CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN 1 | Climate disclosures within the Annual Report Climate disclosures within the Annual Report An Australian focus 1 June 2020 — KPMG.com.au CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN 2 | Climate disclosures within the Annual Report “ The science of climate change, has been understood for decades. In his 2008 climate change report, economist Ross Garnaut AC wrote that “fire seasons wil start earlier, end slightly later, and generally be more intense. This effect increases over time, but should be directly observable by 2020 “ CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN Climate disclosures within the Annual Report 3 A changing Climate Australia saw Garnaut’s predictions come true in the Not just as a matter of corporate sustainability reported summer of 2019/20 through the intense bushfires outside of annual reports but as a matter that should be that followed an extended drought that impacted huge considered as part of the preparation of the annual areas of the eastern states. These terrible events led reports. Guidance developed jointly by the AuASB and not only to loss of life and destruction of assets but also AASB indicate a need to describe how material climate a wide range of second order impacts including on the risks have been considered in the Financial Statements regional and rural economy, social well-being, the and therefore be subject to audit. natural environment and productivity. Last year saw a significant increase in questions asked Current climate modelling shows us that even if global at AGMs in relation to climate risk – a trend we expect emissions are significantly and quickly reduced, events to see increase going forward and we have already seen that led to the bushfires will continue and increase in climate-related resolutions raised at several leading frequency and severity in future decades. The long term companies’ AGMs in May. prognosis for the Australian climate under the ‘business as usual’ emissions profile is catastrophic. We acknowledge that this topic can be complex and that there are many uncertainties. Our understanding of how, Even as Australia recovers, the realisation that the risks when and how quickly the impacts of climate change posed by a changing climate are real, systemic and and the societal and economic response will impact on accelerating is stark. Expectations that businesses need individual organisations also continues to evolve. The to act to minimise their contribution to potential future impacts (current and future) are not uniform across or climate change have increased. Corporate entities are within industries, sectors or geographies, nor is their beginning to explore the potential opportunities and timing certain. risks presented by the socio economic responses to climate risk and manage the impact of potential carbon But one thing is clear - this complexity is no excuse to do prices, new low emissions technologies and changing nothing. Businesses deal with complexity and customer demands. uncertainty every day. Assessing how, when and where climate risks and opportunities may impact your The growing understanding that financial value is at risk business model is a critical first step. Disclosure of these through inaction - and that there is potential strategic potential impacts and your strategic responses in your and long term competitive advantage by climate-friendly Annual Report and Financial Statements is the second. strategies - is increasingly the focus of investors, regulators, customers and communities in the activities In this report, we aim to help businesses navigate the of Australian corporates. Studies repeatedly show ESG different disclosure requirements and recommendations (Environmental, Social and Governance) investments applicable in Australia that may be impacted by climate outperforming other investments. risks. This report will be useful to CFOs, accountants and other preparers as they look to communicate the Consequently investors and regulators are keen to impacts of climate on their business models, strategy, understand how companies are addressing the impact financial performance, and future prospects in their of climate (both transitional and physical). What risks Annual Reports and Financial Statements. and opportunities have been identified, what assumptions have been made in their analysis and how have strategies been flexed or redefined to minimise risks and maximise opportunities? We would say that while there has been progress in this area there is still room for significant improvements to be made, in terms of increasing the depth and focus of climate disclosure. Eileen Hoggett Adrian King Our key financial regulators and standard setters, ASIC, National Leader Global Chair – Sustainability, APRA and the ASX Corporate Governance Council have External Audit Climate Change & ESG Services all recently issued guidance emphasising the T: +61 2 9335 7413 T: +61 3 9288 5738 importance of considering climate change. E: ehoggett@kpmg.com.au E: avking@kpmg.com.au CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN 4 | Climate disclosures within the Annual Report Contents Why do I need to disclose? 6 What are climate risks and opportunities and what are their impacts? 10 Which risks should I disclose? 12 How should I report climate effects in the Front-end of the Annual Report? 16 How do I account for climate impact? 23 How do I disclose climate impacts in the Financial Statements 28 CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN Climate disclosures within the Annual Report 5 Purpose of this report The purpose of this report is to provide you with a summary of the various requirements, recommendations and guidelines that govern the preparation of the Annual Report and Financial Statements in Australia and help you identify where climate risks may need to be considered and disclosed for your company based on its specific facts and circumstances. 1 Climate risk is here – Climate risks may be 2 climate change is impacting material even if you do not Key take current corporate strategies, valuations and investor decisions. think they are – materiality is assessed from a user's perspective. aways 3 Regulators expect climate 4 Disclose impacts and key Be consistent – 5 impacts to be disclosed in the assumptions in the Financial disclosures in the Financial Annual Report – Statements – Statements need to be climate risk impact on assets and liabilities should be consistent with statements governance, business model, measured and recognised and strategies outlined in the strategy, risk management, and taking into account the impact Front-end of your Annual performance and prospects of climate change. Material Report (where relevant and should be made in the your climate-related assumptions material to a user's Annual Report – where material. and associated uncertainties understanding). should be disclosed even if there are no quantitative impacts on recognised balances. The Annual Report is a primary document through which companies communicate details of their activities, financial results and strategies to shareholders and other stakeholders. For the purposes of this report when we refer to the ‘Front-end’ of the Annual Report we include all sections of the Annual Report before the Financial Statements including the Directors Report. CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN 6 | Climate disclosures within the Annual Report Why do I need to disclose? “It is increasingly obvious that climate change is and will inevitably affect the economy, and it is increasingly difficult … for directors of companies of scale to pretend that climate change will not intersect with the interests of their firms. In turn, that means that the exposure of individual directors to “climate change litigation”. Noel Hutley SC CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN Climate disclosures within the Annual Report 7 Business and financial landscape Pressure has also come from investor groups, such as Climate Action 100+, the Investor Group on Climate Change (IGCC), signatories to the Principles The Australian regulators and standard-setters have a of Responsible Investment (PRI) and the UN consistent message on the significance of the risks Environmental Program Financial Initiative (UNEP FI), and opportunities generated by a changing climate. who represent many trillions of dollars of assets This consensus has built over the years since the under management. These groups continue to issue ratification of the Paris Climate Agreement in 2015 . statements confirming the importance of climate risk to the functioning of the capital markets, and their Climate risk is now widely recognised as a critical risk commitment to align their investment portfolios with to both business, society and the capital markets. In the Paris Agreement, a 1.5 degree future and to push the World Economic Forum’s Global Risk Report key corporate entities on climate risk management 2020, released in Davos on January 15th 2020, the and disclosure. top 5 risks facing businesses are all related to environmental factors associated with a changing Locally, the Australian Sustainable Finance Initiative climate. (ASFI) brings together leaders of Australia’s major banks, superannuation funds, insurance companies, In Australia, the first significant post-Paris warning to financial sector peak bodies and academia to develop business came from senior legal counsel Noel Hutley, a Sustainable Finance Roadmap. The roadmap, to be who issued an updated opinion in 2019 stating that: launched in 2020, will recommend pathways, policies “It is increasingly obvious that climate change is and and frameworks to better enable the financial will inevitably affect the economy, and it is services sector (through their allocation of capital) to increasingly difficult in our view for directors of contribute, amongst other things, to the Paris Climate companies of scale to pretend that climate change Agreement and support the achievement of the will not intersect with the interests of their firms. In Sustainable Development Goals. turn, that means that the exposure of individual directors to “climate change litigation” is increasing, Studies continue to show that ESG investing probably exponentially, with time.” outperforms ‘mainstream’ investments. This outperformance has also continued in the post In 2017, the first substantial guidance on climate risk COVID-19 era1. to the financial sector came from the Taskforce on climate-related Financial Disclosure (TCFD) which was set up by the G20 Financial Stability Board (and which KPMG was one of the inaugural members). The TCFD identified the broad range of climate risks and how they may impact an organisations income statement, cash flow and balance sheet. The TCFD specifically identified that disclosure was expected to improve over time as organisations ‘learn by doing.’ This insight is equally applicable to organisational understanding, as they work through the process of identifying a range of climate risks and potential impacts on their governance, strategy and risk management processes. Note: (a)Recommendations of the Task Force on Climate- related Financial Disclosures, Final Report: June 2017 1 Post COVID-19 era CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN 8 | Climate disclosures within the Annual Report Material climate-related risks need to be disclosed and accounted for within the Financial Statements and covered by the audit opinion CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN Climate disclosures within the Annual Report 9 Recent relevant regulatory developments within Australia In the last two years, regulators and standard setters in Australia have increased guidance and ‘encouragement to disclose’ on climate risk. Currently there are no explicit requirements to provide climate-related information in the Annual Report, but there are a number of implicit requirements or recommendations that are likely to be significant for a climate-exposed business. With growing investor and community expectations on companies to ‘do the right thing’, it is important that best practice be followed. AASB and AuASB ASIC A joint bulletin released by the standard-setters in ASIC updated its guidance in Regulatory Guide 247 December 2018, considers how AASB Practice Effective disclosure in an operating and financial Statement 2 Making Materiality Judgements should review (RG247) in August 2019 for boards preparing be applied to climate-related and other emerging an Operating & Financial Review (OFR) under the risks. The joint bulletin observes that climate change Corporations Act. The updated RG 247 requires a considerations have most commonly been disclosed discussion on environmental, social and governance outside of the Financial Statements (i.e. in the Front- risks (RG247.64) with a specific focus on systemic end of the Annual Report or a separate climate change risk (RG247.66) where material to a Sustainability/Integrated Report). listed entity's future financial position, performance or prospects. ASIC advises directors to consider But, importantly, it recommends that material additional disclosures as required under TCFD, climate-related risks need to be disclosed and as appropriate. accounted for within the Financial Statements and covered by the audit opinion. Further consideration of Further, ASIC has highlighted climate within their climate risk materiality is included in page 13 financial reporting surveillance areas of focus over below. Even though Practice Statement 2 is not recent years, specifically calling it out disclosures in mandatory, it represents the AASB’s best practice the OFRs. ASIC also highlights the need to consider guidance for making the materiality judgements climate in the determination of asset values in the required by Australian Accounting Standards when Financial Statements. preparing general purpose Financial Statements. APRA Companies should note that this Practice Statement is effective now. APRA continues to encourage the adoption of the Taskforce on Climate-related Financial Disclosure’s recommendations to assist entities with assessing, ASX Corporate Governance Council managing and disclosing financial risks associated The ASX Corporate Governance Principles and with climate change. APRA have also stated that Recommendations (4th Edition) address emerging they will focus on climate risk in future years to issues around culture, values and trust. develop a climate change financial risk Prudential Recommendation 4.3 asks boards to focus and report Practice Guide (PPG) as well as undertaking on their process to verify the integrity (accuracy vulnerability assessments which will consider the and balance) of all periodic corporate reporting estimated potential physical impacts of a changing including integrated and / or sustainability climate, including extreme weather events, on the reporting. Recommendation 7.4 specifically asks for balance sheet of regulated entities, as well as the disclosure of any material environmental or social risks that may arise from the global transition to a risks and how they are being or will be managed. low-carbon economy. Recommendation 7.4 specifically references use of the TCFD framework, where appropriate. The 4th Edition is effective for listed companies for financial Note: (a)Recommendations of the Task Force on Climate- year ends commencing on or after 1 January 2020. related Financial Disclosures, Final Report: June 2017 CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN 10 | Climate disclosures within the Annual Report What are climate risks and opportunities and what are their impacts? Identifying significant risks and opportunities The first step to reporting is an understanding of the types of climate risk and how they might impact on your company’s business model. Consideration should also be given to climate impacts on your supply chain and in your value chain. CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN Climate disclosures within the Annual Report 11 Transition Risks – Market Transition Risks – Policy, Legal and Reputational and Technology The company may be perceived to be undertaking The company or its customers are exposed to the activities that are damaging to the climate, resulting in potential impacts of climate-related legislation potential disruption to its key relationships. or regulation. For example: For example: – prolonged reputational damage resulting in – additional carbon costs or taxes may be imposed on significant loss of customers business activities – perceived exposure or poor climate response may – additional carbon costs or taxes may be imposed on reduce supply of capital or availability of insurance suppliers activities or may impact on the cost/ cover attractiveness of services provided by an entity in – inability to meet business customers’ qualifying the hands of a customer thresholds for environmental matters – increased risk of climate-related litigation – societal pressure for increased regulation or taxation – localised constraints may be placed on the ability to of key business activities operate specific sites – competitors may move to decarbonise. – widespread constraints may be placed on the ability Market and reputational risks may represent the most to operate the underlying business model immediate climate-related risks a company faces and – prohibitions on key business inputs or products may crystallise with little advanced warning. – loss of demand due to curtailment of Disclosures covering risk governance and management, customers’ activities and the company’s external impacts (and responses if – risk of emerging technologies aimed at supporting developed) may be of particular relevance. the global carbon transition. The political uncertainty inherent in climate-related regulation may lead to a wide range of potential outcomes – some may be negative, others may be Physical Risks – Acute and Chronic margin enhancing. Disclosure of how a specific risk is The company’s ability to operate successfully if directly being managed, the assumptions made and the process exposed to potential adverse physical effects from to assess potential impacts across different regulatory climate change. responses may be of particular relevance. For example: – damage to owned or public infrastructure – loss of access to key business inputs – disruption to key markets Strategic Opportunities - Resource – loss of demand for key products. Efficiency, Energy Source, Direct climate impacts may be the most significant risk Products/Services, Markets, Resilience for many companies in the long term. However, there The company may identify opportunities from a may be substantial uncertainty over both the physical climate-related matter – the counter to any of the impacts, and their ultimate financial impact – for risks identified above. example, the extent to which costs are borne by For example: consumers or producers. Which activities are exposed – demand for new or established products given to which risks may be of particular relevance. certain characteristics favoured under changing climate environment – damage to competitor business models as a result of a greater impact of climate risk on their business model than on your own. Where climate-related opportunities are an important part of a company’s value story, information on progress in this area may be material despite the opportunity being at the early stages of development. CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN 12 | Climate disclosures within the Annual Report Which risks should I disclose? Climate risks may be material even if you do not think they are – materiality is assessed from a user's perspective. CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN Climate disclosures within the Annual Report 13 Applying materiality to climate The result is that there is no difference in how quantitative and qualitative information should be information in the Annual Report approached. Materiality is assessed from the perspective of the primary users and the decisions Whilst s299A of Corporations Act and ASIC’s RG247 they make about resource allocation, not the do not explicitly refer to ‘materiality’, RG247.31 and magnitude of the source data. 32 state that the OFR in a directors’ report must contain information that shareholders in the entity Applying materiality requires a focused approach: would ‘reasonably require to make an informed specific information on the typically small number of assessment’ of the matters set out in s299A(1)(a)–(c). matters that could move the user’s assessment, Information that shareholders would ‘reasonably rather than superficial information on a collection of require’ needs to be determined by considering the matters that would not. Directors will need to take specific circumstances of the entity. account of the magnitude, time value, and likelihood of potential impacts when determining which matters ASIC gives guidance on good disclosure practices in would affect a user’s economic decisions and so Section E of RG247. Directors and preparers of an should be reported. OFR should present the narrative and analysis in a way that maximises its usefulness to shareholders. The AASB and AuASB Joint Bulletin provides further insights for companies that operate in the As a matter of good practice, an OFR should industries that are expected to be affected by present information in a single section, and in climate risks (as identified by the TCFD). The a manner that is: financial, energy, transportation, material and – complementary to and consistent with the annual buildings and agriculture, food and forest products financial report sectors should all explain whether and how climate-related risks have been considered, even – balanced and unambiguous if there are no material impacts disclosed in the – clear, concise and effective. balance sheet. ASX Corporate Governance Principles & What disclosures are material to the Recommendations (4th Edition) recommendation 7.4 Financial Statements? states that a listed entity should disclose whether it has any material exposure to environmental or social Could investors reasonably expect climate-related risks to risks and, if it does, how it manages or intends to have a significant impact on the entity and would that risk manage those risks. qualitatively influence