Are you prepared for the increasing investor scrutiny on climate risk disclosures? Climate Risk Disclosure Barometer: Australia 2019 Contents 3 Foreword 4 About this report 10 Key findings 16 Banks 18 Insurers 20 Asset owners and managers 22 Agriculture, food and forest products 24 Energy 26 Transportation 28 Manufacturing 30 Real estate, buildings and construction 32 Mining 34 Non-key TCFD sectors 36 What next? 2 Are you prepared for the increasing investor scrutiny on climate risk disclosures? Foreword It is my pleasure to introduce EY 2018 Global Climate Change practice disclosures across the world. the third edition of EY Climate and Sustainability Services study on This report adds to these insights, by institutional investors demonstrated covering 175 of Australia’s largest Risk Disclosures Barometer: investors’ growing appetite for companies in highly impacted sectors. Australia. This paper provides information relating to the risks from This year’s Australian barometer a perspective on the state of climate change in order to make shows that on average Australian disclosures from Australia’s informed decisions. 48% of investors companies are amongst global leaders largest companies, in sectors surveyed said they would immediately in terms of coverage of the TCFD rule out an investment on the basis Recommendation, but there is still a exposed to the risks of climate on climate risk disclosures; up 40% need for improvement if companies are change, and considers the since the 2017 survey. And the vast to meet the growing expectations of extent to which Australian majority of investors (92%) stated that stakeholders. disclosures are in alignment climate risk disclosures would affect their investment decisions. Yet the We hope this report will inspire you with the Task Force on Climate- to fully explore and disclose your findings in this report reveal that whilst related Financial Disclosures Australian companies are responding company’s climate risks and to identify (TCFD)’s Recommendations to these demands through increased and seize opportunities (the Recommendations). disclosures, there is still much room for improvement in the quality of those disclosures. In 2018, for the first time, we published Dr. Matthew Bell EY Global Climate Risk Disclosures EY Asia-Pacific Leader Barometer which offers international Climate Change and comparisons and insights into leading Sustainability Services Carbon risk disclosure barometer: Australia 2019 3 About this report In June 2017, the TCFD, set up by the Financial Stability Board (FSB), finalised its TCFD recommendations recommendations on climate- The Recommendations provide a reporting framework for climate related financial risk disclosures risks and opportunities that can be integrated with current financial (the Recommendations). reporting disclosures. They define climate impacts in the following two distinct categories, which should both be addressed: The Recommendations aim to improve organisational • Transition impacts reflect the risks and opportunities associated understanding of climate risks with changes in the economy, including growth impacts, sector re- weighting and other macroeconomic factors. and opportunities, and their potential impacts, and thus • Physical impacts impacts reflect the changes in the physical climate (e.g., altered rainfall amounts, intensities and timings) that may reduce the risk of a systemic impact future business activities. financial shock to the economy. The Recommendations also provide specific guidance for certain This report provides an annual higher-risk sectors in both the financial sector (e.g., banks, insurance snapshot on the alignment with the companies, asset owners and managers) and other sectors (e.g., Recommendations across sectors in energy; transportation; material and buildings; and agriculture, food Australia likely to be highly impacted. and forest products). This report is intended to provide The adoption of the Recommendations are voluntary in most companies, regulators, investors, countries (although certain elements have been legislated in France). and stakeholders of all types with an However, several national-level regulators and global investors have understanding of the current state of publicly supported the Recommendations, and are accelerating their Australian climate risk reporting. adoption. The increasing level of shareholder activism in high-risk It also offers insights into the sectors is placing pressure on companies to pay closer attention to differences in reporting across sectors, their disclosures on climate risks and opportunities, and familiarise and suggests areas of improvement, themselves with the Recommendations. in the quality and coverage of climate risk disclosures. Drivers Adoption of the Recommendations by companies is being driven by both external and internal stakeholders. The rationale for companies to adopt the Recommendations varies between stakeholder groups. Stakeholder Drivers Actions Examples group An increasing number of questions have been asked at Annual General Meetings (AGM) relating to the impact that climate change will have on the business. Several of these Shareholder resolutions requested improved disclosures relating to climate risk in alignment with the Concern Resolutions Recommendation. In 2018, a number of Australian companies faced this type of resolution about long- including QBE Insurance Group, Origin Energy, Rio Tinto, Santos, and Whitehaven Coal. External Investors term value of investments The world largest sovereign wealth fund (Norges Bank) had previously divested from Reputational mining and power generation companies that derive 30% or more of their income or power concerns from thermal coal. In March 2019, the Bank announced it will also divest from oil and gas Divestment exploration companies but would retain stakes in companies, such as BP and Shell that are developing renewable energy technologies. The policy has been introduced to avoid exposure to long-term asset commodity prices with volatility from climate risk. 4 Are you prepared for the increasing investor scrutiny on climate risk disclosures? Stakeholder Drivers Actions Examples group Blackrock, currently the world’s largest asset manager, has continually pushed improved Concern disclosures on climate risk and has encouraged companies to adopt the Recommendations. about long- In his 2019 Letter to CEOs, Larry Fink, BlackRock Chairman and CEO, reiterated this view: Direct Investors term value of “As wealth shifts and investing preferences change, environmental, social, and governance engagement investments issues will be increasingly material to corporate valuations. This is one of the reasons with why BlackRock devotes considerable resources to improving the data and analytics for Reputational management measuring these factors, integrates them across our entire investment platform, and concerns engages with the companies in which we invest on behalf of our clients to better understand your approach to them.” Australia’s financial regulators, the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Reserve Bank of Australia Reports (RBA) have each spoken publicly about the systemic economic risks posed by climate encouraging change and highlighted an increased focus on the financial implications of climate change adoption scenario analysis. In March 2019, RBA Deputy Governor, Guy Debelle emphasised in reference to the Recommendations that “both the physical impact of climate change and the transition are likely to have first-order economic effects.” The Senate Committee hearing on climate risk disclosure questioned the need for additional External regulatory guidance driving momentum for more detailed regulatory guidance on carbon Legislation risk disclosure. Further government scrutiny is expected in the future should there be a Reduce change in Government. Internationally there is growing momentum to review the definition exposure of of “fiduciary duty” to explicitly require it to include environmental and social outcomes. civil society to negative Other Legal action have been taken by shareholders against companies for not disclosing a true financial and fair view of their financial statements by not including climate change risk disclosures in impacts their annual report. For example, in July 2018 an Australian superannuation fund member relating to Legal Action filed suit against the member’s superannuation fund alleging that the fund violated the climate risk Corporations Act 2001 by failing to provide information related to climate change business risks and any plans to address those risks. More legal action of a similar nature is expected as the impact from climate change increase. In December 2018, the Australian Accounting Standards Board (AASB) and the Auditing and Assurance Standards Board (AUASB) released a joint statement on the integration of Financial climate risks into financial statement materiality considerations: Climate related and other accounting emerging risk disclosures: assessing financial statement materiality using AASB Practice standards Statement 2. While not mandatory, the AASB and AUASB expect that directors and preparers consider the materiality of relevant climate-related risks when preparing financial statements. An influential legal opinion prepared by Noel Hutley QC on Climate Change and Director Company directors Duties and commissioned by the Centre of Policy Development, concluded that Australian Personal Legal company directors “who fail to consider ‘climate change risks’ now could be found liable for liability if opinions breaching their duty of care and diligence in the future”. This has made company directors climate risk on Director more aware of the potential personal liabilities of not addressing climate risk. In 2019 this not addressed duties conclusion was reiterated, reemphasising the need for directors to take affirmative action to understand, manage, and disclose climate risks. Internal Developing A number of companies have released Climate Change Position Statements or equivalent Strategy team Maintaining long-term reports. Sometimes these reports explicitly reference alignment with the TCFD. Typically, long-term business these reports outline the company’s view on climate change (and the extent to which it is business plans that aligning its business strategy to deliver a less than two degrees global warming scenario), growth include and then discusses the implications and proposed action plan to integrate this position into climate risk its long-term business plans. Carbon risk disclosure barometer: Australia 2019 5 Methodology Structure of the analysis Research for this report assessed A total of 175 companies were assessed. The breakdown of companies the extent to which companies had assessed by sector is provided in the table below.