Top 5 considerations for climate-related corporate governance released in new analysis

Top 5 considerations for climate-related corporate governance released in new analysis

MinterEllison, a commercial law firm in the Asia-Pacific, has published new analysis which indicates that companies have not been prioritising their surveillance of their climate change risk disclosures. In their analysis of annual reports for the 2019 financial year, MinterEllison found that only 21 (7%) of ASX300 companies had ‘meaningful’ climate change risk disclosures, compared with 137 (45.5%) of reports containing little or none.

            This does not bode well for many listed companies in light of the Australian Securities & Investments Commission’s (ASIC) recent announcement that it will prioritise this in the 2020 financial year. So how do boards assure themselves that they are having meaningful climate change risk disclosures? To answer this question, MinterEllison has set out their top 5 climate change-related governance issues for directors to consider this reporting season.

Narrative disclosures – TCFD and stress-testing move from gold standard to base expectation

An increasing proportion of mainstream institutional investors now expect investee companies to apply the governance, strategy, risk metrics and disclosure framework set out in the 2017 Recommendations of the Bloomberg Taskforce on Climate-related Financial Disclosures (TCFD). One of the key TCFD Recommendations relates to stress-testing and scenario planning of business strategies against a plausible range of climate futures, emphasising the inclusion of information on the impact of climate change on financial performance, position and prospects.

Consider how your business has made credible inroads on the journey towards compliance with the Recommendations of the TCFD in FY20.

‘Net zero’ emissions transition

Mainstream investors and large proxy advisors are increasingly voting in favour of activist shareholder resolutions that seek corporate disclosure of net zero emission strategies – often against the recommendation of management.

Consider how you envision your business will continue to thrive in a ‘net zero’ economy, and your strategy for transitioning your business.

…and a roadmap for achieving Paris Agreement goals

Bare pledges of ‘support for Paris Agreement goals’ are not enough. In FY20, investors are looking for a roadmap of short- and medium-term targets against which to assess a corporation’s net zero transition commitment, and evidence of credible progress on that journey.

Consider your business plans and their progression towards achieving emissions reduction commitments and your strategy for achieving these goals. 

Valuation and impairment – relevance of climate change-related assumptions to financial reporting and audit

Standard setters made clear that they expect climate change-related assumptions to be clearly stated, highlighting the potential to be a material accounting estimation variable, impacting on asset useful lives, fair valuation, impairments and provision for bad and doubtful debts.

What consideration has been given to the climate-related variables that may materially impact on your accounting estimates (financial position) and prospects?

Governance, executive remuneration and their relationship with climate change strategy.

Companies should benchmark their governance of climate change strategy and risk management against the recommendations of the TCFD and ensure that a portion of the discretionary remuneration of relevant senior officers is linked to progress against the business’ climate targets.

Consider your company’s governance structures and if they are benchmarked against the TCFD.

View a PDF version of this report here.

View the press release here.

Cover photo by Charles Forerunner on Unsplash.

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