Time for the ASX 200 to disclose climate-related risks

By

08/09/2017

The Australian Council of Superannuation Investors (ACSI) recently published the 10th edition of our sustainability report, which assesses disclosure performance within ASX 200 –companies, individually and by sector.

This year, for the first time and in direct response to investor demand, the report assessed climate-related disclosures reported by these companies. The demand for climate-related disclosure is evident globally. In May, shareholders in ExxonMobil, the world’s biggest publicly listed energy company, voted in favour of requiring the company to disclose its climate change impacts.

Fiduciary investors – including superannuation funds and other institutional investors – are required to maximise long-term investment returns for their beneficiaries. This means fiduciaries need to be able to effectively price climate risk
into their investment decisions.

In 2016, 70 of the ASX 200 companies did not make any climate-related disclosures. Indeed, fewer than half of Australia’s largest listed companies have a climate change policy or an emissions reduction target.

This is unacceptable.

A new standard

Improving the level of climate-related disclosure is now a key focus for ACSI. We have identified 16 companies that we will engage with directly on climate change disclosure this year. Some of these companies rank as “leading” for their sustainability reporting. We will be encouraging all of them to adopt the best practice framework developed by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD).

The final TCFD framework, published in June 2017, recommends that all companies disclose their governance processes and risk assessments related to climate matters. For companies with material risks, it suggests incorporating scenario analysis into the business strategy, and establishing and disclosing those metrics and targets.

We believe adopting this standard will improve the availability, reliability and comparability of climate-related disclosures, and should be a consideration for all ASX 200 companies. We anticipate that investors will play close attention to how companies respond to this call to action.

Room for improvement

Sustainability disclosure that prioritises material risks is vitally important to investors. Access to information about how companies manage and monitor key risks to their business enables them to make informed investment decisions. Conversely, a lack of relevant data impedes investors’ ability to integrate environmental, social and corporate governance factors into their decision making.

Over the past 10 years, we have observed significant improvements in sustainability disclosure. Almost all of the ASX 200 companies (92 per cent in 2016) now disclose some information relating to sustainability.

Superficially at least, it seems we have nearly won our battle to embed sustainability disclosure within ASX 200 reporting practices. However, the depth of disclosure by many companies remains sub-optimal, considering that 42 per cent are only achieving a “basic” or “moderate” rating.

For us, the ongoing challenge is to embed greater meaning in companies’ sustainability disclosures. Beyond acknowledging the material sustainability risks they face, we want companies to articulate the steps they are taking to address them.

We can’t deny there are some high performers in the mix. Half of the ASX 200 companies report sustainability matters to a “leading” or “detailed” standard, and 30 have achieved a “leading” rating for four or more years.

Reaping the rewards

So what is it that differentiates these leading companies from the poor performers? It’s difficult to generalise, but there are some commonalities.

We know that larger companies tend to be better at sustainability disclosure than smaller ones. Companies that have a higher exposure to risks also tend to disclose them better. That said, there are poor performers among the biggest and most exposed sectors, and leaders that fit neither of the above descriptions.

Ultimately, companies that get sustainability disclosure right demonstrate two key behaviours: they recognise the potential impact (risk and opportunity) to their business, and they prioritise shareholders’ disclosure needs. This then enables investors to integrate environmental, social and corporate governance in their investment decision making.

Interestingly, there is evidence that investors already put a “price” on quality reporting. Of every dollar invested in the ASX 200, 85 cents goes to companies that report to a “leading” or “detailed” standard.

Investors clearly value companies that do sustainability disclosure well, and regard those that don’t as less attractive.

Louise Davidson is the chief executive of the Australian Council of Superannuation Investors (ACSI).