investor’s decisions, regardless of the quantitative impact on the Financial Statements? Applying materiality to climate information in the Financial Yes No Statements Have these risks affected Are climate-related risks any of the amounts likely to have a material We sometimes hear that materiality is difficult recognised in or impact in the entity’s disclosed in the Financial specific circumstances? to apply to climate-related matters – but Statements? recommendations by the AASB and AuASB in their Joint Bulletin emphasise the need to assess the materiality of climate-related risks on financial Yes No Yes No statement disclosures. In making this assessment an entity should consider both quantitative and Determine Disclose Consider the No relevant why no risks when disclosures qualitative factors. disclosures impact determining necessary amounts Broadly, information will be material to the Financial recognised Statements if it could reasonably be expected to and make relevant affect the primary users’ economic decisions. disclosures Primary users include existing and potential investors, lenders and other creditors. Australian Accounting Standards link this assessment to the Source: Climate-related and other emerging risks practical question of whether the information would disclosures: assessing financial statement materiality using AASB/IASB Practice Statement 2 affect a user’s assessment of the company’s long- term future cash flows or management’s stewardship of its resources. Note: (a) Climate-related and other emerging risks disclosures: assessing financial statement materiality using AASB/IASB Practice Statement 2: December 2018 CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN 14 | Climate disclosures within the Annual Report There is a real danger that climate-related risks and their impact on performance and prospects are under disclosed in Annual Reports . CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN Climate disclosures within the Annual Report 15 Where should I report climate impacts? Disclosure guidance covering the We strongly encourage companies to approach climate- related matters as a part of their mainstream reporting, Front-end of the Annual Report and recognising that climate may impact each area of the Financial Statements Annual Report. This can range from financial statement impacts, in some cases, through to including Climate-related disclosures are often approached on a disclosures in the Annual Report on the material social siloed-basis, with a specific segment of the Front-end of and environmental risks (including climate risk) the Annual Report (basic TCFD and/or risk information), information required by shareholders. To do this, we devoted to the issue. A number of organisations will suggest the following ladder as a starting point for address the whole matter in the sustainability report. considering how to reflect climate-related matters in an Whilst this may allow companies to feel they have Annual Report. The remainder of this report is divided ‘ticked the climate box’, this is not the approach which into three different sections outlining the following regulators, investors and other key stakeholders wish to detailed disclosure recommendations: see. It is not considered good practice. – Guidance on disclosures relevant to the Front-end There is real danger that climate-related risks and their section of the Annual Report. impact on performance and prospects are under – Guidance on accounting for climate impacts. disclosed in Annual Reports or that financial statement disclosures are not consistent with disclosures made – Guidance on disclosures relevant to the Financial in the Front-end of the Annual Report, or in other Statements. documents. There is also a lesser risk of potential over-disclosure of matters that are not material and not useful to shareholders. Disclosures in the Front-end of the Disclosures in the Financial Accounting for climate impacts Annual Report Statements Matters Matters Obligations Climate- Contingent Climate- monitored as represent resulting from related liabilities related factors an emerging current and climate- expectations arising from which require and potential known risk & related resulting in climate- significant business issue opportunity matters adjustments related factors accounting to carrying judgements, amounts estimates or Governance and assumptions Business Model Strategy, Risk disclosures Management, Accounting Where the board Performance Considerations : is monitoring and Outlook Accounting Provisions Considerations: climate as a Financial Information E.g. onerous Asset potential risk statements needed to contracts or legal Impairments Financial (see pages disclosure: understand the and constructive statements 10-12) E.g. where Contingent principal risks obligations disclosure: expectations of liabilities and opportunities (see page 21) Accounting faced by the an asset’s value E.g. relating to judgements business and in use or useful potential and estimates how they are life no longer environmental support its Where climate managed/ remediation carrying amounts considerations mitigated (see obligations (see pages represent an pages 13-18) (see page 27) 22-24) important accounting judgement (e.g. valuation or impairment) (see page 28-29) CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN 16 | Climate disclosures within the Annual Report How should I report climate effects in the Front-end of the Annual Report? Climate risk impacts on Governance, Business Model, Strategy, Risk Management and Performance and Prospects should be made in the your Annual Report – if material, and not hidden away in a separate sustainability report CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN Climate disclosures within the Annual Report 17 FRONT-END CLIMATE REPORTING Governance Describing board oversight of climate risks and opportunities Changes in the 4th Edition of the ASX Corporate Governance Principles & Recommendations (4th Edition) focus the board’s attention on addressing emerging issues around, for example, culture, values and trust, and the importance of managing, monitoring and reporting on material non-financial risks (or value drivers) impacting operations today, or likely to do so in future. Climate change and the TCFD reporting requirements is explicitly referenced in Recommendation 7.4 (Risk). Furthermore, the 4th Edition requires the board to consider and report on how they verify the quality and accuracy of this additional ‘non-financial’ information for use by shareholders and other stakeholders. Likewise, ASIC’s guidance to boards, updated in 2019, on preparation of the operating & financial review (OFR) in their annual directors’ reports (RG247) also highlights a number of specific risks that currently, or will in future, materially impact on the entity’s financial performance, position and prospects. Again ASIC draws out climate change. This recent ‘regulatory’ guidance requires boards to assess and report on the sustainability of the company’s business model, including describing how they are responding to the potential short and longer term implications of climate-related matters. Shareholders’ understanding of and confidence in the process by which boards have assessed climate-related matters will be particularly important for companies that have identified lower-levels of climate-risk compared to the market perception of sector-exposure. TCFD Guidance gives specific guidance on what governance questions should be considered and disclosed. Governance: Disclosures that may need to TCFD Guidance that may assist with the disclosures address climate-related matters (where material): TCFD Aspect Disclosure Requirement Disclosure TCFD Guidance(a) Section Directors' report needs to include if the entity’s 1a Describe the processes and frequency for 299(1)(f) operations are subject to any particular and Describe informing the board and its committees on Corporations significant environmental regulation under a law of the board’s climate-related issues Act the Commonwealth or of a State or Territory— oversight disclosures should include policies and practices in of climate- Discuss how the board and its committees place to monitor and review performance (or links to related consider climate-related issues when: those details on-line) and provide details of the risks and entity’s performance in relation to compliance with • considering strategy, plans, and risk opportunities relevant environmental regulation. management policy Section 299A RG247.5 explains The objectives of the OFR • setting performance objectives Corporations requirements are to provide shareholders with a • monitoring implementation and Act and narrative and analysis to supplement the financial performance, and RG247.5 report and assist shareholders in understanding the Requirement operations, financial position, business strategies • overseeing major capital expenditures, for an OFR and prospects of an entity. To the extent that acquisitions, and divestitures. climate change is impacting current operations, Discuss how progress against goals/ targets for financial position, strategy and prospects, or is likely climate-related issues is monitored. to in future, then fulsome disclosure in the OFR is appropriate (linked to any financial disclosures in the 1b Describe any climate-related responsibilities Financial Statements). Describe assigned to management-level positions or management’ committees, covering: 4th Edition – Recommendation 4.3 states that a listed entity s role in R4.3 on the should disclose its process to verify the integrity of • whether the committee or management-level assessing integrity of any any periodic corporate report it releases to the position reports to the board and managing periodic market that is not audited or reviewed by an climate- • the associated organisational structure(s) corporate external auditor. related • the processes by which management is reports risks and The Commentary explains that investors informed about climate-related increasingly rely on a broader range of reporting, opportunities issues including integrated and sustainability reports. It is • how management monitors climate-related important for the board to explain the process by issues. which the entity has satisfied itself that the climate disclosures made are materially accurate, balanced and support provides investor decision making. Note: (a) This is a summary, the guidance is available at https://www.fsb-tcfd.org/publications/ CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN 18 | Climate disclosures within the Annual Report FRONT-END CLIMATE REPORTING Business Model The role of business model descriptions in supporting investor assessments of climate-risk Business model descriptions should provide essential context for the matters raised throughout the OFR. Information on the business model may be material to shareholders where it supports an assessment of the business’s exposure to uncertainties such as those associated with climate-related matters. ASIC’s guidance on the OFR emphasises the importance of explaining the business environment, for example the impact of material climate change matters on the continued availability and affordability Business model – climate-exposed features that may need to be disclosed Aspect Disclosure Requirement Section Discussion of an entity’s operations should 299A include an explanation of the entity’s business Corporations model and its effect on the entity’s operations. Act and This will include a discussion of results for key RG247 operating segments and major components of Section C – the overall result to assist the shareholders to Operations & understand the entity’s results. financial position Section RG247.40 Information about an entity’s 299A operations and financial position should be Corporations tailored to reflect the individual circumstances of Act and the entity and the business environment in RG247. 