Quality of climate change disclosures across ASX200
11 December 2020
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The Australian Council of Superannuation Investors (ACSI) has recently released a study that provides an overview of the current state of climate-related disclosures and management in ASX200 companies. The report highlights examples of best practice as well as most evident gaps in reporting. The study focuses on a number of important issues such as identifying the current state of Task-Force on Climate-related Financial Disclosures (TCFD) adoption, as well as providing insight into how companies are setting objectives on their journey to meeting the Paris Agreement.
Path to Net-Zero Emissions
Of the ASX200 companies assessed, 18 have set net-zero targets with some of these companies also setting time-based emissions targets. The challenge still remains for a large portion of these companies to set short and medium term targets, to clearly articulate to investors how a company’s strategy and plans are aligned with meeting the Paris Agreement. This is reflected by the fact that 13 of the 18 companies that have set net-zero targets are still yet to disclose how short and medium-term strategies are aligned to their strategic outlook for achieving these net-zero commitments.
TCFD Adoption
ACSI’s study also shows that the number of companies aligning their disclosures with the TCFD framework has increased significantly, with 60 of the ASX200 companies having adopted the framework in 2019. The largest of these increases has been in sectors classified as being of higher-risk with 83% of energy companies, 83% of transport, 71% of banks, 50% of utilities, 67 % of insurance, 50% of real estate companies and 43% of materials. Disclosure regarding TCFD adoption is often found in free-standing climate change reports rather than being integrated into financial statements. However, there are some examples of companies in the materials and energy sectors that have announced impairments on assets reflecting changes in oil, LNG and carbon prices, linking risks arising from their respective low-carbon transitions.
Emissions Reporting and Targets
A total of 60% of ASX200 companies are now disclosing the carbon footprint of their operations (Scope 1 & 2), whilst only 37% of ASX200 companies have set emissions reduction targets. Most of these targets are set with the short-term in mind, rather than medium or long-term. ACSI found that sectors subject to material exposure to direct and indirect transition risk had not set any emissions targets, with 75% of utilities, 67% of energy and 59% of materials companies falling into this group. Only 7 companies have set science-based targets (SBT) aligned with the Paris Agreement goals. ACSI notes that it expects short and long-term incentives to have measures linking to decarbonisation targets, with this trend continuing to grow into the future.
Transition Risk Scenario Analysis
There has been an 80% year-on-year increase in companies disclosing scenario analyses (32 companies in 2019), with additional 28 companies having indicated they had planned or were in the progress of completing a scenario analysis for FY21. Of these scenarios already undertaken, the number of those aligned with the Paris Agreement has more than doubled. Concerns remain over the rigour of these scenarios and the lack of stress-testing against challenging and potentially disruptive scenarios. As mentioned above, the line of sight regarding the Paris Agreement goals is somewhat blurred, with very few companies informing their investors about short and medium-term strategies to meet these goals. Many companies in high-risk sectors continue to fall behind in stress-testing their businesses against climate risk, with 25% of energy, 50% of utilities and 62% of materials companies having neither undertaken nor committed to undertaking scenario analysis, which poses a real concern for the future sustainability of these businesses.
Physical Risk Analysis
Companies in the ASX200 are progressing forward when it comes to disclosing their exposure to physical climate risks in a meaningful manner, and it is yet to be seen how these disclosures can be standardised. The link between the physical risks and financial quantifiable measurements of the impact of these is yet to be established, with progression expected on this in the coming years.
Climate change and the associated risks will undoubtedly continue to drive many corporate behaviours and strategic objectives in the short, medium and long-term. The sooner the strong and well established links can be formed between these risks and financial outcomes, the more impact these disclosures will have for both companies and their stakeholders.
For more information on the detail of this report and the in-depth analysis behind the above, please see ACSI’s report here.
Path to Net-Zero Emissions
Of the ASX200 companies assessed, 18 have set net-zero targets with some of these companies also setting time-based emissions targets. The challenge still remains for a large portion of these companies to set short and medium term targets, to clearly articulate to investors how a company’s strategy and plans are aligned with meeting the Paris Agreement. This is reflected by the fact that 13 of the 18 companies that have set net-zero targets are still yet to disclose how short and medium-term strategies are aligned to their strategic outlook for achieving these net-zero commitments.
TCFD Adoption
ACSI’s study also shows that the number of companies aligning their disclosures with the TCFD framework has increased significantly, with 60 of the ASX200 companies having adopted the framework in 2019. The largest of these increases has been in sectors classified as being of higher-risk with 83% of energy companies, 83% of transport, 71% of banks, 50% of utilities, 67 % of insurance, 50% of real estate companies and 43% of materials. Disclosure regarding TCFD adoption is often found in free-standing climate change reports rather than being integrated into financial statements. However, there are some examples of companies in the materials and energy sectors that have announced impairments on assets reflecting changes in oil, LNG and carbon prices, linking risks arising from their respective low-carbon transitions.
Emissions Reporting and Targets
A total of 60% of ASX200 companies are now disclosing the carbon footprint of their operations (Scope 1 & 2), whilst only 37% of ASX200 companies have set emissions reduction targets. Most of these targets are set with the short-term in mind, rather than medium or long-term. ACSI found that sectors subject to material exposure to direct and indirect transition risk had not set any emissions targets, with 75% of utilities, 67% of energy and 59% of materials companies falling into this group. Only 7 companies have set science-based targets (SBT) aligned with the Paris Agreement goals. ACSI notes that it expects short and long-term incentives to have measures linking to decarbonisation targets, with this trend continuing to grow into the future.
Transition Risk Scenario Analysis
There has been an 80% year-on-year increase in companies disclosing scenario analyses (32 companies in 2019), with additional 28 companies having indicated they had planned or were in the progress of completing a scenario analysis for FY21. Of these scenarios already undertaken, the number of those aligned with the Paris Agreement has more than doubled. Concerns remain over the rigour of these scenarios and the lack of stress-testing against challenging and potentially disruptive scenarios. As mentioned above, the line of sight regarding the Paris Agreement goals is somewhat blurred, with very few companies informing their investors about short and medium-term strategies to meet these goals. Many companies in high-risk sectors continue to fall behind in stress-testing their businesses against climate risk, with 25% of energy, 50% of utilities and 62% of materials companies having neither undertaken nor committed to undertaking scenario analysis, which poses a real concern for the future sustainability of these businesses.
Physical Risk Analysis
Companies in the ASX200 are progressing forward when it comes to disclosing their exposure to physical climate risks in a meaningful manner, and it is yet to be seen how these disclosures can be standardised. The link between the physical risks and financial quantifiable measurements of the impact of these is yet to be established, with progression expected on this in the coming years.
Climate change and the associated risks will undoubtedly continue to drive many corporate behaviours and strategic objectives in the short, medium and long-term. The sooner the strong and well established links can be formed between these risks and financial outcomes, the more impact these disclosures will have for both companies and their stakeholders.
For more information on the detail of this report and the in-depth analysis behind the above, please see ACSI’s report here.
