.
  4. Metrics and targets: tools used by the company to assess and manage climate-related risks and opportunities.

The recommendations also provide supplemental guidance for certain financial and non-financial sector industries, including banks, insurance companies, asset managers and owners, as well as energy and transportation industries.

Application of the TCFD's recommendations in Australia

The TCFD's recommendations were considered earlier this year by the Senate Economic References Committee in its report on carbon risk disclosure. The Senate Committee noted that the recommendations will be hugely influential in terms of corporate reporting practice on a global level, and recommended the following actions domestically:

  • that the Australian Government nominate a single government entity to have primary responsibility for coordinating the response to the TCFD's recommendations; and
  • that the Australian Government commit to implementing the TCFD's recommendations where appropriate, and undertaking the necessary law reform to give them effect.

The Australian Government has not yet provided a response to the Senate Committee's report.

Using shareholder resolutions to influence boards

An area in which companies and directors may face pressure to address climate-related financial risks is in response to shareholder resolutions at company meetings. Activist groups are using carefully-crafted shareholder resolutions calling for companies to act on environmental and social issues.

Shareholders of oil and gas giant, Santos Limited, voted at the company's AGM this year on a shareholder resolution requiring the company to amend its constitution to include certain climate change-related measures and disclosures. Though the resolution was not passed, the inclusion of it in the notice of meeting generated considerable discussion of the topic among commentators.

Earlier this year in the US, ExxonMobil shareholders passed a resolution on climate risk disclosure despite board opposition.

What does this mean for companies and their directors?

Regardless of one's stance on climate change, companies and their directors need to be proactive in considering climate change risks and how these might impact on a company's financial position. With increased governmental and non-governmental input, as well as shareholder activism, directors who fail to consider these risks are likely to fall under scrutiny and may, in some circumstances, be subject to litigation for such failures.

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