40 – which it operates. This includes the timing and Tailored impact of climate risks on the business model. information Section RG247.42 continues: This includes explaining the TCFD Guidance that may assist with the disclosures 299A key features of the business model – that is, (where material): Corporations how the entity makes money and generates Act and income or capital growth for shareholders, or TCFD RG247.42 - otherwise achieves its objectives. Where Disclosure TCFD Guidance(a) Operations material, entities will need to disclose the likely timing and impact of climate matters on its 2a Provide the following information: supply chain, activities and products and Describe services, as well as actions being taken to adapt the climate- – A description of what is considered to be the the business model, where required. related relevant short-, medium-, and long-term time risks and horizons, taking into consideration the useful Section RG247.43 An OFR should include matters that life of the organization’s assets or 299A are relevant to understanding an entity’s opportunities the infrastructure and the fact that climate- Corporations performance and the factors underlying its related issues often manifest themselves Act and results – in other words, the underlying drivers organization has identified over the medium and longer terms, RG247.43 – and reasons for the entity’s performance. Underlying over the – A description of the specific climate-related Examples provided include external drivers, i.e. short, drivers of issues for each time horizon (short, medium, new competitors, exchange rates, ESG risks medium, and performance and long term) that could have a material (RG247.64), and internal financial and non- long term. (or resources financial impact on the organization, and financial drivers i.e. major new products & (innovation); new markets (expanded customer relationships/ base); intangible and off-balance sheet assets capitals) (intellectual capital) (RG247.47); CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN Climate disclosures within the Annual Report 19 FRONT-END CLIMATE REPORTING Strategy Explaining strategic responses to Information on strategy may be material where it addresses shorter-term factors (for example the climate-related factors company’s strategy for managing a climate-stressed asset), and longer-term factors that affect the ASIC’s guidance on describing company strategy in achievement of the company’s disclosed outcomes the OFR states that it should cover both shorter and (for example, where they may necessitate a longer-term aspects of strategy. change in the company’s business model and strategic priorities). Strategy - disclosures that may need to address climate-related matters: Where the company has identified material climate risks or opportunities it is likely that shareholders will Aspect Disclosure Requirement need information on the company’s strategy for Section RG247.27 An OFR should … provide an responding to them. 299A overview of the entity’s business strategies, Corporations and prospects for future financial years. TCFD guidance will assist in explaining how climate- Act and related factors are incorporated into the strategy RG247.27 setting process. Information about an TCFD Guidance that may assist with the disclosures entity’s (where material): business TCFD Section RG257.54 - We consider that information on Disclosure TCFD Guidance(a) 299A business strategies and prospects for future Corporations financial years , should focus on matters that 2b Describe how climate-related issues serve as an Act and may have a significant impact on the future Describe input to financial planning, the time period(s) RG247.54 financial performance and position of the entity. the impact used, and how these risks and opportunities are discussion of climate- prioritized. Describe the impact on businesses RG247.55 – Section 299A does not specify any of business related and strategy in the following areas: particular time period for which business strategies and risks and strategies and prospects should be described… – products and services prospects opportunities for future financial ‘years’. The relevant time period will depend on the individual on the – supply chain and/or value chain circumstances of the entity, taking into account organization’s – adaptation and mitigation activities. factors such as the age of the entity, the businesses, business in which it is engaged, the industry in strategy, and – Investment in research and development. which it operates and the types of commitments financial Describe any climate-related scenarios used to it enters into. planning. inform the organisation’s strategy and financial planning RG247.57 – To make an informed assessment of an entity’s business strategies and future – operations (including types of operations and prospects, shareholders are likely to need location of facilities) Operating costs and information that provides them with context revenues about the entity as a whole – that is the OFR – capital expenditures and capital allocation sets out the entity’s business objectives, how – acquisitions or divestments these objectives are to be achieved and significant factors on which the achievement of – access to capital. these objectives depends. 2c Describe how resilient strategies are to climate- Where a company’s assessment of climate risks related risks and opportunities, taking into Describe and opportunities are material, the impact on consideration a transition to a lower-carbon the resilience current strategy and/ or on future plans should economy consistent with a 2°C or lower scenario of the be disclosed. and, where relevant, scenarios consistent with organization’s increased physical climate-related risks. 4th Edition The Commentary to Recommendation 1.1 says strategy, Principle 1 – that Generally speaking, the board should be taking into Consideration given to disclosing: Lay solid responsible under its charter for: (inter-alia): … consideration different – where strategies may be affected by climate- foundations defining the entity’s purpose and setting its climate- related risks and opportunities for strategic objectives;…overseeing management management in its implementation of the entity’s strategic related – how strategies might change to address and oversight objectives, instilling of the entity’s values and scenarios, such potential risks and opportunities performance generally; … overseeing the including a – the climate-related scenarios and associated entity’s process for making timely and balanced 2°C or lower time horizon(s) considered. disclosure of all material information;… satisfying scenario. itself that the entity has in place an appropriate risk management framework (both for financial and non-financial risks). Note: (a) This is a summary, the guidance is available at https://www.fsb-tcfd.org/publications/ CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN 20 | Climate disclosures within the Annual Report FRONT-END CLIMATE REPORTING Risk Management Explaining climate-related risks and how they are assessed climate-related risks may feature in a number of areas at the Front-end of the Annual Report: In the first instance, the company’s governance discussion may need to address how the board is monitoring the emergence of climate-related risk. Consideration of transition risks and physical risk are given particular emphasis in the Commentary to Recommendation 7.4 of the 4th Edition of the ASX Corporate Governance Principles & Recommendations (4th Edition). RG247.25 requires discussion of business performance and the factors underlying its results and financial position. This discussion is not limited to short-term factors. Longer term future prospects should also be considered, taking account of their timing and uncertainty to determine whether they are likely to affect an investor’s decisions. Directors are advised to consider disclosure of additional information in the OFR on systemic risks, like climate change (RG247.66). Where climate change risk is considered material to the current position and future prospects, the risk discussion should be specific to the nature of the risk identified. Disclosure cannot be approached as a box-ticking exercise. In some instances it may be the case that climate risk is a component of a broader risk, for example because it may result in changing customer needs or tendering criteria. As with any other material business risk, the OFR should explain how the risk is being managed, and its possible impact on the company. There may well be significant uncertainties over how climate risk ultimately affects the company. In this case disclosures may best be addressed by providing sufficient detail to support shareholders’ assessments of potential exposure, rather than on management describing a particular set of potential effects. Risks - disclosures that may need to address climate-related matters: Aspect Disclosure Requirement Section 299A RG247.62 – It is important that a discussion about future prospects is balanced. It is likely to be misleading to Corporations Act and discuss prospects for future financial years without referring to the material business risks… By ‘material RG247.62 Prospects for business risks’, we mean the most significant areas of uncertainty or exposure, at a whole-of-entity level, that future financial years could have an adverse impact on the achievement of the performance or outcomes disclosed in the OFR. Section 299A RG247.64 - An OFR should include a discussion of environmental, social and governance risks where those Corporations Act and risks could affect the entity’s achievement of its financial performance or outcomes disclosed, taking into RG247.64 Prospects for account the nature and business of the entity and its business strategy. future Section 299A Each risk that is disclosed should: Corporations Act and (a) be described in its context (e.g. why the risk is important or significant, and its potential impact on the RG247.65 Climate entity’s financial prospects) disclosures (b) include any relevant associated analytical comments (e.g. whether the risk is expected to increase or decrease in the foreseeable future) (c) where the risk relates to factors within the control of management, specify how these factors will be controlled or managed by the entity. Section 299A The board is specifically asked to consider climate change risk: Climate change is