AUSTRALIA: Enforcement Action for Climate Risk Disclosure Failures

Tuesday February 9 2021

A speech has been made by Cathie Armour (ASIC Commissioner), regarding sustainable finance climate risks, disclosing and managing climate-related risk is a key director responsibility.

The Australia Securities Investment Commission (ASIC) has announced that the law requires climate risk to be included in OFR disclosures, particularly when it is a material risk that could affect financial performance.

ASIC has previously highlighted climate-related risk as a systemic risk in market that has the potential to significantly impact companies, investors and consumers. ASIC focus is on ensuring listed companies have appropriate governance structures in place to manage this issue, and providing the market with reliable and useful information on their exposure to material climate-related risks and opportunities.

ASIC considers that the law requires an operating and financial review to include a discussion of climate risk when it is a material risk that could affect the company’s achievement of its financial performance.

Challenges

Notwithstanding these steps forward, there is still a way to go and some companies are much further along than others. Unsurprisingly, ASIC saw that solid governance of this risk generally leads to better disclosure. Some of the challenges for preparers and users of climate-related disclosure continue to be:

• Scenario analysis – where listed companies choose to undertake and disclose it. Particularly, the diversity of scenarios being disclosed against, and how individual scenarios are applied differently by companies operating in similar industries, locations and circumstances.
• Physical risks of climate change – the assessment, management, mitigation and disclosure of the physical risks of climate change. The intersection of scientific outputs with financial-sector input remains an underdeveloped area, including the lack of common language and taxonomies.

ASIC intends to adopt a consultative approach as continue to monitor the adoption of TCFD reporting and the development of climate-risk disclosure practices over the coming period. However, as is always the case, ASIC may consider enforcement action should there be serious disclosure failures. This includes whether the failures relate to the impact of climate change, or to other matters such as operations or the prospects of the business.

Climate change risk guidance for directors

• Consider climate risk
  Directors and officers of listed companies need to understand and continually reassess existing and emerging risks that may be applicable to the company’s business, including climate risk. This should extend to both short- and long-term risks. Boards should ask if they have considered climate risk in their decision-making process.
• Develop and maintain strong and effective corporate governance
  Strong governance facilitates better information flows within a company and facilitates active and informed engagement and oversight by the board in identifying and managing risk. Boards should consider if they are comfortable with the level of oversight they maintain over climate risks and opportunities and the governance structures in place to assess, manage and disclose these risks and opportunities.
• Comply with the law
  Directors of listed companies should carefully consider the requirements relating to operating and financial review (OFR) disclosures in annual reports under s299(1)(a)(c) of the Corporations Act 2001. ASIC considers that the law requires an OFR to include a discussion of climate risk when it is a material risk that could affect the company’s achievement of its financial performance. Depending on the circumstances, disclosure of climate risk may also be required by the law in other contexts, such as a prospectus or continuous disclosure announcement. Boards should ask if material climate-related disclosures have been made and updated where necessary and appropriate.
• Disclose useful information to investors
  The voluntary disclosure recommendations issued by the TCFD are specifically designed to help companies produce information useful for investors. ASIC recommends listed companies with material exposure to climate risk consider reporting under the TCFD framework.

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