* adopted the Recommendations based Table 1 on publicly-available disclosures as at the end of March 2019. ASX200 Sectors identified by Number of companies and the 20 largest Global Climate Risk Disclosure TCFD as most exposed companies Barometer superannuation funds were filtered to risk reviewed against sectors identified as most Financial Banks Banks 7 exposed to climate related risks. services sector Insurance companies Insurance companies 7 Asset owners** Scoring Asset owners and managers Asset managers** 31 Companies were scored on Other Agriculture, food and Agriculture, food and two different metrics, being 15 sectors forest products forest products the coverage and quality of disclosures. Energy Energy 16 Coverage Manufacturing 20 Companies were scored on the basis Materials and Buildings 18 of the percentage of the 11 TCFD buildings** recommendations addressed by them. Mining 25 A score of 100% indicates that the Transportation Transportation 11 company has addressed all the recommendations. Retail, health and N/A 19 consumer goods Companies that have no disclosures related to the core element. Telecommunications and technology N/A 6 Total 175 * As at March 2018 ** For the purposes of this report, these sectors were re-grouped where distinctions between categories could not be easily determined (assets owners and managers) or where further sub-sector analysis was useful (materials and buildings). Within each sector, the analysis is presented under the four core elements that reflect how companies operate — governance, strategy, risk management, and metrics and targets (shown in figure above). *** New sectors for 2018 EY report Core elements of • Governance — Quality recommended climate-related The organization’s governance around Companies were given a rating (out of financial disclosures climate-related risks and five) on the basis of the quality of the opportunities disclosure, expressed as a percentage of the maximum score should the • Strategy — The actual company implement all 11 TCFD and potential impacts recommendations. of climate-related risks, and opportunities on the A score of 100% indicates that organization’s businesses, the company had adopted all the strategy and financial recommendations and the quality of the planning disclosure met all the requirements of the TCFD (i.e., gaining a maximum score of 5 • Risk management — for each of the 11 recommendations). The processes used by the organization to identify, The quality of the disclosures was scored assess and manage using the following scoring system: climate-related risks 0 — Not publicly disclosed • Metrics and targets — 1 — Limited discussion of the aspect (or The metrics and targets only partially discussed) used to assess and mange 3 — Aspect is discussed in detail relevant climate-related 5 — Addressed all features of the aspect risks and opportunities in the disclosure 6 Are you prepared for the increasing investor scrutiny on climate risk disclosures? Key trends and observations As the urgency of climate change Australia’s financial regulators align In December 2018, the Australian continues to be emphasised, businesses backing disclosure of climate-related Accounting Standards Board (AASB) need to understand and respond to the financial risk and Auditing and Assurance Standards impacts now Boards (AUASB) issued an advisory Australia’s main financial regulators In October 2018, the have clarified their expectations that bulletin on the practicalities of Intergovernmental Panel on Climate climate risk disclosures should be disclosing the impact of climate-related Change (IPCC)’s Special Report on considered by Australian companies. risks that are material to financial global warming of 1.5°C outlined that In March 2019, the RBA completed statements. This included disclosing global warming is likely to reach 1.5°C the trifecta of Australian financial whether and how climate risks are within the next 12-30 years.¹ regulators promoting the disclosure reflected in the financial statements The report also highlighted that of climate-related financial risk. The and if not, why not.4 The 2019 ASX climate-related risk for natural and Council of Financial Regulators (CFR), Corporate Governance Principles human systems are significant even at comprising RBA, APRA and ASIC, has and Recommendations, also included 1.5°C. Other forecasts have highlighted convened a working group to monitor specific reference to climate risk and that the 1.5°C warming threshold could regulatory developments in climate risk encourages entities to implement the temporarily be exceeded within the and promote efforts to improve risk Recommendations.5 next five years.² management and disclosure.³ Australia’s climate is characterised by variability and extremes. CSIRO’s State of the Climate 2018 report outlines We need to think in terms of trend rather than cycles in the that Australia can expect to experience: weather. Droughts have generally been regarded (at least further increases in temperature, with more extremely hot days, an economically) as cyclical events that recur every so often. In increase in fire risk, high-intensity contrast, climate change is a trend. The impact of a trend is storms, and intense heavy rainfall. ongoing, whereas a cycle is temporary.… The recent IPCC Australia’s changing climate will be report documents that climate change is a trend rather than felt by businesses, affecting different parts of the economy, infrastructure, cyclical, which makes the assessment much more complicated. community and ecosystems. While the What if droughts are more frequent, or cyclones happen more physical impacts of climate change are often? The supply shock is no longer temporary but close to significant, businesses also need to understand the risks associated with permanent. That situation is more challenging to assess and transitioning to a low carbon economy. respond to.⁶ The risks of transitioning to a low carbon economy are currently viewed Guy Debelle as more immediate risks to business. Deputy Governor, Reserve Bank of Australia 1 Special Report: Global Warming of 1.5°C, Intergovernmental Panel on Climate Change (IPCC), 2018. 2 “Forecast suggests earths warmest period on record”, MET Office, 6 Feb 2019. 3 Financial Stability Review – October 2018, “Regulatory Developments”. Accessed via https://www.rba.gov.au/publications/fsr/2018/oct/regulatory-developments.html 4 Climate-related and other emerging risks disclosures: assessing financial statement materiality using AASB Practice Statement 2, December 2018, AASB and AUASB. Accessed via: https://www.aasb.gov.au/admin/file/content102/c3/AASB_AUASB_Joint_Bulletin_13122018_final.pdf 5 Corporate Governance Principles and Recommendations, 4th Edition, ASX Corporate Governance Council, February 2019. Accessed via https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-fourth-edn.pdf 6 “Climate Change and the Economy”, Speech, March 2019, Reserve Bank of Australia (RBA). Accessed via https://www.rba.gov.au/speeches/2019/sp-dg-2019-03-12.html Carbon risk disclosure barometer: Australia 2019 7 Companies should be prepared for Directors duties and increasing Climate-related risks (including climate questions and resolutions at litigation risk physical, transition and litigation Annual General Meetings risk) present foreseeable risks An influential legal opinion prepared In the past year there has been an by Noel Hutley QC on Climate Change of harm to Australian business. increasing number of resolutions raised and Director Duties and commissioned This requires prudent directors at Annual General Meetings requesting by the Centre of Policy Development, to take positive steps: to inform improved disclosure relating to climate concluded that Australian company themselves, disclosure the risks risk and companies positions on climate directors “who fail to consider ‘climate as part of financial reporting change and energy issues. In 2018, a change risks’ now could be found number of Australian companies faced liable for breaching their duty of care frameworks, and take such this type of resolution including QBE and diligence in the future”. This has steps as they may see fit to take, Insurance Group, Origin Energy, Rio made company directors more aware with due regard to matters Tinto, Santos, and Whitehaven Coal. of the potential personal liabilities such as the gravity of the harm, of not addressing climate risk. In the probability of the risk, and 2019 this conclusion was reiterated, the burden and practicality of Many shareholders are concerned reemphasising the need for directors to available steps in mitigation … about climate change. In addition take affirmative action to understand, Company directors who fail to manage, and disclose climate risks. to having an impact on people consider climate change risks and the planet, climate change now could be found liable for poses a real and immediate risk breaching their duty of care and It is likely that a director who on investments and has broad diligence in the future … is uninformed as to the risks and longer term effects on the a negligence allegation against a associated with climate change, global economy. director who had ignored climate or who makes no conscious Both in Australia and overseas risks was likely to be only a decision or judgement on this shareholders are taking action matter of time.9 issue in their consideration of to get the companies they hold corporate strategy, planning and Mr Noel Hutley SC and shares in to disclose the full Mr Sebastian Hartford Davis risk management, or in their Climate Change and Directors’ Duties extent of their involvement in consideration of transactions fossil fuels and to start working coming before them for approval, towards a low carbon economy.⁷ would fail to discharge their duty Australian Centre for Corporate of due care and diligence under Responsibility section 180 of the Corporations Act. The board is required to inquire where information is not presented to them, and to seek advice on specialist and complicated issues. It is also likely that inadequate consideration of climate-related risks will breach the duty.8 Sarah Barker Special Counsel, MinterEllison 7 “Climate Change and the Economy”, Speech, March 2019, Reserve Bank of Australia (RBA). Accessed via https://www.rba.gov.au/speeches/2019/sp-dg-2019-03-12.html 8 Directors’ Liability and Climate Risk: Australia – Country Paper, April 2018, Sarah Barker. Accessed via https://ccli.ouce.ox.ac.uk/wp-content/uploads/2018/04/CCLI-Australia-Paper-Final.pdf 9 “Climate Change and Directors Duties: Supplementary Memorandum of Opinion”, March 2019, Centre for Policy Development. 