a systemic risk that could Corporations Act and have a material impact on the future financial position, performance or prospects of entities…. Directors may RG247.66 Climate also consider whether it would be worthwhile to disclose additional information that would be relevant under change disclosure integrated reporting, sustainability reporting or the recommendations of the Task Force on Climate-related requirements Financial Disclosures (TCFD), where that information is not already required for the OFR. 4th Edition – Principle 7 A listed entity should establish a sound risk management framework and periodically review the effectiveness Recognise and manage of that framework. risk 4th Edition - Glossary The 4th Edition’s glossary defines environmental risks as the potential negative consequences (including systemic risks and the risk of consequential regulatory responses) to a listed entity if its activities are adversely affect the natural environment or if its activities are adversely affected by changes in the natural environment. CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN Climate disclosures within the Annual Report 21 FRONT-END CLIMATE REPORTING Risk Management Risks - disclosures that may need to address climate-related matters: Aspect Disclosure Requirement 4th Edition – Recommendation 7.4 states that a listed entity should disclose whether it has any material exposure to Recommendation 7.4 environmental or social risks and, if it does, how it manages or intends to manage those risks. on environmental and The Commentary explains How an entity manages environmental and social risks can affect its ability to create social risk long-term value for security holders. Accordingly, investors increasingly are calling for greater transparency on the environmental and social risks faced by listed entities, so that they in turn can properly assess the risk of investing in those entities. It goes on to say: “One particular source of environmental risk relates to climate change. This includes: – risks related to the transition to a lower-carbon economy, including policy and legal risks, technology risk, market risk and reputation risk – physical risks, such as changes in water availability, sourcing, and quality; food security; and extreme temperature changes affecting an organisation’s premises, operations, supply chains, transport needs, and employee safety – many listed entities will be exposed to these types of risks, even where they are not directly involved in mining or consuming fossil fuels. The Council would encourage entities to consider whether they have a material exposure to climate change risk by reference to the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (“TCFD”) and, if they do, to consider making the disclosures recommended by the TCFD. TCFD Guidance that may assist with the disclosures (where material): TCFD Disclosure TCFD Guidance(a) 2a – describe the organisation’s relevant short-, medium-, and long-term time horizons, taking into consideration Describe the climate- the useful life of its assets or infrastructure related risks and – describe the specific climate-related issues potentially arising in each time horizon (short, medium, and long opportunities the term) that could have a material financial impact on the organisation organisation has identified over the short, – describe the processes used to determine which risks and opportunities could have a material financial medium, and long term. impact on the organisation – describe the risks and opportunities by sector and/or geography if applicable. 3a – describe the risk management processes for identifying and assessing climate-related risks including how Describe the the relative significance of climate-related risks is determined organisation’s – describe the factors considered including existing and emerging processes for identifying regulatory requirements. and assessing climate- related risks. – disclose the processes for assessing the potential size and scope of risks, definitions of risk terminology, and references to risk classification frameworks used. 3b – describe the processes for managing climate-related risks, covering decisions to mitigate, transfer, accept, Describe the or control those risks organisation’s – describe the processes for prioritising climate-related risks, including how materiality determinations are processes for managing made within their organisations. climate- related risks 3c – describe how processes for identifying, assessing, and managing climate-related risks are integrated into Describe how their overall risk management. processes for identifying, assessing, and managing climate- related risks are integrated into the organisation’s overall risk management. Note: (a) This is a summary, the guidance is available at https://www.fsb-tcfd.org/publications/ CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN 22 | Climate disclosures within the Annual Report FRONT-END CLIMATE REPORTING Performance and Outlook Reporting on progress managing Reporters need to strike a balance in the OFR disclosures and make sure disclosures made are climate-related matters relevant to requirements of Corps Act/RG247. ASIC’s guidance requires the OFR to include a Additional information of interest to other discussion of the underlying drivers that address stakeholders can be referenced and included matters relevant to understanding the company’s in other reports. operations, performance, position and future prospects. TCFD Guidance that may assist with the disclosures (where Where a climate-related matter has been identified as a material): material risk, a business environment factor, or a TCFD strategic priority, it is likely that the underlying drivers Disclosure TCFD Guidance(a) and progress in managing the matter will be relevant. 4a – provide the key metrics used to measure and As with other aspects of the OFR, disclosures should Disclose the manage climate-related risks and be included where relevant and material to metrics used opportunities, including those related to by the water, energy, land use, and waste shareholders. Climate-related impacts may be relevant, organisation management. Metrics should allow for trend for example, where the company is exposed to to assess analysis, and include a description of the relationship and reputational risks because of its climate- methodologies used to calculate or estimate activities. related risks the metric and – describe whether and how related Companies may also find they are being asked by opportunities performance metrics are incorporated into ratings agencies to disclose climate-related in line with its remuneration policies strategy and performance measures. Nevertheless, the Performance risk – provide internal carbon prices applied if disclosures in the OFR should be those relevant to a management applicable shareholder’s assessment of the company’s specific process. – provide climate-related opportunity metrics circumstances as they relate to its performance, such as revenue from products and services designed for a lower-carbon economy position and future prospects. 4b – provide Scope 1 and Scope 2 GHG emissions Metrics and targets should be designed to allow Disclose and, if appropriate, Scope 3 GHG emissions management to measure performance and ensure Scope 1, and the related risks, calculated using the that the business is being managed in a way that Scope 2, and, GHG Protocol methodology. Provide related, if appropriate, generally accepted industry-specific GHG minimises climate risks and ensures that opportunities Scope 3 efficiency ratios are maximised. greenhouse – GHG emissions and metrics should allow for gas (GHG) trend analysis Drivers of Performance - disclosures that may need to emissions, address climate-related matters: and the – provide a description of the methodologies related risks. used to calculate or estimate the metrics. Aspect Disclosure Requirement 4c – describe key climate-related targets such as Section RG247.25 An OFR provides an overview that Describe the those related to GHG emissions, water 299A Corps. enables shareholders to understand an entity’s targets used usage, energy usage, etc., in line with Act business performance and the factors underlying by the anticipated regulatory requirements or RG247.25 its results and financial position. organization market constraints or other goals, such as: a) Entity’s to manage Efficiency or financial goals; b) Financial loss business climate- tolerances; c) Avoided GHG emissions related risks through the entire product life cycle; and d) Section Information about an entity’s operations involves and Net revenue goals for products and services 299A Corps an explanation of the underlying drivers of its opportunities designed for a lower-carbon economy Act RG247 results, and of key developments in the reporting and – consider addressing whether the target is Section C period…. A discussion of the results for the key performance absolute or intensity based, time frames over Operations; operating segments and major components of against which the target applies, base year from financial the overall result would also assist shareholders targets. which progress is measured, and key position to understand the entity’s results. performance indicators used to assess progress against targets 4th Edition A listed entity should disclose its process to Principle verify the integrity of any periodic corporate – where not apparent, organizations should Recommend report it releases to the market that is not provide a description of the methodologies ation 4.3 audited or reviewed by an external auditor. used to calculate targets and measures The Commentary explains that increasingly, investors are relying on a broader range of corporate reports including integrated reports and sustainability reports. Boards will need to explain how they have verified the balance and accuracy of climate-related performance KPIs Note: (a) Applicable to large companies and other narrative disclosures. CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN Climate disclosures within the Annual Report 23 How do I account for climate impact? Companies that operate in the industries expected to be affected by climate risks need to consider if and how the financial consequences of these risks impact the recognition and measurements of assets and liabilities CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN 24 | Climate disclosures within the Annual Report ACCOUNTING FOR CLIMATE EFFECTS Accounting considerations Accounting considerations Provisions Whether or not climate-related risks impact the Australian Accounting Standards do not permit the recognition and measurement of assets and liabilities recognition of provisions for future operating losses. recognised in are Financial Statements very industry However, climate-related considerations may be and entity specific. Although many entities are getting applicable in relation to the following: better at identifying and articulating the climate-related – legal obligations resulting from changes or potential risks for their specific operations and are considering changes to law and regulation (for example, the how their evolution or