Current climate modelling shows us that even if global emissions are significantly and quickly reduced, events that led to the terrible bushfires in our eastern states last summer will continue and increase in frequency and severity in future decades. The long term prognosis for the Australian climate under the “business as usual” emissions profile is catastrophic.
Worldwide, the realisation is growing that the risks posed by a changing climate are real, systemic and accelerating. On 15 January, just as the Australian bushfires were at their height, the World Economic Forum in Davos issued its Global Risk Report 2020, in which the top five risks facing businesses were all related to environmental factors associated with a changing climate.
Expectations that businesses need to act to minimise their contribution to potential future climate change have increased. Corporate entities are beginning to explore the potential opportunities and risks presented by the socio economic responses to climate risk and manage the impact of potential carbon prices, new low emissions technologies and changing customer demands.
Locally, the growing understanding that financial value is at risk through inaction – and that there is potential strategic and long term competitive advantage by climate-friendly strategies – is increasingly the focus of investors, regulators, customers and communities in the activities of Australian corporates.
Last year saw a significant increase in questions asked at AGMs in relation to climate risk – a trend we expect to increase going forward. We have already seen climate related resolutions raised at the AGMs in May.
Investors and regulators are asking: how are companies are addressing the impact of climate (both transitional and physical)? What risks and opportunities have been identified, what assumptions have been made in their analysis and how have strategies been flexed or redefined to minimise risks and maximise opportunities?
Our key financial regulators ASIC, APRA and the ASX Corporate Governance Council have all recently issued guidance emphasising the importance of considering climate change – and, importantly this should not be hidden away in a sustainability report. Instead climate risk is a matter that should be considered as part of the preparation of the annual reports. Guidance developed jointly by standard-setters, the AuASB and AASB, indicate a need to describe how material climate risks have been considered in the Financial Statements and therefore be subject to audit.
So how are Australian businesses performing on climate risk disclosure? We would say that while there has been progress in this area there is still room for significant improvements to be made, in terms of increasing both depth and focus of reporting.
In a report published on 1June, KPMG aims to help businesses navigate the different disclosure requirements and recommendations applicable in Australia that may be impacted by climate risks. We hope the report will be useful to CFOs, accountants and other preparers as they look to communicate the impacts of climate on their business models, strategy, financial performance, and future prospects in their Annual Reports and Financial Statements.
When addressing their 30 June reports, companies should consider five points:
- Climate risk is here – climate change is impacting current corporate strategies, valuations and investor decisions
- Climate risks may be material even if you do not think they are – remember, materiality is assessed from a user’s perspective.
- Regulators expect climate impacts to be disclosed in the Annual Report – climate risk impacts on governance, strategy, risk management and performance and prospects should be made in the your Annual Report – if material, and not hidden away in a separate sustainability report.
- Disclose impacts and key assumptions in the Financial Statements – assets and liabilities should be measured and recognised taking into account the impact of climate change. Material climate related assumptions and uncertainties impacting these balances should be disclosed such as your assumptions around the timing and cost of a price on carbon.
- Be consistent – disclosures in the Financial Statements need to be consistent with statements and strategies outlined in the Front-end of your the Annual Report (where relevant and material to a user’s understanding
We acknowledge this topic can be complex and that there are many uncertainties. Our understanding of how, when and how quickly the impacts of climate change and the societal and economic response will impact on individual organisations also continues to evolve. The impacts (current and future) are not uniform across or within industries, sectors or geographies, nor is their timing certain.
But one thing is clear – this complexity is no excuse to do nothing. Businesses deal with complexity and uncertainty every day. Assessing how, when and where climate risks and opportunities may impact your business model is a critical first step.
Disclosure of these potential impacts and your strategic responses in your Annual Report and Financial Statements is the second.
Studies repeatedly show ESG (Environmental, Social and Governance) investments outperforming other investments. Addressing climate risk effectively will benefit businesses.
KPMG's guide on reporting the impacts of climate on business models is here.
This article originally appeared on KPMG NewsRoom.
