- APRA is asking businesses how they are addressing climate change.
- Green finance is increasing, with investor demands driving the transition to a low carbon economy.
- Large organisations will come under pressure this year from investors to address the impact of climate risk in annual reports.
What's on the horizon for accountants in 2018? Sustainability, including climate change risk, is one of the headline issues and 2018 is shaping up to be an important year in this area in terms of business reporting.
For CFOs and accountants drawing up annual reports for the end of the financial year (EOFY), the release of the Financial Stability Board’s (FSB) Taskforce on Climate-related Financial Disclosures (TCFD) recommendations will be of major interest. It seems likely that large organisations will see resolutions from shareholders at their annual general meetings if they fail to address the impact of climate-related risks in this year’s reporting season.
When it comes to climate change reporting by business, the agenda has been set by the taskforce recommendations, together with two landmark 2017 speeches by the Australian Prudential Regulatory Authority (APRA) Executive Board Member Geoff Summerhayes.
A new horizon
In February 2017, Summerhayes spoke about Australia’s new horizon for climate change and said APRA considers that “some climate risks are distinctly ‘financial’ in nature”. Many of these risks are foreseeable, material and actionable now. Climate risks also have potential systemwide implications that APRA and other regulators here and abroad are paying much closer attention to.”
This declaration was followed up with a speech “The Weight of Money: A Business Case for Climate Risk Resilience’ at the end of November 2017 to the Centre for Policy Development (CPD) in Sydney. In the November speech, he noted actions taken by APRA since February, including creating an internal working group and developing a cross-industry heat map to identify key climate-related risks across each of APRA’s regulated industries.
In further moves, APRA is also questioning regulated entities to understand their awareness of the impact of climate change on their business and actions taken and is discussing sustainability and financial risk dimensions of the economy related to climate change with Treasury and other financial regulators, including the Australian Securities and Investment Corporation (ASIC) and the Reserve Bank of Australia (RBA).
The APRA initiative is part of what has been termed the trifecta for climate-related risk disclosure in Australia. The two other parts of the trifecta include a 2016 opinion by QC Noel Hutley that directors need to consider climate-related risks as part of their fidicuary duties and the June 2017 release of the TCFD recommendations. It seems likely that this trifecta will be the change needed to get climate change onto the mainstream financial agenda.
So far, 237 companies with a combined market capitalisation of over $6.3 trillion have publicly committed to support the TCFD recommendations by the board. Summerhayes noted the widespread support for the recommendations.
Chartered Accountants Australia and New Zealand’s CEO Rick Ellis is one of those to publicly support the TCFD recommendations. Other organisations include some Big Four accounting firms, ANZ, NAB, BHP, Qantas, Westpac and APRA itself. Investors have also shown significant support for the recommendations, with over 150 financial firms, responsible for assets of over $81.7 trillion signing a statement of support.
It seems likely that large organisations will see resolutions from shareholders at their annual general meetings if they fail to address the impact of climate-related risks in this year’s reporting season.
ANZ Bank was the first to commit to disclosures in line with the TCFD recommendations. At the Centre for Policy Development event, ANZ's loans and specialised finance managing director, Christina Tonkin, said understanding climate change related risks is important for business.
“Our stakeholders are increasingly interested in a broader view – a more holistic story about how we are creating value over time and the opportunities and challenges impacting our future.”
The weight of money
The transition to a low carbon economy is underway and is moving quickly. “The weight of money, pushed by commercial imperatives such as investment, innovation and reputational factors, is increasingly driving that shift, rather than scientists and policymakers,” Summerhayes made this clear in his most important message.
Other players are also in agreement. Steven Skala AO, Chair of the Clean Energy Finance Corporation (the specialist clean energy financier established by the Australian government) told the Centre for Policy Development event that a low carbon economy is a high priority.
“Our objective is to continue to play a serious role in stimulating the reduction of carbon emissions, by ensuring the benefits of cleaner generation are delivered across the economy, alongside a much stronger focus on reduced energy consumption.”
The growth of green finance
Underlining these Australian developments, other similar messages were delivered overseas at December’s One Planet Summit in Paris, which marks two years since the historic Paris Climate Change agreement. France’s Economy Minister Bruno Le Maire stated: “Finance must be green, or it won’t exist.”
This growth in green finance and the transition to a low carbon economy present a huge opportunity to businesses willing to take steps in this direction. The UN and World Bank have forecast investment opportunities of over US$22 trillion by 2030 to keep countries on track to meet the Paris commitments. The World Bank has also committed to stop funding upstream oil and gas projects from 2019.
Global investors have launched too Climate Action 100+, a five-year initiative to engage with large corporates with the highest emissions to help accelerate action. So far, 409 investors have signed the statement, representing over US$24 trillion in assets, including the Investor Group on Climate Change, which represents 52 Australian and New Zealand investors and advisors who manage $1 trillion in assets.
Organisations which fail to seriously consider the impacts of climate change will miss out. The weight of money is moving to our low carbon future and moving fast.
Consideration of the risks and opportunities associated with climate change can no longer be the sole responsibility of the sustainability team. The issue has financial, legal, risk management and strategic related consequences and needs to be on the agenda of appropriate departments within the business, including accountants.
Karen McWilliams FCA is the CA ANZ Ethics and Sustainability Leader.