development can be monitored, implementation of legislation aligned with the Paris it is safe to say that, at this time, for many entities Agreement). In general, obligations arising from there are a lot of unknowns and uncertainties when it regulatory change will not be recognised until the regulatory change is virtually certain of being enacted comes to considering the impacts (if any) on the recognition and measurement of assets and liabilities – obligations for litigation and/or fines or penalties arising from climate-related matters recognised in their Financial Statements. – constructive obligations arising from specific This section goes through some of the areas of the commitments, or past practice, to remedy Financial Statements where climate risk may have environmental damage made by the entity some form of impact on the recognition and – provisions for contracts assessed to be onerous as a measurement of assets and liabilities now or in the result of expected climate-related costs that do not future. Entities should apply the concepts of amount to provisions for loss making operations. materiality in ‘Which risks should I disclose’ (see page 8) to their specific facts and circumstances when considering these accounting considerations and revisit them periodically to determine whether positions, judgements and assumptions made continue to hold true. Key Accounting Considerations: Provisions(a) AASB 137: Provisions, Contingent liabilities, and Contingent Assets Provisions for Future operating losses do not meet the definition of a liability, provisions should AASB 137 future losses not be recognised for future operating losses. §63-64 Onerous contracts AASB 137 defines an onerous contract as ‘a contract in which the unavoidable AASB 137 costs of meeting the obligations under the contract exceed the economic §66-69 benefits expected to be received under it.’ Where the entity identifies an onerous contract it recognises the present obligation under the contract as a provision after taking account of any impairment losses on assets dedicated to the contract. Some contracts may be part of an overall loss-making operation. In our view, a provision should not be recognised for these contracts unless the cash flows related to the contract are clearly distinguishable from the operations as a whole. Otherwise, a provision would effectively be recognised for future operating losses. Consequences of Where details of a proposed new law have yet to be finalised, an obligation arises AASB 137 potential changes to only when the legislation is virtually certain to be enacted as drafted. The §22 law and regulation standard notes that in many cases it will be impossible to be virtually certain of the enactment of a law until it is enacted. Note: (a) This list is intended to provide an introduction to the accounting considerations only. The specific facts of each issue will need to be considered in the context of Australian Accounting Standards requirements as a whole. CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN Climate disclosures within the Annual Report 25 ACCOUNTING FOR CLIMATE EFFECTS Accounting considerations (cont.) Asset lives and values The effect of climate-related risk on financial and non-financial assets Climate-related factors, for example those that create the possibility of adverse regulatory outcomes, may affect an entity’s expectations of the future returns an asset is capable of generating, leading to a reassessment of asset useful lives, an impairment indicator or expenses not meeting the definition of an asset that can be capitalised. These same climate-related factors may impact the determination of asset fair values as they may influence a market participants view of what they would be willing to pay for the asset given the potential climate risk related uncertainties. In respect of financial instruments, where an entity has customers or lendees affected by climate-related risks, this may need to be considered in the assessment of expected credit losses. This is a forward-looking assessment that may require consideration of potential future economic scenarios and the likelihood of their occurrence, alongside whether there have been significant increases in credit risk. Asset lives, values and impairments: Key accounting treatments that may be affected by climate-related risk(a) AASB 13: Fair Value Measurement Assets accounted AASB13 defines fair value as the price that would be received to sell an asset ... in AASB 13 for at fair value an orderly transaction between market participants at the measurement date. §9 A fair value measurement using present value techniques is made under AASB 13 §B15 conditions of uncertainty because the cash flows used are estimates rather than known amounts. In many cases both the amount and timing of the cash flows are uncertain. AASB 13 §B16 Market participants generally seek compensation (ie a risk premium) for bearing the uncertainty inherent in the cash flows of an asset or a liability. A fair value measurement should include a risk premium reflecting the amount that market participants would demand as compensation for the uncertainty inherent in the cash flows. Otherwise, the measurement would not faithfully represent fair value. In some cases determining the appropriate risk premium might be difficult. However, the degree of difficulty alone is not a sufficient reason to exclude a risk premium. AASB 116: Property, Plant, and Equipment Reassessment of AASB 116 requires the residual value and the useful life of an asset to be AASB 116 asset useful lives reviewed at least at each financial year-end. §51 Example Disclosure: APA Group reviews the estimated useful lives of property, plant and equipment at the end of each annual reporting period. Physical, economic and environmental factors are taken into consideration in assessing the useful lives of the assets, including but not limited to asset condition and obsolescence, technology changes, commercial contract lives and renewals, global and regional gas supply-and-demand, and climate change based on TCFD scenario testing to 2030. Any reassessment of useful lives in a particular year will affect the depreciation expense. (Source: APA Group Annual Report 2019, page 76) Assets accounted for Where assets are measured under the revaluation model subsequent to initial AASB 116 under the revaluation recognition, revaluations should be made with sufficient regularity to ensure that §31 model the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. AASB 116: Property, Plant, and Equipment and AASB 138: Intangible Assets Recognition of AASB 116 only allows the cost of an item of property, plant and equipment to be AASB 116 expenditure as an asset recognised as an asset if it is probable that future economic benefits associated §7 with the item will flow to the entity, and the cost can be measured reliably. AASB AASB 138 138 has the same requirement, along with the item needing to meet the definition §18 of an intangible asset. Note: (a) This list is intended to provide an introduction to the accounting considerations only. The specific facts of each issue will need to be considered in the context of Australian Accounting Standards requirements as a whole. CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN 26 | Climate disclosures within the Annual Report ACCOUNTING FOR CLIMATE EFFECTS Accounting considerations (cont.) Asset lives and values (cont.) Asset lives, values and impairments: Key accounting treatments that may be affected by climate-related risk(a) AASB 6: Exploration for and Evaluation of Mineral Resources Impairment testing AASB 6 provides specific requirements for assessing the impairment of AASB 6 of mineral resource exploration and evaluation (E&E) assets. These differ to the requirements of §18 assets AASB 136. E&E assets are assessed for impairment only when specific facts and circumstances suggest that the carrying amount of the asset may exceed its recoverable amount, and on the transfer of the assets to development assets. In contrast to other assets, there is no requirement to assess whether an indication of impairment exists at each reporting date until an entity has sufficient information to reach a conclusion over the technical feasibility and commercial viability of extraction. This standard does however include industry specific examples of facts and circumstances that indicate an entity should test for impairment. AASB 9: Financial Instruments Financial instrument Measurement of expected credit losses AASB 9 measurement of An entity shall measure expected credit losses of a financial instrument in a way §5.5.17 expected credit losses that reflects: a) an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes b) the time value of money c) reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. Significant increase in credit risk AASB 9 AASB 9 requires at each reporting date, an assessment of whether the credit risk §5.5.9 on a financial instrument has increased significantly since initial recognition. Example Disclosure: Climate risk is a risk for the Group. The impacts of climate change have the potential to affect our customers’ ability to service and repay their loans, and the value of collateral the Group holds to secure loans. These impacts include long- term changes in climatic conditions, extreme weather events, and the action taken by governments, regulators or society more generally to transition to a low carbon economy. The Group is a major provider of non-retail loans. A key step in credit risk due diligence for non-retail lending is the assessment of potential transactions for environmental, social and governance (ESG) risks, including climate risk, through our ESG Risk Assessment Tool. All Institutional Banking and Markets loans, as well as large loans in other business units, are evaluated through the Group’s compulsory ESG risk assessment process. The risk of climate change is assessed at origination and during the annual review process. Exposures with medium or high risk profile are subject to additional due diligence and heightened consideration and assessment in the credit process. As at 30 June 2019, there is considered to be no material risk of loss due to climate-related risk in our client exposures. (Source: Commonwealth Bank Annual Report 2019, page 206) Note: (a) This list is intended to provide an introduction to the accounting considerations only. The specific facts of each issue will need to be considered in the context of Australian Accounting Standards requirements as a whole. CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN Climate disclosures within the Annual Report 27 ACCOUNTING FOR CLIMATE EFFECTS Accounting considerations (cont.) Asset lives and values (cont.) Asset lives, values and impairments: Key accounting treatments that may be affected by climate-related risk(a) AASB 136: Impairment of Assets Requirement to assess AASB 136 requires an assessment at the end of each reporting period of AASB 136 assets for impairment whether there is any indication that an impairment test is required. Intangible §9, 10 assets with indefinite useful lives and goodwill must be tested annually. Basis on which assets Level at which