How are Australian Banks progressing on climate-related disclosures?
Banks are increasingly in danger of serious climate-related losses by 2050 unless action is taken to curb climate-related physical risks such as rising temperatures and sea levels driving loan and mortgage defaults with investment losses and climate-related lawsuits.
In our latest analysis of banks’ climate-related disclosures the overall progress banks are making in disclosing climate-related matters has slowed down in 2021.
In the first part of our benchmarking analysis we looked at banks’ climate-related disclosures within their 2021 annual reports.
This second instalment follows the KPMG’s analysis issued in May 2022 but includes a peer benchmarking of 35 global banks and looks at how the climate-related disclosures align with the recommended disclosures of the Task Force on Climate-related Financial disclosures.
In this report the findings continue to follow similar trends. We note that although more granular information has been provided in areas such as risk management and governance, banks are not yet providing quantitative disclosures in areas such as scenario analysis and financed emissions.
Why should Australian Banks improve their climate-related risks disclosures
Banks can mitigate the financial impacts of responding too late to the physical and transition risks of climate change. The Bank of England estimates the UK banks and insurers could shoulder nearly £340bn worth of climate-related losses by 2050, unless action is taken to curb climate-related physical risks such as rising temperatures and sea levels driving loan and mortgage defaults with investment losses and climate-related lawsuits.
In Australia, a similar exercise is underway with the Climate Vulnerability Assessment (CVA), a Council of Financial Regulators (CFR) initiative led by APRA, which has adopted a scenario based approach to assess the nature and extent of the financial risks that large banks in Australia may face due to climate change. This findings are expected in late 2022
Whilst the results of the CVA are not yet available, APRA has already recognised there will be losses of some description:
“Climate change will inevitably drive losses for banks and insurers – even in a scenario where governments around the world take swift and early action to bring us to net zero,” Sam Woods, deputy governor for Prudential Regulation and chief executive officer of the Prudential Regulation Authority, said.
The significant increase overseas in reporting frameworks and regulatory changes is an important area for banks to keep top of mind.
In 2021 both the UK and New Zealand introduced mandatory reporting requirements into legislation for listed companies.
And, in 2022 the pace has continued. Here are three examples.
- The newly formed International Sustainability Standards Board (ISSB™) released two proposed IFRS® Sustainability Disclosure Standards in March 2022, covering general requirements as well as climate-related disclosures.
- The US Securities and Exchange Commission (SEC) and the European Financial Reporting Advisory Group (EFRAG) also have proposals out for comment which impose greater climate-related reporting requirements amongst corporations.
- The Australian Accounting Standards Board is currently running a consultation on the ISSB exposure drafts. The AASB will ultimately drive any mandatory reporting for Australian organisations.
Opportunity for leadership
We currently expect heightened reporting requirements and disclosures for Australian organisations by the end of 2022 with implementation in either 2023 or 2024.
In the past, the Big 4 banks were widely considered leaders in TCFD reporting domestically; as early adopters, they led the ASX100 in why an organisation should disclose and how to.
However, as the TCFD framework has matured and grown along with stakeholders’ expectations, the banks have not kept up with the international pace of change.
Shareholders are interested in how their investments are mitigating and dealing with exposure to climate change. They read annual reports and expect to see how these issues are addressed.
Some examples of how Australian banks could improve include:
Governance – The Oversight
Governance disclosures need to inform readers about how an organisation considers and manages climate-related risks and opportunities. This requires clear, transparent and holistic information. Banks should describe how the board has oversight of climate-related risk and opportunities. Most bank’s board and/or board committee considers climate-related issues when reviewing and guiding strategy and risk management policies. Leading disclosure amongst peers outlines the process by which the board monitors and oversees progress against goals and targets for addressing climate-related issues. Other opportunities of improvement include disclosing whether climate-related issues are considered in areas other than strategy and risk management policies, such as business plans.
Risk Management – The Why
Globally, peers are now disclosing closer alignment to the TCFD banking specific guidance, which requires detailed disclosures around traditional banking industry risk categories such as credit, market, liquidity, and operational risk. Some Australian banks make similar disclosures, but none disclose all traditional risks. Furthermore, these disclosures need to include detail about the potential size and scope of the identified risks and the activities undertaken and planned to manage these risks.
Strategy – The Response
Australian banks are completing scenario analysis however the disclosures of the impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning is less comprehensive compared to global peers. Strategy disclosure could include the quantitative impact of scenario analysis and the organisation’s strategic response across the whole bank, not just a few sectors.
Metrics & Target – The Measurement
Leading disclosures now provide metrics to assess the impact of (transition and physical) climate-related risks on their lending and other financial intermediary business activities in the short, medium, and long term. More importantly, emerging disclosures include descriptions of the extent to which their lending and other financial intermediary business activities are aligned with a well below 2°C scenario.
Across strategy, risk management and targets, leading disclosures are now not just about taking steps to consider and capture climate-related risks and opportunities, but to disclose the impact that the derived insights have on the organisation.
Key Findings from the reports
In the first report we noted three key findings:
- Banks continue to focus on risk management: Banks are aware of climate-related risks with 77 percent of banks disclosing that climate-related risks could have material or adverse impacts on their businesses.
- Banks continue to focus on climate-related matters in the front part of their annual reports but disclosures in their financial statements are less common: Users of financial statements are increasingly looking for information about the financial impact of climate-related risks. However, only 37 percent of the banks mention climate in the notes to the financial statements.
- Metrics and targets are sometimes vague: 80 percent of banks disclose information on their metrics and targets but the nature and extent of information disclosed varies significantly. For example, while targets are disclosed, the banks are less transparent about progress towards achieving these targets, with only 49 per cent providing quantitative disclosures about progress to date.
The key findings in Phase 2 are:
- Banks have put in place governance structures and risk management frameworks – however, we are yet to see the full these changes on their strategies, metrics and targets. The current lack of quantitative disclosures in areas such as scenario analysis could mean it is challenging for banks to determine the full impacts on their financial planning process (including annual budgets and business plans) as well as their business and strategy.
- Many banks have committed to achieving net zero by 2050 – however, metrics are not yet disclosed at a granular level to enable users to understand and assess how banks have progressed towards these targets.
- There is currently limited quantitative disclosure of scenario analyses – making it challenging to use the information disclosed to assess the resilience of a bank’s climate strategy.