8 Are you prepared for the increasing investor scrutiny on climate risk disclosures? The climate risk disclosures of Australia’s largest companies are amongst the world best. But we cannot be complacent: the global average is not good enough. In 2018, for the first time, EY’s climate risk disclosures analysis was expanded to cover more than 500 companies in 18+ countries and regions. This included the assessment of Australia’s 30 largest listed entities. The Global Climate Risk Disclosure Barometer provides a global snapshot and allows comparisons across countries with varied regulatory drivers. This report dives deeper in to the Australian context for 175 of Australia’s largest listed companies. While we are seeing leadership on climate-related risk disclosures from Australia, this leadership is limited to only a few top performers. Across all sectors there is a considerable gap between top performers and laggards. With only incremental improvement observed in disclosures for 2018, we continue to see a large majority of companies lacking the depth in disclosures that investors are seeking. The release of AASB’s and AuASB’s joint bulletin on assessing financial statement materiality for climate-related risk disclosures has furthered the expectation on Australian companies to consider climate risk, not only in financial fillings but also in financial statements. This has drawn greater attention to climate risk from those in the executive charged with financial affairs as they begin to navigate the complexities of how to factor climate risk in to financial statements such as those relating to asset impairment and fair value. Josh Martin Senior Manager, EY Carbon risk disclosure barometer: Australia 2019 9 Key findings 2018 Financial 26% Overall Non-financial sectors results 29% sectors 30% 63% 53% 60% 24% Risk Targets Governance Strategy 28% 31% management and metrics 33% 64% 65% 55% 60% 77% 74% 74% 71% 68% 65% 65% 65% 55% 51% 45% 45% 39% 38% 34% 36% 33% 32% 28% 23% 21% 18% Banks Insurance companies Asset owners and managers Agriculture, food and forest products Energy Manufacturing Real estate, buidlings and construction Mining Transportation Retail, health and consumer goods Telecommunications and technology Coverage Quality 10 Are you prepared for the increasing investor scrutiny on climate risk disclosures? 2017 23% Overall 25% Financial Non-financial 26% sectors results sectors 52% 53% 51% 22% 25% Risk 27% Targets 27% Governance Strategy management and metrics 45% 58% 54% 55% 67% 64% 64% 56% 49% 50% 44% 46% 43% 41% 35% 33% 23% 23% 25% 22% 17% 17% N/A N/A Banks Insurance companies Asset owners and managers Agriculture, food and forest products Energy Manufacturing Real estate, buidlings and construction Mining Transportation Retail, health and consumer goods Telecommunications and technology Carbon risk disclosure barometer: Australia 2019 11 EY findings continue to expose Climate risk disclosure have not the lack of depth in climate- yet been incorporated within “financial filings.” related disclosures. There The Recommendations ask for has been an incremental disclosures to be made in financial improvement compared to filings, alongside other financial 2017, however there is room disclosures. This element of the for improvement. Recommendations is yet to be widely implemented. This is particularly evident in the area of strategy. Almost all sectors of Consistent with the findings of EY the economy face major disruption 2018 Global Climate Risk Disclosures from climate transition and climate Barometer, some companies did impacts over the coming years. Yet include their disclosures within the the majority of companies are still not annual report as part of a discussion engaging seriously with these risks, on the business strategy, as part of the or positioning themselves to take directors’ report or within the operating advantage of potential opportunities. and financial review (which includes a description of the future prospects With investors paying increasing of the business). However, the attention, this is likely to affect their overwhelming majority reported within reputation and valuation even before non-financial reports, e.g. sustainability the impacts are fully realised. An reports or Carbon Disclosure Project example of this is Norges Banks’ recent (CDP) reporting. divestment announcement, which only resulted in the divestment of oil and Most companies are not providing Despite the Recommendations, there gas companies that had not integrated high quality disclosures aligned to are a number of reasons why most climate solutions, such as renewable the Recommendations companies have not taken the step energy, in to their strategy. This type to include disclosures in their annual of action causes a short-term valuation Consistent with the findings of EY reports or directors’ reports. The change based on the company’s Global Climate Risk Disclosures relative immaturity of processes to strategic understanding of climate risks Barometer and last year’s Australia capture and report on climate change and opportunities. Climate Risk Disclosures Barometer, risks is likely one reason, as well this year’s Australian analysis showed as the difference in timeframes of Assessing climate-related risks and that roughly two-thirds of companies traditional operational and strategic opportunities can be complex, and may assessed have started to disclose financial disclosures compared to the require detailed analysis. However, climate change-related risks, with the timeframes required to capture physical disclosing information on climate average coverage score being 60%. climate risks. change scenario planning not only However, the quality of the disclosures addresses the TCFD recommendations, was relatively poor, with the average It can also be difficult to translate but also provides companies with new score being 29%. these risks into financial implications inputs into business strategy, and due to a lack of standards supporting engages increasingly socially aware Across each of the TCFD elements, robust and comparable measurement employees with the strategy, which in results show that, on average, practices. However, shareholder turn enhances internal capability and companies reported better on resolutions, enforcement of listing processes. “targets” and “metrics” (mainly rules and regulator focus are likely driven by reporting on Scope 1 and 2 to force companies to change their greenhouse gas (GHG) emissions) and current approach in upcoming “governance.” Disclosures relating to reporting periods. “strategy” and “risk management” were the least developed. Arguably, as these components are more complex, they require detailed analysis on how climate change will impact a business and how the business is responding. 12 Are you prepared for the increasing investor scrutiny on climate risk disclosures? Incremental improvement in reporting Australian firms are slowly responding to the Recommendations and steadily improving the quality of their disclosures. Our analysis reveals modest year-on-year improvement in quality of disclosures across sectors with an increase of 3% for both the financial and non-financial sectors. However, there is considerable variability within sectors with some companies discussing all aspects of the Recommendations, whilst others are lagging behind, with no disclosures relating to any of the Recommendations. Physical risk disclosures fall behind which companies and sectors are transition risk likely to feel the consequences are Many companies identified transition more immediate. Transition risks are risks that either directly impact their generally associated with “mitigation” sector or the supply chains they rely action, which by definition means upon. While analysis of transition actions taken to reduce the likelihood risks is at a mature level, the same is and consequence of future physical not observed for analysis of physical consequences. So, although in some risks. Modelling the potential impacts sectors, companies have considered of physical risks to business is an the physical implications of a inherently complex process. changing climate. A key issue with understanding the The analysis identified, however, potential financial impacts of physical that the physical risks are not only risks is that there is no standard yet to overlooked in valuation models, but fully integrate these risks into valuation often completely omitted from forward- models, which traditionally heavily looking strategic and risk management discount long-term financial impacts disclosures, even in sectors where (e.g. Net Present Value models). asset lives can reach 50 to 100 years. Physical impacts of climate change are Aside from the inherently more key risks to many sectors over the complex modelling associated with long-term, and this lack of scenario-based physical risk analysis, understanding and disclosure highlights one of the key reasons for a more a significant gap in the quality of consistent consideration of transition current disclosures. risk is that the time-scales over Carbon risk disclosure barometer: Australia 2019 13 Reporting is exceeding meaningful Will your business conform to a analysis or action “wait-and-see” approach or will Scenario analysis was mentioned in the it look to benefit from disclosing disclosures of many of the larger global climate-related risks and For businesses and opportunities? entities. Nevertheless, it was mostly in the context that they expected to financial markets, [the] Climate risks are more complex conduct the analysis in the future. In challenge is understanding and long-term in nature than most other cases, no detail was given around the climate modelling and traditional business risks, and this has the scenarios analysed or the results conducting the scenario contributed to a lack of understanding of the modelling. Several organisations and measurement of their potential analysis to determine also disclosed their support for a 2°C impacts. If an organization does not future, but did not state how their the potential impact have a clear understanding of the business aligned with the associated on their business and range and magnitude of the potential economic outlook. Where companies investments.10 financial impacts from climate change, had undertaken detailed scenario it may be increasingly detrimental to its analysis, generally, the scenarios only financial performance. As divestment Guy Debelle dealt with transition risks. Deputy Governor, announcements and stakeholder action These omissions reduced the scores for Reserve Bank of Australia increases, a wait-and-see approach quality of strategic disclosures. increases the risk short-term reputation damage and lose of value. Annual report So, where to start? Disclosing climate-related risks likely Sustainability report requires changes to the governance and risk assessment processes (as per CDP response the Recommendations).It also requires collaboration across sustainability, Webpage on sustainability risk, finance, operations and investor or climate change relations business functions. It may take several reporting cycles for Other an organisation to be in a position to generate valuable information Mismatch between what investors This is not reflected where companies for management, investors and want and what they get are disclosing information relating to shareholders to help them make the Recommendations. The analysis informed decisions. The earlier your EY 2018 Global Investor Survey for this report showed that CDP company embarks on this journey and found that investors are increasingly Reponses remained a primary source provides a platform to help educate focusing on non-financial disclosures of detailed disclosure, alongside directors and management about from companies to inform investment sustainability reports or stand-alone climate risks, the better positioned decisions. However, the Survey also climate risk reports. your company will be to engage with showed that investors mainly relying investors and shareholders on the on annual report for gathering This year, more relevant information impacts and opportunities for your information, while considering was found in Annual Reports but this organisation. sustainability reports, corporate was not yet the primary location of websites, or sustainability rankings information relating to the way in produced by a third party. which climate-related financial risk is managed by a company. 