assets are assessed AASB 136 are assessed for Recoverable amounts are determined at an individual asset level unless the cash §22 impairment inflows are not largely independent of other assets or groups of assets. If this is the case, recoverable amount is determined on a cash-generating unit basis. Calculating value in use The calculation of an asset's value in use is based on the estimated future cash AASB 136 flows from the asset, taking account of possible variations in the amount or timing §30 of those future cash flows, time value of money (represented by the current market risk-free rate of interest), the price for bearing the uncertainty inherent in the asset and other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset. Longer-term assumptions for calculating value in use Budgets and forecasts used for value in use projections should cover a maximum AASB 136 period of five years, unless a longer period can be justified. Beyond this period §33 projections should be extrapolated using a steady or declining growth rate unless an increasing rate can be justified. This growth rate shall not exceed the long-term average growth rate for the products, industries, or country or countries in which the entity operates, or for the market in which the asset is used, unless a higher rate can be justified. Example Disclosure: The recoverable value estimates used in the impairment of assets analysis considers climate change risk through the adjustment of cash inflows associated with the planned closure of Group’s Power Station. This recoverable value estimate demonstrates that the carrying value of Group’s Operations CGU is not impaired. Management recognises that there is an increased pace of change in the energy industry and associated political landscape and will continue to work towards incorporating quantification of the financial impact of climate change and related policies within our annual financial filings in accordance with Australian Securities and Investments Commission (ASIC), Australian Prudential Regulation Authority (APRA), and Australian Accounting Standards Board (AASB) recommendations. Notwithstanding the above, any change to the planned closure dates of Group’s coal-fired generation plants as a result of climate change may have a material impact on the National Electricity Market and may result in a material change to AGL’s estimated cash inflows. No impairment loss has been recognised for the Customer Markets, Wholesale Markets or the Group Operations CGUs for the year ended 30 June 2019 (2018: $nil). (Source: AGL Annual Report 2019, page 111) Note: (a) This list is intended to provide an introduction to the accounting considerations only. The specific facts of each issue will need to be considered in the context of Australian Accounting Standards requirements as a whole. CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN 28 | Climate disclosures within the Annual Report How do I disclose climate impacts in the Financial Statements Material climate-related assumptions and associated uncertainties should be disclosed even if there are no quantitative impacts on recognised balances CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN Climate disclosures within the Annual Report 29 CLIMATE EFFECTS IN THE FINANCIAL STATEMENTS Disclosure considerations Even if entities determine that based on their operations, climate-related risks do not have a material Accounting judgements and estimates quantitative impact on the recognition and measurement Disclosure of climate-related accounting judgements of assets and liabilities recognised in Financial and estimates Statements at the present time, there is certainly an In some situations, climate factors may give rise to increasing focus and expectation from regulators and significant judgements and estimation uncertainty investors on more information being provided in the associated with the recognition or measurement of assets Financial Statements on this topic. As a result, it is or liabilities e.g. provisions. Where there is significant risk important, particularly for entities operating in sectors that these assumptions may change within the next that are more significantly impacted by climate, to financial year (for example because of an uncertain regulatory environment), AASB 101 requires the consider the disclosures they make in the notes to their assumptions on which the accounting is based to be Financial Statements and whether climate-related risks explained. discussions should be featured. For some entities this For assets carried at fair value, expectations of climate will manifest itself in judgement and estimation factors may be a significant component of the fair value uncertainties disclosures related to specific assets or assumptions required to be disclosed under AASB 13. liabilities. Climate-related risk may also be a consideration in This section goes through some of the possible impairment assessments for non-financial assets including disclosure requirements of the accounting standards goodwill and indefinite life intangible assets. Where the where information on climate-related risks may be impact of specific climate-related risks represents a key assumption in cash flow forecasts used to determine relevant to include based on an entity’s specific facts and recoverable amount (for example, because the assessment circumstances. makes assumptions about particular regulatory outcomes), AASB 136 and AASB 101 require this to be explained. Further AASB 136 requires disclosure of the impact of a reasonably possible change in these key assumptions (if material) where they are used to determine the recoverable amount of goodwill or indefinite life intangible assets. Note: (a) This list is intended to provide an introduction to the accounting considerations only. The specific facts of each issue will need to be considered in the context of Australian Accounting Standards requirements as a whole. CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN 30 | Climate disclosures within the Annual Report CLIMATE EFFECTS IN THE FINANCIAL STATEMENTS Disclosure considerations (cont.) Disclosure of key accounting judgements affected by climate-related risk(a) AASB 101: Presentation of Financial Statements Disclosure of For the entity’s significant accounting policies, AASB 101 requires the disclosure of those AASB 101 assumptions and judgements that have the most significant effect on the amounts recognised in the Financial §122 estimates affecting the Statements Financial Statements AASB 101 also requires disclosure of information about the assumptions the entity has made AASB 101 about the future and other major sources of estimation uncertainty that have a significant risk §125,129 of resulting in a material adjustment to assets and liabilities within the next financial year. The disclosures must include their nature and carrying amount. The standard provides the following examples of potential disclosures: a) the nature of the assumption or other estimation uncertainty b) the sensitivity of carrying amounts to the methods, assumptions and estimates underlying their calculation, including the reasons for the sensitivity c) the expected resolution of an uncertainty and the range of reasonably possible outcomes within the next financial year in respect of the carrying amounts of the assets and liabilities affected d) an explanation of changes made to past assumptions concerning those assets and liabilities, if the uncertainty remains unresolved. Example Disclosure: The recognition of site closure and rehabilitation provisions requires significant estimates and assumptions such as: requirements of the relevant legal and regulatory framework; the magnitude of possible contamination; the timing, extent, and cost of required closure and rehabilitation activity; and potential changes in climate conditions. These uncertainties may result in future actual expenditure differing from the amounts currently provided. The provision recognised for each site is periodically reviewed and updated based on the facts and circumstances available at the time. (Source: South32 Annual Report 2019, page 102) Additional disclosures AASB 101 requires additional disclosures when compliance with the specific requirements in AASB 101 Australian Accounting Standards is insufficient to enable users to understand the impact of §17(c) particular transactions, other events and conditions on the entity's financial position and financial performance. Disclosure of key accounting judgements affected by climate-related risk(a) AASB 13: Fair value measurement Disclosure of AASB 13 contains a comprehensive disclosure framework for amounts measured at fair value that AASB 13 assumptions aims to provide information necessary to assess: §91-99 relating to – the methods and inputs used to develop those measurements assets carried at fair value – the effect of the measurements on profit or loss or OCI of recurring fair value measurements that are based on significant unobservable inputs – for recurring Level 3 measurements. For ‘Level 3’ assets (that is those where the valuation depends on unobservable inputs), the disclosure requirements include the valuation technique and inputs used, quantitative information about AASB 13 significant unobservable inputs, valuation processes and policies, narrative description of the sensitivity §93 to changes in unobservable inputs, and narrative discussion of sensitivity to changes in unobservable inputs The entity must consider amongst other matters how much aggregation or disaggregation to undertake and whether additional information is needed to evaluate the quantitative information disclosed. Application guidance to AASB 13 discusses how risk should be taken into account, recognising that AASB 13 this may be done by the use of most-likely cash flows at a risk-adjusted discount rate, risk-adjusted Application cash flows (discounted at the risk free rate) or unadjusted cash flows discounted using a risk-premium Guidance Note: (a) This list is intended to provide an introduction to the accounting considerations only. The specific facts of each issue will need to be considered in the context of Australian Accounting Standards requirements as a whole. CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN Climate disclosures within the Annual Report 31 CLIMATE EFFECTS IN THE FINANCIAL STATEMENTS Disclosure considerations (cont.) Disclosure of key accounting judgements affected by climate-related risk(a) AASB 136: Impairment of Assets Asset AASB 136 requires disclosure of information for an individual asset or a cash-generating unit AASB 136 impairment where an impairment loss has been recognised or reversed during the period and the §130(f) assumptions recoverable amount is fair value less costs of disposal. Disclosures include: – for fair value measurements categorised within Level 2 and Level 3 of the fair value hierarchy, each key assumption on which management has based its determination of fair value less costs of disposal. Key assumptions are those to which the asset’s (cash- generating unit’s) recoverable amount is most sensitive. – the discount rate applied where a present value technique was used. Example Disclosure: