There is a "real danger" company directors are exposing themselves to litigation by taking a "box ticking" approach to disclosing climate change-related financial risks in annual reports, KPMG warns.
KPMG global head of sustainability Adrian King and Australian head of audit Eileen Hoggett, in a world-first guide to be released on Monday, said climate-related disclosures were often "siloed" in a front-loaded section of the annual report, rather than incorporated throughout financial documents relied on by shareholders and investors.
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| Drought-stricken countryside in western NSW ... companies have been
warned to properly disclose climate-related financial risks. Janie Barrett |
"There is real danger that climate-related risks and their impact on performance and prospects are under-disclosed in annual reports," write Mr King and Ms Hoggett in their report, which seeks to provide guidance to firms on how to fulfil expectations set by regulators on the evolving issue.
KPMG said disclosures outlining the risks faced by investors due to a changing climate, financial risks caused by a warming planet, or by regulations to cap emissions, or legal, social and reputational risks, were often being lumped into a separate "sustainability report".
Also, they were not connected to financial statement disclosures and were not consistent with disclosures being made in other company documents.
"While this may allow companies to feel they have 'ticked the climate box', this is not the approach which regulators, investors and other key stakeholders wish to see. It is not considered good practice," the report said.
"Climate risk impacts on governance, business model, strategy, risk management and performance and prospects should be made in the annual report – if material, and not hidden away in a separate sustainability report.
"Disclosure cannot be approached as a box-ticking exercise."
In rating agency sights
KPMG said companies should disclose the assumptions behind estimations of potential exposure to climate risks where there was significant uncertainty on the effects of climate change, and warned that rating agencies were also likely to probe businesses for information on climate exposure.
Last week, the Australian Prudential Regulation Authority told a senate committee it would delay the introduction of new climate-focused stress tests on the local banking sector because of the coronavirus pandemic.
However, prudential regulators, global central banks and securities regulators are increasingly incorporating climate-related risks and disclosures into their regulatory toolbox.
A landmark legal opinion published by barristers Noel Hutley, SC, and Sebastian Hartford Davis, which argued boards that failed to consider climate-change risks could be found liable for breaching their duty of care and diligence, has been endorsed by Australia's financial regulators and royal commissioner Kenneth Hayne.
Recent research from investment bank Citi found Australian corporations were producing lengthy sustainability reports that had no influence on company decision-making as business chiefs were continuing to buy emissions-intensive assets despite flagging emissions as key business risks.
Citi analyst Zoe Whitton found more than 3000 major global companies had started to disclose climate-related risks, meaning two-thirds of companies were giving investors guidance on how climate change or the transition to a low-emissions economy could affect operations.
However, only one-third of current market disclosures were "quality".
Mr King said climate change had taken a back seat to short-term financial survival during the pandemic, but investors were still hungry for information on climate risk.
"There's no doubt regulators are coming, but regulators usually set the minimum standards to pick up the laggards," Mr King said.
"There's a real opportunity to demonstrate that you fully understand this topic, communicating the response and demystifying this topic. All anyone wants to know is do you understand the risk and how are you going to respond to it."
Links
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