10 Climate Change and the Economy, Speech, March 2019, Reserve Bank of Australia (RBA). Accessed via https://www.rba.gov.au/speeches/2019/sp-dg-2019-03-12.html 14 Are you prepared for the increasing investor scrutiny on climate risk disclosures? Carbon risk disclosure barometer: Australia 2019 15 Banks Sector overview • The banking sector continued outperform 51% the non-financial sectors particularly on the quality of disclosures. This reflects the sectors involvement with driving the deployment of the Recommendations. Quality • The four largest banks were the top performers. All four banks measured their Coverage 74% financed emissions and conducted scenario analysis over their portfolios for transition and physical risks. • The disclosure of physical risks improved compared to last year. In particular, the larger banks disclosed the methodologies and results from their physical risk scenario analysis further aligning disclosure with the Recommendations. • There was minimal improvement from smaller banks which lowered the sector average. The disclosures from smaller banks were typically high-level and focused on managing the banks’ operational impacts. • None of the banks adopted risk mitigation strategies that specifically excluded any sector or companies from financing. However, they did adopt specific lending criteria for sectors at higher risk of the impacts of climate change. They also enhanced financing to lower risk and growth sectors and companies to facilitate an orderly and just transition to a low carbon economy. This approach is consistent with the views of the deputy governor of the Reserve Bank of Australia, which acknowledged in a recent speech on Climate Change and the Economy that financial stability will be “better served by an orderly transition rather than an abrupt disorderly one”.11 11 Guy Debelle, Deputy Governor, Reserve Bank of Australia. (2019). Climate Change and the Economy. Accessed via https://rba.gov.au/speeches/2019/sp-dg-2019-03-12.html 16 Are you prepared for the increasing investor scrutiny on climate risk disclosures? Both the coverage and quality of disclosures for the banking sector were the highest scores for the sectors included in this Report. Responsibility for the risk and opportunities of climate change were in most cases integrated 79% Governance into the function of the Board, executive leadership, and risk committees. Two of the larger banks set up a separate committee to focus on the specific challenges and opportunities of climate change. Responsibilities and processes around the Board’s oversight and 50% management’s role were clearly articulated by most banks. Most banks recognised that their financing activities are their most material risk and opportunities. Disclosure of both transition risks and physical risks were articulated. For transition risks, regulatory and demand changes impacting the power generation and mining sectors were highlighted as key risks for the sector. For physical risks, key risks commonly Strategy identified included a loss of productivity for the agriculture sector and increasing repair and replacement costs in the property sector due to changes in the climate. It was also common for 67% opportunities to be identified around the financing of green growth sectors. 53% The larger banks conducted scenario analysis. Those that performed scenario analysis focused on the business lending and retail lending portfolios. The most notable improvement was the larger banks moving beyond scenario analysis of transition risks to include scenario analysis of physical risks. This was largely attributed to an industry-led pilot project on implementing the Recommendations under the United Nations Environment Program Finance Initiative. The top performers attempted to quantify the impact of customers’ losses to their credit ratings and probability of default. However, it was acknowledged that gaps in the available data and refinement of the methodologies was required. More banks disclosed their risk management practices compared to the previous year. Most banks developed a Climate Change Position Statement that was supplemented by a responsible lending and investing framework. A common theme was equal focus on managing the risks in lending to high-risk sectors (such as agriculture, power generation, mining), harnessing the Risk opportunities by financing to green assets (including renewable energy, green buildings), as management well as managing the risks from their own operations. 71% The larger banks disclosed the use of specific lending criteria for power generation and mining 58% customers to manage their risk in these sectors. However, none of the explicitly exclude any high-risk sectors from financing. This was typically justified as facilitating an orderly and just transition towards a low carbon economy, as sudden withdrawals of financing for certain sectors could result in negative social and economic impacts on local communities dependent on these sectors. While six of the seven banks disclosed operational Scope 1, 2 and 3 GHG emissions, only the four largest disclose financed emission. Disclosure of financed emissions was typically 81% combined with data on the bank’s lending exposure to perceived high-risk sectors from physical Targets and metrics and transition risks as well as green assets to provide an approximate measure of climate risk. The number of banks that set targets had increased compared to last year. Common metrics 43% and targets included green lending and financed emissions intensity. Coverage Quality Carbon risk disclosure barometer: Australia 2019 17 Insurers Sector overview • Insurers faced greater scrutiny and pressure 33% from shareholders and the media over the last year to disclose and address potential risks from climate change. The improvements in the overall score of the insurance sector this year Quality reflected the growing commitment by insurers to address this challenge in response to the intensifying pressure. Coverage • Several insurers moved from responses to CDP Climate 2018 to publish standalone Climate 65% Change Action Plans. These plans included a comprehensive list of action statements, against which progress reporting was made on the status of implementation. • Several insurers had adopted stringent risk management strategies by announcing an explicit withdrawal of support for the fossil fuel sector as means to manage transition risks. • A limited number of insurers disclosed how they planned to manage physical risks. Disclosure of physical risks improved on the previous year. However, there is room for further improvement, particularly in consideration of the significant financial losses from extreme weather events over recent years. 18 Are you prepared for the increasing investor scrutiny on climate risk disclosures? Top performers provided more clarity over governance structures compared to last year by clearly defining the roles and responsibilities of the board, management and committees and how they function together. Two of the seven insurers assessed established a cross-functional Governance 27% Climate Change Working Group to implement their Climate Change Action Plans. However, three insurers described the management of climate risks in general terms as part of the overall sustainability governance. These same insurers performed poorly in other aspects of 64% the Recommendations due to limited disclosures. Commonly identified risks related to the insurer’s underwriting and investment portfolios, and included the physical impacts of climate change on insurance claims and the impact of transition to a low-carbon economy on investments. The sector also identified opportunities around new revenue streams from the development of new products such as adjusted Strategy premiums for customers with green assets. 71% The insurance sector frequently performs scenario analysis and stress-testing to better 37% understand their risk profile. However, disclosures on the application of scenario analysis and stress-testing for assessing the risks of climate change showed room for improvement. Three of the seven insurers assessed reported that scenario analysis was used but only provided limited detail over the methodologies and results of the assessment. Most insurers reported they would commence scenario analysis in the coming year. This was generally aligned with peers globally, given that the UNEP FI recently convened the TCFD pilot for insurers in November 2018. Two of the insurers assessed in this review are involved in this pilot. There were major improvements in the sector’s disclosure of risk management practices this year. Notably, the top performers published standalone Climate Change Action Plans. This was a separate report outlining in detail the ongoing and future actions to be undertaken. These action statements generally covered governance practices, risk management practices Risk over the underwriting and investment portfolios, and over operational carbon emissions, and management collaborative efforts with partners on climate change advocacy. 67% 42% Several insurers disclosed an explicit withdrawal of support for the fossil fuel sector. Despite, disclosure of physical risks improving compared to the previous year, only a limited number of insurers disclosed how they planned to manage physical risks, leaving much room for improvement. A limited number of insurers set robust targets and metrics for climate risks that were aligned to material physical and transition risks. Operational emissions were typically disclosed, however none of the insurers disclosed whether they monitored the carbon intensity of 25% their underwriting or investment portfolios. There was no disclosure of targets and metrics Targets and metrics specifically addressing physical risks. The lower coverage and quality scores for metrics and targets was recognised by insurers with the development of metrics and targets commonly listed as an action item in Climate Change 57% Action Plans. Coverage Quality Carbon risk disclosure barometer: Australia 2019 19 Asset owners and managers Sector overview • Asset owners continued to focus on advocating for better climate-related disclosures from 18% investee companies rather than progressing Quality disclosures within the sector. • Participation levels in the CDP Climate 2018 continued to be low with twenty-two Coverage companies not responding to CDP Climate 2018 and two companies that chose to make their responses private this year. 45% • Many asset owners and managers considered climate change as part of their broader ESG framework, but did not provide further discussion specific to the unique challenges of managing climate risk. • Greater legal action is likely on the horizon if asset owners and managers continue with comparably poor disclosures to other sectors. The case of an Australian superannuation fund member filling a legal suit against his superannuation fund alleging that the fund violated the Corporations Act 2001 by failing to provide information related to climate risks and any plans to address those risks is an example the type of action that may become more common. 