Towards Net Zero: Disclosure of climate risk is vital to reach climate change targets

“Now is the time to improve the quantity, quality and comparability of climate disclosures. Today’s climate crisis demands that we re-allocate global capital to manage risks and seize transition opportunities across all of our economies.” Dr. Mark Carney, United Nations Special Envoy for Climate Action Finance and Trustee of the World Economic Forum

For Australian business, 2020 has seen not only the physical risks of climate change but the transitional risks impact their operating environment. From the physical impacts of 2019/2020 bushfire season which saw over $2.3 billion in insurance losses at the start of the year to the first successful climate ‘litigation’ that resulted in a settlement between McVeigh vs Rest Super in November 2020.

Business is a critical player in achieving the Paris climate goals and is certainly not immune from the physical effects of climate change or the impacts of transitioning to a net zero economy.

That’s why companies are under pressure to disclose their governance, identification and management of climate risks and opportunities. Our research indicates that companies are rising to the challenge of meeting stakeholders’ expectations through their climate reporting however, there is still some way to go.

KPMG International’s Toward Net Zero – How the world’s biggest companies report on climate risk and decarbonization analyses how companies are viewing and reporting on climate risk. The global report assesses the G250[1] against KPMG’s developed 12 best practice criteria that cover governance of climate-related risks, identifying climate-related risks, impacts of climate-related risks and reporting on net zero transition. KPMG Australia’s supplementary report assesses the ASX100[2] against a select subset of these criteria to understand how Australian companies perform against the globe.

KPMG’s 12 quality criteria for climate risk reporting and net zero reporting

Three years on from the launch of the Taskforce for Climate-related Disclosures (TCFD), the global Toward Net Zero report’s score card is predominantly filled with C’s and D’s showing that less than half of the G250 satisfy the developed criteria for best practice climate risk disclosures. However, pockets of industry, companies and countries have outperformed.

In Australia, within the ASX100 the results are somewhat better.

  • 58% report using the TCFD framework. This is up from 16% in 2017.
  • 78% clearly acknowledge climate change as a financial risk. Up from 52% in 2017.
  • 67% have set carbon reduction targets. Up from 47% in 2017.

This significant improvement reflects a growing awareness to improve the quality and prevalence of climate related disclosures amongst Australian companies’ reporting suites.

However, the ASX100 still has some way to go with disclosing how they are supporting the transition to a net zero operating environment, with the number of companies using science-based targets to reduce carbon emissions falling well behind the G250.

  • Currently, only 17% of the ASX100 have science-based emission reduction targets. Science Based Target initiative (SBTi) assessed targets are critical to ensuring emission reductions are in line with the level of decarbonisation needed to limit warming to less than 1.5°C / 2°C
  • Scenario analysis is critical to quantify risks faced by an organisation however, only 20% of the ASX100 are currently disclosing their use of scenarios. Whilst this is an improvement from 2017 where no companies used scenario analysis this level is worryingly low. Robust scenario analysis remains important to ensure stakeholders have confidence that an organisation’s climate analysis is appropriately considering the impact of climate change.

For those companies currently not using either SBTis, Scenario Analysis the Science Based Target initiative published their conceptual foundation in September 2020 for setting and assessing corporate net-zero targets. This is the first step in the development of a specific criteria and guidance document to be published in 2021.

In addition, the Climate Measurement Standards Initiative is developing guidelines specific to Australian companies to assess the physical risks of climate change.

Modelling and target setting are complex and climate risk reporting is relatively new. Encouragingly we are seeing progress behind the scenes. A light touch approach will not provide financial stakeholders with the decision-useful information they need and could result in substantial risk management issues if the company fails to fully understand and act on the impacts of climate change on its business.

We are confident that more and deeper disclosures are on the way and that we will see a rapid ratcheting-up in the volume and quality of both action on climate change and climate risk reporting.

[1] The G250 are the world’s 250 largest companies as defined by the Global Fortune 500 ranking.
[2] ASX100 Companies (the largest companies by market capitalisation) defined by the Australian Securities Exchange

Read the full report.

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