By Robin Hamaker-Taylor
Late summer 2020 has seen a flurry of activity relating to climate risk disclosure requirements, frameworks and consultations, with several milestone announcements and in the last few weeks from Australia, the US, and New Zealand in particular. We bring these announcements together here, as well as highlight a UK consultation on climate risk governance and reporting in pension schemes, closing 7 October 2020.
On September 14th, a set of guidelines on physical climate risk assessment and disclosure was launched in Australia by The Climate Measurement Standards Initiative (CMSI). The CMSI is an Australian industry-led collaboration established to assist with, and support, climate-related financial disclosures. CMSI involves insurers, banks, scientists, reporting standards professionals, service providers and supporting parties.
The CMSI has recommended financial disclosure guidelines and developed scientific scenario specifications for the purpose of disclosure of scenario analyses for climate-related physical damage to buildings and infrastructure. The open-source guidelines are voluntary, and provide Australian banks, financial institutions and insurers with robust scientific and technical information on how to assess the risk of climate-related damage associated with a set of acute and chronic risks. The guidelines aim to allow Australian firms to determine their physical risks from these extreme events in a credible and consistent way, and to disclose physical risks under the TCFD recommendations. Importantly, this guidance sets out a potential framework for regulation of climate risks, should regulators decide to mandate disclosures in Australia.
Involved parties include: QBE, Suncorp, IAG, RACQ, NAB, Westpac, Commonwealth Bank, HSBC Australia, Munich Re, Swiss Re, Leadenhall CP, MinterEllison and Investor Group on Climate Change. The new CMSI guidelines can be downloaded here.
All eyes were on New Zealand this month as well, when the Government announced plans to make climate-related financial disclosures mandatory for certain firms, on 15 September. The Cabinet agreed to introduce a mandatory regime through an amendment to the 2013 Financial Markets Conduct Act. Disclosures would be required from around 2023, if approved by Parliament, on a ‘comply-or-explain’ basis. At present, around 200 entities in New Zealand would be required to produce climate-related financial disclosures in line with the TCFD recommendations:
- All registered banks, credit unions, and building societies with total assets of more than $1 billion;
- All managers of registered investment schemes with greater than $1 billion in total assets under management;
- All licensed insurers with greater than $1 billion in total assets under management or annual premium income greater than $250 million;
- All equity and debt issuers listed on the NZX; and
- Crown financial institutions with greater than $1 billion in total assets under management.
There is emerging evidence that key organisations in the United States are starting to understand climate risk as a financial risk. Specifically, the US Commodity Futures Trading Commission (CFTC) released a report on 9 September 2020, entitled: Managing Climate Risk in the U.S. Financial System. The report, produced by the Climate-Related Market Risk Subcommittee of the Market Risk Advisory Committee is the first of-its-kind effort from a US government entity.
The work was instigated by CFTC Commissioner Behnam, and comes after the CFTC announced in 2019 that a climate sub-committee of the Commission on climate risk would be established. Commissioner Benham recognised the global progress toward climate risk supervision, not least by the network of 60+ central banks and supervisors (known as the NGFS) who are sharing best practice on the matter. The US is not yet a member of the NGFS, and though some states, private sector actors and financial institutions have been assessing and disclosing climate risks, the federal government progress on this is sluggish.
The report brings together a set of over 50 recommendations to mitigate the risks to financial markets posed by climate change. Though regulation of climate risk and mandated disclosure is perhaps a ways off in the US, and in many other countries, this landmark report could help pave the way for improved oversight of climate risks, in particular as the report finds that Existing statutes already provide U.S. financial regulators with wide-ranging and flexible authorities that could be used to start addressing financial climate-related risk now. The full report can be downloaded here.
In late August, the UK Department for Work and Pensions (DWP) put out a consultation which seeks views on policy proposals to require trustees to address climate risks and opportunities. In particular, this would be for trustees of larger occupational pension schemes and authorised schemes. It also invites responses on proposals to disclose these in line with the recommendations of the international industry-led Task Force on Climate-related Financial Disclosures (TCFD).
It is proposed that among the activities required would be calculating the ‘carbon footprint’ of pension schemes and assessing how the value of the schemes’ assets or liabilities would be affected by different temperature rise scenarios, including the ambitions on limiting the global average temperature rise set out in the Paris Agreement. The disclosures would be required to be made publicly available, referenced from the schemes’ Annual reports and Accounts, and pension savers informed of the availability of the information via their annual benefit statement.
The consultation closes on 7 October 2020, and more information on responding to the consultation can be found here.