20 Are you prepared for the increasing investor scrutiny on climate risk disclosures? 15% Governance of climate risks was typically integrated in to overall ESG governance. Climate risks were acknowledged as being more material to investee company sectors rather than to the asset owners’ and managers’ own operations. As such, disclosures around responsibility Governance for managing climate risk and opportunities tended to focus on the activities of investment managers rather than operational risks. Reporting channels from investments up to the Board 42% were not articulated well in disclosures in most cases. Risks associated with the transition to a low carbon future were disclosed in more detail 14% than the physical risks of climate change. Many companies in the sector identified changing regulation that favours low carbon industries which impact investment portfolios, both from the perspective of the risk and opportunity linked to climate change. Strategy Only one asset owner and three superannuation funds disclosed on the use of scenario 37% analysis to assess the potential impacts of climate change to their business. A common issue identified was the difficulty faced by companies in obtaining reliable climate-related data and information from investee companies. The level of maturity within the sector on responding to the Recommendations is low comparatively to other sectors. Many asset owners and managers mentioned they considered climate change as part of their broader ESG framework for investment due diligence, proxy voting and engagement with investee companies. However, most companies did not include deeper discussion of the specifics of climate risk management within their companies. These observations were similar Risk 28% to those made in the prior year. management Management of climate-related risks were often disclosed in relation to exclusions or 62% negative screens for emissions intensive activities such as thermal coal or the energy sector more broadly. Disclosures around specific ESG funds targeting renewable and clean energy investments were also prevalent in public reporting, indicating both risk and opportunity management is implemented within the sector in relation to climate change impacts on investment portfolios. Asset owners and managers typically disclosed the carbon emissions of their own operations. 16% Only a small number within the sector provided disclosures relating climate risks in the portfolio. Five companies disclosed the carbon footprint of their equity portfolios and compared Targets the emissions intensity of their portfolio to the emissions intensity of globally recognised and metrics indices such as MSCI ACWI or S&P/ASX index. Top performers reported percentage holdings in either fossil fuels or renewable energy companies and calculated the carbon footprint of 40% direct investments. Coverage Quality Carbon risk disclosure barometer: Australia 2019 21 Agriculture, food and forest products Sector overview • There was considerable improvement in the average coverage scores for the agriculture, 28% food & forest products sector compared Quality to the prior year. There was also a modest improvement in the average quality score. • Two companies indicated publicly that they Coverage are in the process of assessing climate risk disclosures against the Recommendations and intend to improve disclosure in 2019. 68% • The quality of disclosures was highest for risk management, followed by targets and metrics, governance and strategy. While most companies have identified that they are exposed to climate-related risks and some have started measuring their performance against climate-related targets; significant improvement is required in the corporate governance of, and strategic response, to climate change. • Most disclosures were made through either sustainability reports or annual reports, with only a third of companies providing disclosure through reponse to CDP Climate 2018. Of the five companies that submitted responses to CDP; two were not released to the public, contrary to previous years. The lack of access to these reports likely lowered the coverage and quality scores for the sector overall. 22 Are you prepared for the increasing investor scrutiny on climate risk disclosures? There was a considerable increase in the coverage of governance disclosures from last year, while the quality of governance disclosures had modest incremental increase. Ten companies stated that their board and/or a board committee (e.g. audit, risk, sustainability Governance 28% committee) is responsible for overseeing climate-related risk and opportunities. Top performers 73% described the relationship between management and the board and how climate-related risks, performance and progress on targets are reported to the board. Only one company in the sector met all the Recommendations related to governance. Coverage of strategy disclosures increased from last year, while quality of strategy disclosures decreased. 17% The coverage and quality of disclosures relating the resilience of strategy under different Strategy climate-related scenarios, including a 2°C or lower scenario, were not addressed well by the sector. Only one company described a climate change trajectory assessment it had undertaken 67% and the likely impact on their product yields. It will become increasingly important for companies in the agriculture, food & forest products sector to assess their resilience to climate change, especially as Australia continues to experience more frequent and severe drought and other impacts associated with, and exacerbated by, a changing climate. The quality of disclosures on risk management were the highest for the section. Disclosures relating to the description of processes for managing climate-related risks were of a particularly high quality for the sector, reflecting the high risk the sector faces with changes in the physical climate such as prolonged and more frequent periods of drought. Risk 73% management Two companies met all the Recommendations for risk management, providing detailed 36% disclosures on their climate-related risk identification and assessment processes and how this linked with their overall enterprise risk management system. Companies that scored poorly often described their enterprise risk management system, but did not specifically mention climate-related risks. Another important, but often lacking aspect, was how companies determine the relative significance of climate-related risks in relation to other risks. Coverage of targets and metrics disclosures increased from last year, while quality of disclosures remained consistent. The quality of disclosures in relation to metrics used by companies to assess climate-related Targets risks and opportunities in line with their strategy and risk management process were strongest and metrics 31% within the sector. This demonstrates that companies in the sector are measuring their climate- related risks and opportunities. However, only seven companies had targets against which they 64% were managing performance meaning there is room for improvement with in the sector for setting targets. Three companies failed to disclose their Scope 1 and Scope 2 emissions and eleven companies did not disclose their Scope 3 GHG emissions. Ten companies disclosed the importance of measuring and managing their water consumption and intensity, a key climate risk exposure for the agriculture, food and forestry sector. Coverage Quality Carbon risk disclosure barometer: Australia 2019 23 Energy Sector overview • The average coverage and quality scores for 34% the energy sector were consistent with last year. Within the sector there was enhanced disclosure made by several companies which was offset by the addition of two Quality new companies to the sector that were not assessed last year, both of which performed well below average for the sector. Coverage • Larger companies achieved significantly higher scores than their smaller peers, with average 65% quality scores exceeding 60% for ASX50 listed companies. Many of these companies have been challenged by investor groups and NGOs to demonstrate the resilience of their business in a low carbon economy, which has led to more transparent disclosures including quantitative scenario analysis. • Half the companies assessed submitted responses to the CDP Climate 2018, although two of these responses were not released to the public. Companies who did not respond or publish their CDP Climate 2018 report performed poorly in the disclosure scoring, with the exception of one company which released a stand-alone climate change report aligned to the Recommendations. • Three companies have indicated publicly that they are in the process of assessing climate risk disclosures against the Recommendations and intend to improve disclosure in 2019. • Most disclosures were made through either sustainability reports, stand-alone climate change reports or responses to CDP Climate 2018. Only one company included substantial disclosures within mainstream financial filings (annual report). 24 Are you prepared for the increasing investor scrutiny on climate risk disclosures? Coverage of governance disclosures fell slightly from the 2018 analysis, partly through lack of disclosures made by new entrants to the sector group and lower participation and disclosure to CDP Climate 2018. Those companies that did address governance recommendations improved the quality of disclosures, particularly in relation to management’s role in assessing and Governance managing climate risks and opportunities. 