Super funds can lead the way on climate risk disclosure

Pauline Vamos

By

16/08/2017

OPINION | We just reached a climate-change tipping point. It’s not the ice caps or the permafrost. Climate-risk disclosure has entered the financial mainstream. And this should be a wake-up call for investors.

Investors can and must lead by example. Not just by calling for others to do more on climate-risk disclosure, but by getting their own houses in order. They can start by disclosing the risks they face from a changing climate – whether they be the impacts of changing weather patterns on investor portfolios or the health and wellbeing of their members, through to the risk of assets becoming stranded.

In Australia, super funds have already led the way on recognising long-term risk to portfolios. Indeed, they are naturally placed to do so and have been integrating this thinking into investment approaches for years. Now is the time for super funds to take the next step on managing climate risk.

But why now? The last 12 months has seen a perfect storm of the legal, financial and governance aspects of climate change develop, culminating in legal action against the Commonwealth Bank.

Taking a step back, in June, the G20-referred Financial Stability Board initiated, tongue-twistingly named, Task Force on Climate-related Financial Disclosures (TCFD) finalised its recommendations for climate disclosure. These are intended to apply globally and be reported in mainstream annual financial and statutory accounts.

This is not a feel good exercise or a misguided compliance burden. It is designed, in the words of TCFD chair Michael Bloomberg, to make “markets more efficient, and economies more stable and resilient”. It acknowledges that climate change is a material risk to financial stability and therefore should be of interest to all investors.

The TCFD sets out minimum expectations for disclosure on climate governance and risk management. It is intended to apply to all organisations. Its requirements escalate according to the size of the organisation and its exposure to climate-related risk.

The largest and most exposed are expected to test how resilient their corporate strategies are under future climate scenarios and report publicly on what they find. This includes testing against the ambitious target set in the Paris Agreement to limit warming to two degrees. Even in this scenario huge economic transition is required in some sectors.

The TCFD is expected to become the new global benchmark. It will be used by investors, including super funds, as well as banks and insurers to assess the companies they invest in and finance.

But investors’ own disclosure also falls under the TCFD recommendations. Banks, insurance companies, asset managers and asset owners (including super funds) should all report in line with the TCFD.

A step change in risk recognition

The work of the taskforce represents a step change in the recognition by financial regulators of climate change risk. It’s unsurprising then that in February 2017 APRA’s Geoff Summerhayes confirmed publicly that climate risk was on the Australian regulator’s radar.

In other local developments, the 2016 opinion of Noel Hutley SC and James Mack stated that company directors are legally obliged to consider climate change risk. This has recently been extended to trustees of superannuation funds in a further opinion. Hutley forewarned of legal action noting, “It is likely to be only a matter of time before we see litigation against a director who has failed to perceive, disclose or take steps in relation to a foreseeable climate-related risk”.

This month the Commonwealth Bank was served. In a global first, a suit has been filed against the bank for allegedly failing to adequately disclose climate change risk in its annual report.

Such developments speak to the need for urgency in investors getting their own houses in order. Super funds are well placed to demonstrate genuine leadership, having a natural alignment with the ultimate objectives of long-term risk management. Investors must lead by doing, moving beyond the rhetoric that has sufficed up until now. These good intentions need to be backed up with strategies that are informed by robust analysis – both of which need to be transparently disclosed.

Especially as fund members and regulators increasingly have climate change in their sights.

Pauline Vamos is the chief executive of Regnan, an ESG research provider and consultancy for institutional investors. She holds a number of other non-executive roles and was formerly the chief executive of the Association of Superannuation Funds of Australia.