Exploration and evaluation write-offs key assumptions This assessment requires management to make certain estimates and apply judgement in determining assumptions as to future events and circumstances; in particular the assessment of whether economic quantities of reserves have been found. Any such estimates and assumptions may change as new information becomes available. If, after having capitalised expenditure under the policy, the Group concludes that it is unlikely to recover the expenditure by future exploitation or sale, then the relevant capitalised amount will be written off to the income statement. Exploration and evaluation impairment key assumptions The FVLCD for the Kitimat LNG AOI was determined as the present value of the estimated future cash flows (expressed in real terms) expected to arise from the development and use of the asset using assumptions that an independent market participant would take into account. These cash flows were discounted using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the Kitimat LNG AOI. The FVLCD is classified as Level 3 on the fair value hierarchy and has been determined based on the following key assumptions: – Resource estimates - 50% of contingent resources (2C) included as disclosed in the reserves and resources statement on page 44 - 47. – Inflation rate – an inflation rate of 2.0% has been applied. – Discount rate – a post-tax discount rate of 10.5% has been applied. The discount rate reflects an assessment of the risks specific to the asset. – An estimated cost of supply on produced and third-party gas. – An evaluation of climate risk impacts. – Oil price – derived from long-term views of global supply and demand, building upon past experience of the industry and consistent with external sources. Prices are adjusted for premiums and discounts based on the nature and quality of the product. The nominal Brent oil prices (US$/bbl) used were: 2020 2021 2022 2023 2024 2025 63 63 68 72 76 801 1. Based on US$72.50/bbl (2020 real terms) from 2025 and prices are escalated at 2.0% onwards. (Source: Woodside Petroleum Annual Report 2019, page 93) Note: (a) This list is intended to provide an introduction to the accounting considerations only. The specific facts of each issue will need to be considered in the context of Australian Accounting Standards requirements as a whole. CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN 32 | Climate disclosures within the Annual Report CLIMATE EFFECTS IN THE FINANCIAL STATEMENTS Disclosure considerations (cont.) Asset lives, values and impairments: Key accounting treatments that may be affected by climate-related risk(a) AASB 6: Exploration for and Evaluation of Mineral Resources Goodwill or intangible AASB 136 requires disclosure of information for each cash-generating unit (group assets with indefinite of units) for which the carrying amount of goodwill or intangible assets with useful lives recoverable indefinite useful lives is significant in comparison with the entity's total carrying amount assumptions amount of goodwill or intangible assets with indefinite useful lives. For assets AASB 136 where the recoverable amount is based on value in use, disclosures include: §134(d) –the key assumptions affecting the recoverable amount –management’s approach to determining each key assumption –the period for which cash flows have been projected, and justification if this exceeds five years –the growth rate assumed beyond the projection period, and justification if it exceeds the long term average growth rate for the country or market of operation –the discount rate applied. For assets where the recoverable amount is based on fair value less costs of AASB 136 disposal, if fair value less costs of disposal is not measured using a quoted price §134(e) for an identical unit (group of units), disclosures include: –the key assumptions affecting the recoverable amount –management’s approach to determining each key assumption –the level of the fair value hierarchy (see AASB 13) within which the fair value measurement is categorised in its entirety –if fair value less costs of disposal is measured using discounted cash flow projections: –the period for which cash flows have been projected –the growth rate assumed beyond the projection period –the discount rate applied. If a reasonably possible change in a key assumption on which management has AASB 136 based its determination of the unit’s (group of units’) recoverable amount would §134(f) cause the unit’s (group of units’) carrying amount to exceed its recoverable amount: –The amount by which the unit’s (group of units’) recoverable amount exceeds its carrying amount. –The value assigned to the key assumption. –The amount by which the value assigned to the key assumption must change, after incorporating any consequential effects of that change on the other variables used to measure recoverable amount, in order for the unit’s (group of units’) recoverable amount to be equal to its carrying amount. Note: (a) This list is intended to provide an introduction to the accounting considerations only. The specific facts of each issue will need to be considered in the context of Australian Accounting Standards requirements as a whole. CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN Climate disclosures within the Annual Report 33 CLIMATE EFFECTS IN THE FINANCIAL STATEMENTS Disclosure considerations (cont.) Contingent liabilities and Financial instruments Disclosure of climate-related contingent liabilities Contingent climate-related liabilities (such as those relating to environmental remediation or potential climate-related litigation) are disclosed under AASB 137 where the likelihood of settlement is less than probable, but not remote. Climate-related investments and other financial instruments risk The systemic nature of climate-risk may create pockets of ‘concentration risk’ for some entities (for example equity investments or loan/trade receivables carrying exposure to a particular climate-exposed sector, geography, or wider climate outcome). AASB 7 requires the identification of groups of financial instruments that are exposed to a particular risk characteristic. Contingent liabilities disclosures that may be affected by climate-related risk(a) AASB 137: Provisions, Contingent liabilities, and Contingent Assets Disclosure of Unless the possibility of any outflow in settlement is remote, an entity shall AASB 137 contingent liabilities disclose for each class of contingent liability at the end of the reporting period a §86 brief description of the nature of the contingent liability and, where practicable: Financial instrument measurement of (a) an estimate of its financial effect expected credit losses (b) an indication of the uncertainties relating to the amount or timing of any outflow (c) the possibility of any reimbursement. A contingent liability is: AASB 137 (a) a possible obligation that arises from past events and whose existence will be §10 confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity (b) a present obligation that arises from past events but is not recognised because: (i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation (ii) the amount of the obligation cannot be measured with sufficient reliability. Financial instruments disclosures that may be affected by climate-related risk(a) AASB 7: Financial Instruments Disclosures Disclosure of The general disclosure principle in AASB 7 requires an entity to make qualitative and quantitative AASB 7 risks relating to disclosures that enable users of its Financial Statements to evaluate the nature and the extent of risks financial arising from financial instruments to which the entity is exposed at the reporting date, and how the instruments entity has managed them. An entity discloses summary quantitative data about its exposure to each risk arising from its financial instruments at the reporting date. The disclosure is based on information that is provided internally to key management personnel of the entity. Example Disclosure: Credit Risk incorporates the risks associated with us lending to customers who could be impacted by climate change or by changes to laws, regulations, or other policies adopted by governments or regulatory authorities, including carbon pricing and climate change adaptation or mitigation policies. (Source: ANZ Annual Report 2019, page 151) Concentration Concentrations of risk arise from financial instruments that have similar characteristics; and are AASB 7 risk exposures affected in a similar manner when there are changes in economic or other conditions. Identifying guidance concentrations of risk is a matter of judgement and therefore an entity discloses: B8 – a description of how management determines concentrations – a description of the shared characteristics that identify each concentration - e.g. counterparty, geographic area, currency or market – the amount of the risk exposure associated with financial instruments sharing that characteristic. Note: (a) This list is intended to provide an introduction to the accounting considerations only. The specific facts of each issue will need to be considered in the context of Australian Accounting Standards requirements as a whole. CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. MARGIN Liability limited by a scheme approved under Professional Standards Legislation. MARGIN MARGIN CROP MARKS MARGIN MARGIN MARGIN CROP MARKS MARGIN 34 | Climate disclosures within the Annual Report Contact us to dicuss your specific needs Sustainability Services Adrian King Mark Spicer Global Chair – Sustainability, Sustainability Services Climate Change & ESG Services T: +61 2 9335 8020 T: +61 3 9288 5738 E: markspicer@kpmg.com.au E: avking@kpmg.com.au Better Business Reporting Sarah Newman Nick Ridehalgh Sustainability Services Better Business Reporting T: +61 3 9838 4087 T: +61 2 9455 9312 E: senewman@kpmg.com.au E: nridehalgh@kpmg.com.au Department of Professional Practice Zuzana Paulech Julie Locke Department of Professional Practice Department of Professional Practice T: +61 2 9335 7329 T: +61 2 6248 1190 E: zpaulech@kpmg.com.au E: jlocke1@kpmg.com.au © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. It is provided for information purposes only and does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to influence a person in making a decision, including, if applicable, in relation to any financial product or an interest in a financial product. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. To the extent permissible by law, KPMG and its associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any loss or damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement or otherwise). The views and opinions contained in the publication are those of the authors and do not necessarily represent the views and opinions of KPMG, an Australian partnership, part of the KPMG International network. The authors disclaims all liability to any person or entity in respect to any consequences of anything done, or omitted to be done. CROP MARKS CROP MARKS © 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a MARGIN Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 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