31% 72% For most companies, the sustainability, HSE or equivalent committee has oversight of climate- related issues, with one company also mentioning the role of their risk committee in reviewing and monitoring climate-related risks and opportunities as part of investment considerations and performance reviews. Top performers described the relationship between management and the board and how climate-related risks, performance and progress on targets are reported to the board. Companies are still failing to report how management were informed about, or monitored, climate-related risks. Two companies have integrated climate-related transition risk into their core business strategy, positioning their companies to lead Australia’s energy market transformation and prosper in a carbon constrained economy. These strategic imperatives are explicitly covered within annual reports and other mainstream financial filings. Strategy Five companies stated they have undertaken scenario analysis, including a 2°C scenario, 36% however one company only disclosed the generic impact of the scenarios on the broader 65% market and not their business. Three companies disclosed the quantitative impact of a 2°C scenario (change to NPV). Two companies had not updated their scenario analysis within the last year, referring to historical analysis relying on out-dated data. Overall, coverage of strategy recommendations did improve from the previous year’s assessment, with more companies making mention of climate-related risks and opportunities at a high level. Average quality scores were steady from last year, with most disclosures lacking detail. Performance against risk management recommendations did not change materially from the previous year’s assessment. Often these disclosures were covered within responses to CDP Climate 2018, with non-responders scoring poorly. Risk Companies that scored poorly often described their enterprise risk management system, but management did not specifically mention climate-related risks, and could not describe how their climate- 33% related risk identification and management process was integrated into their overall risk management. Another important, but often lacking aspect is how companies determine the 63% relative significance of climate-related risks in relation to other risks. Companies that scored well included descriptions of how they make decisions to mitigate, transfer, accept, or control climate-related risks in detail. Only two companies failed to disclose their Scope 1 and Scope 2 emissions, with half the companies assessed providing historical data for trend analysis. Six companies also disclosed their scope 3 emissions, which for most energy sector companies are the most material emissions across the value chain. Targets and metrics Emission reduction targets have been the focus of several shareholder resolutions recently 35% raised to energy sector companies. This may have influenced the largest improvement across the Recommendations for the sector this year, with three companies establishing new targets, 65% clearly stating the base year and time frames over which the target applies. This included one company which has set an accredited Science-Based Target in line with the Paris Agreement’s 2°C objective, comprising both a scope 1 and scope 2 target along with a scope 3 target, addressing the key climate-related risk around the transition to low or zero emissions energy. Top performers also reported executive remuneration being linked to climate-related KPIs and/ or targets, and the use of an internal carbon price, although the price was only disclosed by two companies. Coverage Quality Carbon risk disclosure barometer: Australia 2019 25 Transportation Sector overview • The transportation section was found to be the 39% highest performing non-financial sector for the quality of disclosures. • The sector average saw an incremental improvement in the in both the coverage Quality and quality of disclosures aligned to the Recommendations. However, there was Coverage 65% variability within the sector. Half of the sector covered ten or more of the eleven The Recommendations, to varying degrees of completeness. • One company received the top coverage and quality score, having undertaken and disclosed the results of its scenario planning analysis. It was noted that BlackRock had investments in the top performing companies in sector; perhaps reflecting BlackRock’s interest in climate change risks and opportunities within its portfolio and vocal support for enhanced climate risk disclosures. At the other end of the spectrum, one company in the transportation sector had no publicly available disclosures relating to climate related risk. • Most companies in the transportation sector had not responded to CDP Climate in 2018. However, those that chose to disclose via CDP were amongst the top performers in terms of the level of detailed disclosure. 26 Are you prepared for the increasing investor scrutiny on climate risk disclosures? The sector was roughly split in half, with the top performers having relatively detailed disclosures about the role of board and managements in relation to the assessment and management of climate-related issues and the other half having very limited quality of disclosures in this area. Governance Disclosures relating to governance of climate risk were typically found across the Annual 73% Report, Sustainability Report, or Corporate Governance Statement. However, those disclosures that described the level of detail outline in the Recommendations were typically found in 47% responses to CDP Climate 2018 or Sustainability Reports indicating that the level of detail required to properly response to the Recommendations is not available in Annual Reports on their own. Despite the sector’s strong overall disclosure performance, disclosures relating to the strategy component of the Recommendations were noticeably lacking for both quality and coverage with scores falling below the overall average. Strategy 27% Only two companies in the sector had disclosed the results of scenario planning. Consideration of the impacts of climate risk were largely qualitative. Impacts were rarely measured in dollars and where a cost range was disclosed the quantification method was unclear. 48% Coverage of risk management in disclosures was relatively high, with most companies including brief mention of how climate change is factored in to a multi-disciplinary company-wide risk framework, without no additional details in relation to targeted climate risk considerations. Risk Typically risk management practices, if disclosed, were found in Sustainability Reports. 76% management Companies that disclosed more detail on climate risk management processes offered insights into the way in which climate risk was considered, criteria used, and responsibilities across the 45% business. Companies typically disclosed Scope 1 and Scope 2 emissions, and in some cases Scope 3 emissions. The detail behind these metrics was not often disclosed. Limited information was available on the types of metrics recommended by the Recommendations for the transportation sector, such as total fuel consumed and percent renewable split out by transport Targets type (road, airlines, marine, rail). and metrics Again, the sector was roughly split in half, with the top performers having relatively detailed 67% disclosures about metrics used, describing the boundary and methodology, and well as some 40% disclosure of historical trend analysis. The other half of the sector reported a limited number of climate-related KPIs but not to the level of detailed recommended in the TCFD guidance. Coverage Quality Carbon risk disclosure barometer: Australia 2019 27 Manufacturing Sector overview • Disclosures made by the manufacturing 32% sector companies (generally categorised in the materials, chemicals and construction sector in the 2018 analysis) improved both in coverage and quality. This resulted from Quality significant progress made by five companies, as well as more modest improvements by nine other companies. Only one company failed Coverage to make any disclosures in relation to the the Recommendations. 71% • For most companies, coverage scores were high, with thirteen out of the twenty companies assessed achieving coverage scores above 90%. The average coverage score was brought down by four companies who failed to cover more than one of the Recommendations. • No manufacturing companies achieved scores above 80% for quality, indicating that even the leading companies for the sector are still on the journey towards reporting in accordance with the Recommendations. • Only eight companies responded to CDP Climate 2018, including one company that did not allow their response to be published. These companies generally outperformed non- responders. Companies that responded to CDP Climate 2018 also tended to provide better disclosures through other channels such as sustainability reports. • Australian companies achieve a higher coverage score than the sector average within EY global analysis, and approximately the same score for quality, demonstrating a comparable awareness of the Recommendations as their global peers. 28 Are you prepared for the increasing investor scrutiny on climate risk disclosures? The quality of governance scores improved significantly compared to last year, with four companies substantially expanding their disclosures to achieve very high-quality scores. Coverage scores also improved, with all but four companies providing some disclosures in relation to board oversight and management responsibility for climate risk. 78% Governance Top performers used various reports to communicate their detailed governance approach, some relying on CDP Climate 2018 responses while others used their sustainability report as 40% their primary means of communication. Companies relying only on their annual report were generally able to cover both governance recommendations, but not in the detail required for quality disclosures. Four companies failed to provide any information in relation to the governance recommendations. While most companies provided some limited discussion in relation to the Recommendations for strategy, few provided sufficient information to address aspect in detail, with only three companies achieving a quality score of over 50%. 25% Disclosures were commonly sourced from CDP Climate 2018 responses, however the top Strategy performer in relation to strategy disclosures did so through their sustainability report. Disclosures in relation to the resilience of the organisation’s strategy under different 65% climate-related scenarios, including a 2°C or lower scenario, were the weakest of all the Recommendations. Two companies have identified and described scenarios they will use for analysis, but are yet to complete and publish the outcomes of the assessment. Coverage and quality scores in relation to risk management improved compared to last year, but few companies are fully addressing any of the Recommendations for risk management. Seven companies achieved quality scores of over 50%, while five companies failed to provide any disclosures. All top performers included risk management disclosures within CDP Climate Risk 2018 reports. 