11 December 2020
Regulatory drivers for improved carbon-related disclosures
International climate policy has taken strides over the past ten years and, often, it is what drives domestic policy associated with climate related risks. The Kyoto Protocol was adopted in 1997 and ratified in 2005, and its purpose was to commit industrialised countries and economies to reduce their greenhouse gas emissions (GHG) in accordance with agreed targets. In 2015, the Paris Agreement was reached to ensure that all nations around the world could unite to combat climate change and adapt to its effects. Policy in Australia to reduce carbon emissions is based on meeting obligations to the Paris Agreement.
However, climate related policy in Australia continues to be controversial. Australia has a target to reduce its GHG emissions to 26-28% below 2005 levels by 2030 (under the Paris Agreement). The Commonwealth Department of Industry, Science, Energy and Resources manages and delivers policies and programs to help Australia respond to climate change, and notes that Australia “is meeting its international obligations and preparing for a lower emissions future through:
- Investment and incentives for business and industry,
- Reporting and regulation of Australia’s biggest emitters, and
- Supporting individuals and households.”
But there is no single and consistent standard for reporting. Numerous frameworks are used by corporations to report and disclose information on carbon risk and emissions, some of which have been made mandatory by the government.
The National Greenhouse and Energy Reporting Scheme (NGERS) requires disclosure by entities producing high quantities of carbon emissions, including gas emissions, energy production and consumption. The Scheme requires Scope 1 and 2 reporting, which includes all emissions in operational control of the entity. Disclosure of GHG emissions informs government policy and international reporting, which verifies the sentiment that ‘corporate Australia is leading the path on emissions reduction’.
The Australian Prudential Regulation Authority (APRA) has published a letter to all APRA-regulated institutions outlining plans to develop a prudential practice guide focused on climate-related financial risks, as well as a climate change vulnerability assessment. The letter also outlines APRA’s intention to update superannuation Prudential Practice Guide, which includes paragraphs related to ESG investments.
The Corporations Act 2001 contains provisions for the contents of annual reports that require disclosure of carbon risks. The Australian Securities and Investments Commission (ASIC) references the importance of all risks disclosure in the Director’s report – which includes environmental, social and governance issues. Further, directors of listed companies have duties under the Corporations Act 2001 to consider and disclose foreseeable carbon risks to their business. If they do not, they may be held to be in breach of their duty of due care and diligence.
The Australian Stock Exchange (ASX) also required listed entities to disclose whether they have any material exposure to economic, environmental and social sustainability risks and, if so, how they manage or intend to manage those risks.
There are many reasons that companies set sustainability strategies, including to understand financial impacts and risks associated with ESG issues, maintain competitive advantage among peers, find new opportunities for innovation and to manage stakeholder concerns and social trends. There are also legal, regulatory and policy drivers that influence a company’s actions and affect financial performance. These include costs associated with internalising management costs associated with compliance, and creating upside opportunity associated with new products, markets or business models that become viable under a different regulatory regime.
The Australian Government Climate Change Authority - Information on Climate Change: https://www.climatechangeauthority.gov.au/publications/information-climate-change
However, climate related policy in Australia continues to be controversial. Australia has a target to reduce its GHG emissions to 26-28% below 2005 levels by 2030 (under the Paris Agreement). The Commonwealth Department of Industry, Science, Energy and Resources manages and delivers policies and programs to help Australia respond to climate change, and notes that Australia “is meeting its international obligations and preparing for a lower emissions future through:
- Investment and incentives for business and industry,
- Reporting and regulation of Australia’s biggest emitters, and
- Supporting individuals and households.”
But there is no single and consistent standard for reporting. Numerous frameworks are used by corporations to report and disclose information on carbon risk and emissions, some of which have been made mandatory by the government.
The National Greenhouse and Energy Reporting Scheme (NGERS) requires disclosure by entities producing high quantities of carbon emissions, including gas emissions, energy production and consumption. The Scheme requires Scope 1 and 2 reporting, which includes all emissions in operational control of the entity. Disclosure of GHG emissions informs government policy and international reporting, which verifies the sentiment that ‘corporate Australia is leading the path on emissions reduction’.
The Australian Prudential Regulation Authority (APRA) has published a letter to all APRA-regulated institutions outlining plans to develop a prudential practice guide focused on climate-related financial risks, as well as a climate change vulnerability assessment. The letter also outlines APRA’s intention to update superannuation Prudential Practice Guide, which includes paragraphs related to ESG investments.
The Corporations Act 2001 contains provisions for the contents of annual reports that require disclosure of carbon risks. The Australian Securities and Investments Commission (ASIC) references the importance of all risks disclosure in the Director’s report – which includes environmental, social and governance issues. Further, directors of listed companies have duties under the Corporations Act 2001 to consider and disclose foreseeable carbon risks to their business. If they do not, they may be held to be in breach of their duty of due care and diligence.
The Australian Stock Exchange (ASX) also required listed entities to disclose whether they have any material exposure to economic, environmental and social sustainability risks and, if so, how they manage or intend to manage those risks.
There are many reasons that companies set sustainability strategies, including to understand financial impacts and risks associated with ESG issues, maintain competitive advantage among peers, find new opportunities for innovation and to manage stakeholder concerns and social trends. There are also legal, regulatory and policy drivers that influence a company’s actions and affect financial performance. These include costs associated with internalising management costs associated with compliance, and creating upside opportunity associated with new products, markets or business models that become viable under a different regulatory regime.
The Australian Government Climate Change Authority - Information on Climate Change: https://www.climatechangeauthority.gov.au/publications/information-climate-change
