The results from this year’s assessment demonstrate where different sectors are on their climate journey. The energy and insurance sectors, for example, have typically been conducting climate scenario analysis for many years. For the energy sector, unsurprisingly this has focused on transition risk associated with decarbonisation. Meanwhile, the insurance sector’s focus on the impacts of physical climate risks builds on existing disaster risk modelling practices. As a result, the energy and insurance sectors are more mature than other sectors in their ability to conduct scenario analysis and integrate this work into their climate and business strategies.
On the flip side, sectors such as telecommunications and agriculture, food and forestry have historically been less exposed to climate risks, and are therefore early on their journey to understanding the implications of climate risks on their businesses.
Regulatory attention also has a role to play. We have seen in the banking and other financial sectors that companies generally scored better across the board for TCFD recommendations, in part due to the highly regulated and compliance-focused nature of the financial services sector.
Moving towards mandatory disclosures
If regulatory attention is anything to go by, we can expect to see developments in this space leading to better climate-related disclosures, and ultimately action, in Oceania.
New Zealand recently introduced mandatory disclosures, and both major political parties are relatively aligned on the need for action on climate change. While the choice and focus of policy mechanisms vary, the tone from the top has given New Zealand companies greater certainty over the years.
In contrast, the historical lack of government-mandated obligations to disclose climate-related risks, in combination with the lack of policy certainty at the federal level in Australia, has made it difficult for companies to set targets and allocate resources to address climate change. However, the Labor Government recently announced its plan to work with regulators to introduce mandatory disclosures in line with global standards.
Australian Treasurer, Jim Chalmers, and regulators, the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC), have endorsed the International Sustainability Standards Board (ISSB) as the main reporting regime for climate-related disclosures. This is a positive step forward for corporate reporting in Australia and an indication of the direction of climate action.
A standardised reporting framework, coupled with the legislated emission reduction targets and imminent amendments to the Safeguard Mechanism, could give companies some certainty regarding what they need to be working towards. The Safeguard Mechanism may not apply to all companies across Australia, but it is a significant step on the road to 2030, and we expect to see much stronger company targets and more ambitious action stemming from this.
Beyond disclosures, APRA and ASIC are turning their attention to ESG generally. This year, APRA issued guidance for banks, insurers and pension funds on managing and disclosing climate-related risks, including physical, transition and liability exposures. And ASIC warned companies against making misleading and deceptive statements in relation to sustainability-related products, and published guidance on how to avoid greenwashing. These developments are indicative of a collaborative approach from the regulators as companies grapple with the climate challenge.
Overall, we expect that greater policy certainty and mandatory disclosures in Australia will lead to a greater organisational focus on climate risks, and an increase in coverage and quality of disclosures in other sectors.
Stakeholder pressure driving disclosure of transition plans
Investor pressure has historically been the key driver for better climate risk disclosure. Shareholders are increasingly asking ESG-related questions at AGMs. We are also seeing resolutions raised by activist investors getting more support from institutional investors. These pressures are driving companies to publish their transition plans and go beyond disclosure to action. Stakeholders are demanding transition plans with substance: they want to see information on capital allocation, targets and roadmaps for how companies plan to achieve their goals.
While stakeholder pressure is pushing the big emitters to consider their decarbonisation strategies, there is a growing gap between companies that face this demand and those that do not.
Our analysis found that two-thirds of companies disclose their decarbonisation strategy, and that the Oceania figure is higher than the overall global score (60.59%). This is in line with the overall better performance by companies in Oceania compared to globally.