75% management 33% Only one company described how they determine the relative significance of climate-related risks in relation to other risks, along with their process for prioritising climate-related risks and opportunities. Many companies reported they identified, assessed and managed climate-related risks as part of a multi-disciplinary company-wide risk framework, without any specific or targeted process in relation to climate risk. Both coverage and quality improved compared to last year’s scores, although still slightly lower than the global averages for the manufacturing sector. Disclosure of Scope 1 and Scope 2 emissions was high, with only three companies not Targets reporting any data on their greenhouse gas emissions profile. Six companies also reported and metrics their material Scope 3 emissions. Some companies failed to disclose the methodologies used in 35% 70% calculating their emissions, and/or did not provide any historical data to allow trend analysis. Other metrics commonly reported by top performers included energy and water use and waste generation. Two companies described how metrics have been incorporated into remuneration policies. Manufacturing companies typically established emission reduction targets compared to many of the other sectors, with almost half of the companies assessed found to have either an absolute reduction target, an emissions intensity target or both. Most of these companies reported progress against targets. No companies provided any commentary on the strategy behind their targets or how these targets would help manage climate-related risks or opportunities. Coverage Quality Carbon risk disclosure barometer: Australia 2019 29 Real estate, buildings and construction Sector overview • The average coverage score and average quality scores for the real estate, buildings and 35% construction sector had a modest incremental Quality improvement compared to last year. The sector led the way on coverage of disclosures matching the Banking sector for the top spot. Coverage However, there was considerable variability among the eighteen companies assessed with twelve companies scoring greater than 80% 70% and three companies scoring below 30%. The quality of disclosure within the sector was consistent with the observation made across all sectors that the quality of disclosure was poor. • Companies that scored highest on coverage and quality where typically those that had Blackrock and/or Vanguard within their top five substantial shareholders suggesting pressure from investors vocal on climate risk is driving better coverage and quality of disclosures within the sector. • Only one of the eighteen companies assessed made disclosures in relation to the financial implication of climate risks. This included how climate risks could impact revenue under certain climate scenarios but did not go as far as to detail how those risks might impact the measurement of fair value across its asset portfolio. • Australian companies achieve higher coverage and quality scores than the sector average within EY global analysis, highlighting a better awareness of TCFD requirements compared to their global peers. 30 Are you prepared for the increasing investor scrutiny on climate risk disclosures? The majority of companies disclosed their climate-related governance with only three companies not providing disclosure of governance practices. Both the coverage and quality of disclosures relating to governance had a modest improvement compared to the prior year. The companies that did disclose included a description of the board’s oversight of climate-related risks 78% Governance and opportunities. Top performers produced detailed descriptions of the roles and responsibilities of individual board members and additional information about the process and timeliness of reporting 38% climate risks and opportunities to top management’s consideration. More than a third of companies also described management’s responsibilities regarding monitoring of climate risks and opportunities. Top performer disclosed how their governance practices are strongly tied to identifying and nurturing opportunities for both commercially viable and emerging technologies. There was only a slight improvement in disclosures relating to strategy. Similar to last year, the majority of companies identified climate-related risks and opportunities as being material for their operations, customers and communities. However there was not much improvement on disclosures relating to the process for determining materiality and in relation to the consideration of climate Strategy scenarios. The top performers identified risks such as energy security and rising energy costs, energy 32% and carbon pricing, and climate and energy regulations and standards. Risks identified to a lesser 72% extent were extreme weather events (floods, heatwaves etc.), impacting fair value, insurance costs and insurability; and cost increases linked with carbon-intensive construction materials. Only one company undertook scenario analysis. The improvement on prior year was a move from qualitative outputs to quantitative financial output such including the impact on company revenue. Transition risks associated with a move to a low carbon economy were given greater consideration by companies than the physical risks of a changing climate again this year. However, more companies acknowledge and identified the physical risks of climate change compared to the prior year. The focus on transition risks by many companies were strongly linked to strategic opportunities such as delivering energy and carbon cost savings, generating onsite renewable energy and outperforming building regulations. In many instances these opportunities were disclosed in relation to not only environmental performance by also better financial outlook. The greatest improvement in disclosures for the sector was those in relation to risk management, particularly with regard to coverage of the Recommendations. There was also an improvement to a lesser extent in the quality disclosures. The average sector quality score for risk management within the Real Estate, Building and Risk Construction sector was lowered by a lack of companies responding to CDP Climate 2018. Seven 75% management companies declined to respond to CDP Climate 2018 and two were not released to the public which 38% is where disclosures on approach to risk management are typically provided in detail, including how climate risk identification and assessment is linked to company-wide approach to risk management. The top perform for the sector provided considerable detail within its CDP Climate 2018 report on the approach to assessing both physical and transition risks. This included the use of the Representative Concertation Pathways (emissions pathways) from the Intergovernmental Panel on Climate Change (IPCC) 5th Assessment Report and Deep Decarbonisation Pathways Project to assess physical risks and transitions risks using scenario analysis. This detailed analysis also quantified the risk of lost revenue for the business. While there was an improvement in the coverage of disclosures the quality of disclosures remained steady at 35%. Notably, there was a lack of disclosure on metrics related to the resilience of asset portfolios to the physical risks of climate change. This is linked to the sector’s relative maturity of 82% considering physical risks compared to the progress that has been made with transition risks and Targets opportunities. and metrics 35% Nearly all companies reported their Scope 1 and Scope 2 emissions and a smaller number also included Scope 3 emissions. Many companies also disclosed sector specific metrics such as the National Australian Building Environment Rating Scheme (NABERS) and Green Start ratings, and in many cases also the Green Real Estate Sustainability Benchmark (GRESB). Both absolute and energy intensity targets were adopted by most companies which are useful for managing transitions risks. Top performers also demonstrated support for the Green Buildings Council of Australia’s (GBCA) Climate Positive Roadmap that sets targets for all new buildings to be emissions- neutral by 2030 and existing buildings by 2050. Coverage Quality Carbon risk disclosure barometer: Australia 2019 31 Mining Sector overview • The mining sector disclosures were 23% characterised by extremes in performance, with three companies achieving average quality scores above 80% and six companies found to be disclosing no information in Quality relation to climate risk. • While the average coverage score improved Coverage 55% compared to last year, the quality score was steady. Modest increase of disclosure were noted for eleven companies, generally consisting of limited discussion of aspects were previously there had been no disclosures. • The top performers included disclosures within mainstream financial filings (annual reports) with additional detail, particularly in relation to scenario analysis, provided in stand-alone climate change reports. • Disclosures by other companies were most often made through sustainability reports and responses to CDP Climate 2018. Nine companies did not publish a sustainability report, limiting the channels through which climate risk considerations could be communicated. • Participation in CDP Climate 2018 declined this year, with thirteen companies not responding, and a further four companies participating but choosing not to make their response public. 32 Are you prepared for the increasing investor scrutiny on climate risk disclosures? While governance is one of the better covered aspects for most sectors, this is not the case for mining and metals. Disclosures in relation to governance saw little improvement from last year, with around half the companies analysed still providing no disclosures in relation to the Board 21% oversight or management’s role in relation to climate risk. Governance The top performers provided extensive detail within annual reports, including interactions between the Board and management, the Board’s role in the climate risk management process, how performance against targets is monitored and reflected in senior executive and leadership 50% remuneration, and the frequency of meetings and interactions. These companies also clearly articulated the management process for monitoring and reviewing current and emerging climate- related issues. Approximately half the companies in the mining sector listed climate risks and opportunities, most often in their CDP responses. The top performers also set a timeframe for each risk or opportunity, and estimated the potential impact and likelihood. Companies participating in CDP 21% Climate 2018 scored better in this aspect, with nine non-participating companies providing zero Strategy disclosures in relation to strategy. The three top performers have developed long-term scenarios to test the resilience of the portfolios under various settings including a 2⁰C scenario, communicated through stand-alone 52% climate change reports which are referenced by sustainability and annual reports. Eight other companies make limited mention of resilience in a low carbon economy. Performance across the Recommendations for risk management tended to mirror that of strategy, with the same companies performing well or providing no disclosures across this aspect. Similarly, companies that did not participate in CDP Climate 2018 typically scored poorly, 22% particularly those that did not produce a sustainability report, further limiting channels through Risk which information could be disclosed. management On average, companies performed best in relation to describing their process for identifying and assessing climate related risk, but some were unable to further describe their process for 56% managing the identified risks. Only the top performing companies adequately described how their processes for identifying, assessing, and managing climate-related risks are integrated into the organisation’s overall risk management. Mining sector companies performed best in relation to targets and metrics, in particular, disclosure of Scope 1 and Scope 2 emissions, with eighteen out of twenty-five companies providing data and most also specifying the methodology used to calculate emissions. The majority of these companies provided historical data to convey trends in emissions. Only the top Targets 27% performers disclosed Scope 3 emissions data. and metrics Disclosures in relation to other metrics used to assess climate related risks and opportunities 60% were not as strong, with some references to energy and water. The better performing companies noted the use of an internal carbon price, and some also described how performance metrics had been incorporated into remuneration policies. Six companies provided some detail of targets set by the organisation and reported performance against these targets, a small increase from the previous year’s analysis. Only three other companies mentioned even considering setting targets to manage climate- related risks and opportunities. Coverage Quality Carbon risk disclosure barometer: Australia 2019 33 Non-key TCFD sectors Despite the focus on certain sectors, the Recommendations provide general guidance for organisations of all types and sectors. Two sectors were included in this report that were not identified by the TCFD as most exposed to climate risk, which are: telecommunications, and retail, health and consumer goods. These sectors were included in the analysis because of their importance to the general public and presence in the ASX200. 34 Are you prepared for the increasing investor scrutiny on climate risk disclosures? Telecommunications Retail, health and consumer goods 39% 21% Quality Quality Coverage Coverage 77% 45% Telecommunications has emerged as a Retail, health and consumer goods leading sector globally in response to sectors, as we refer to it here, includes climate change. This is likely due to a global pharmaceutical and retail number of reasons: companies. Although these companies don’t produce huge volumes of direct • The sector has large and rapidly emissions, they have been grouped growing companies that are together and included in the analysis significant users of electricity, and of this report as they have complex are increasingly exposed to media supply chains that are exposed to attention and reputational risk. The both physical and transition climate community expects these companies change risks. These companies are to be leaders in technology and to also responsible for maintaining the be driving innovation in areas, such consumer reputation of leading brand as energy procurement. As such, names, and increasing their exposure climate change is expected to be a to sustainability issues, including material issue for this sector. climate change. • The sector has large physical networks, with wide geographical The overall quality of this sectors’ spread, that are exposed to extreme Our analysis found for the Australian climate risk disclosures were amongst weather events. EY analysis shows telecommunications sector, the Australia’s weakest. Only four this sector is already disclosing that coverage of the Recommendation companies in the sector had detailed the increase in extreme weather in public disclosures were amongst disclosures relating to more than one of events is having an impact on their the best. As with most sectors, the TCFD’s eleven Recommendations. assets. Disruption to services can be there remains considerable room Given the diversity and complexity of expensive and have a huge impact on for improvement in terms of the the supply chains in this sector it is customers, especially during severe quality of disclosures. Although, likely companies are exposed to be weather events where demands on compared to EY Global Climate Risk exposed to some level of climate risk as communication services may peak. Disclosures Barometer, on average the well presented with opportunities from • This sector is also positioning Australian telecommunication sectors’ climate change. itself to be part of the solution as disclosures were found to be less the economy transitions to a low- detailed that global average of their carbon future. The economy will telecommunications peers. The two digitalise using the technologies largest Australian telecommunications created by this sector, which will companies assessed had higher than reduce emissions from transport and average quality disclosure with some of logistics. This means understanding the smaller companies with very limited climate change is integral to the disclosures constraining the sector’s strategies of these companies. overall score. Coverage Quality Carbon risk disclosure barometer: Australia 2019 35 What next? Climate risks are more complex and longer-term in nature than most traditional business risks, and this has contributed to a lack of understanding and measurement on their potential impacts. As discussed earlier, if an organization does not have a clear understanding of the range and magnitude of potential financial impacts from climate change, this may be increasingly detrimental to its financial performance. What are the biggest What are the incentives, What are my stakeholders’ So, where to start? emission sources in my instruments or indicators expectations in terms Disclosing climate-related value chain? that can help me align of climate footprint and risks likely requires changes my strategy with the 2°C carbon performance (e.g., road map (e.g., internal lead the development to the governance and risk carbon price on CAPEX of low-carbon products assessment processes (as and OPEX, and company- and services, or disclose per the Recommendations). specific targets)? information required by It may require several years investors)? for an organization to be in a position to generate valuable information for investors and What type of How will my products ? and services be affected shareholders to help them make climate risks is my by carbon policies and informed decisions. The earlier business exposed targets? What are the your company embarks on this to in the long run? right anticipation and journey and provides a platform adaptation strategies? to help educate directors and management about climate risks, the better positioned your company will be to engage with investors and shareholders on Are the international What is the potential Are some of my products the impacts and opportunities for climate policies and exposure to new or activities at risk national commitments regulations (e.g., carbon regarding the 2°C road your organization. integrated into my taxation or carbon map? How can I turn business strategy, pricing)? What assets are this into a competitive Companies that seek to supply chain or sourcing at risk (e.g., supply chain, advantage? understand their climate risks strategy? products or activities) and exposure can ask themselves the in which geographies? following questions. 36 Are you prepared for the increasing investor scrutiny on climate risk disclosures? EY Climate Change and Sustainability Services (CCaSS) teams can help organizations as they aim to be ready for a below 2°C economy with initiatives to: • Assess their exposure to climate-related risks EY teams can provide assistance to businesses as they • Build forward-looking scenarios develop and implement their climate risk strategies. There • Disclose the information required by stakeholders are many steps to this process, starting with understanding • Build future-proof strategies in countries of operation your risks and monitoring your impacts through developing • Take advantage of low-carbon market opportunities and financing your strategy to expand the opportunities. Comply Assess your Meet Provide Raise Reduce with climate Develop business extended risk and finance for your your regulatory your own climate stakeholder opportunities low-carbon climate risk reporting strategy challenges expectations management projects exposure requirements Understand Be compliant Be prepared Anticipate the Set your Access climate Implement what 2°C with reporting for new regulatory targets and finance for climate means for requirements. stakeholders and business priorities, low-carbon reduction your business requests. risks, and and benefit projects. actions (resources and Understand capture the from your (e.g., energy technology your emissions opportunities competitive efficiency, road map). (direct, indirect associated advantage. renewable and induced). with a path to energy on the a low-carbon full scope). economy. Drive your climate strategy with appropriate tools (e.g., internal carbon pricing). Why EY EY multidisciplinary teams combine our experience in Assurance, Tax, Transactions and Advisory services with climate change and sustainability knowledge across industries. We have experience of working on climate and energy issues with governments, industrial corporations and investors. We are a leading provider of climate risk disclosures and green bond services, having worked with some of the largest emissions intensive and asset owners globally. EY professionals are involved in industry groups leading the way on climate disclosures and green finance, such as TCFD and the Climate Bond Initiative, where we are an approved verifier. The involvement in these important drivers of climate action means that we have an understanding about the expectations of investors, and the process organizations have to go through to integrate climate change strategy into their business. EY teams’ knowledge and broad range of skills, such as data analytics and project financing, and sector-specific experience means that we can tailor the services and teams to your requirements to help you address your organization’s climate change challenges. Certain services and tools may be restricted for EY audit clients and their affiliates to comply with applicable independence standards. Please reach out to your EY contact for further information. Carbon risk disclosure barometer: Australia 2019 37 38 Are you prepared for the increasing investor scrutiny on climate risk disclosures? Carbon risk disclosure barometer: Australia 2019 39 Contact information EY contacts Oceania Dr. Matthew Bell matthew.bell@au.ey.com Australia Josh Martin josh.maritn@au.ey.com New Zealand Pip Best pip.best@au.ey.com EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Information about how EY collects and uses personal data and a description of the rights individuals have under data protection legislation is available via ey.com/privacy. For more information about our organization, please visit ey.com. © 2019 Ernst & Young, Australia. All Rights Reserved. APAC no. 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