Climate Risk Disclosure Framework in Development

Earlier this week, the Treasury released a consultation paper asking for input on the government’s proposed development of climate risk disclosure mandates. The Albanese government announced their intention to make it compulsory for banks and other big businesses to be transparent about their climate action after they came to power.

What is ‘Climate Risk Disclosure’?

‘Climate risk’, in the world of financial institutions, refers both to the direct physical risks of climate change, as well as the run-on risks it may pose to business. For example, rising temperatures might impact home and life insurance policies, or the transition to renewables might increase uncertainty in investment.

Climate risk disclosure refers to the obligation of businesses to be transparent about what their company is doing to mitigate these risks. Open disclosure of this kind can encourage investment by increasing clarity for stakeholders, and also combat greenwashing by holding businesses accountable for their climate action promises.

Climate risk disclosure frameworks are already operational in New Zealand and the UK, and are in development in the US, Switzerland and Singapore. These frameworks have made it mandatory for major businesses and financial institutions, including large banks, insurers and credit unions.

The Task Force on Climate-Related Financial Disclosures (TCFD), created by the Financial Stability Board, has developed some of the most widely-used guidelines for climate risk reporting.

Australia’s own system will be designed in line with the International Sustainability Standards Board’s climate reporting guidelines. Erwin Jackson, the director of policy at the Investor Group on Climate Change (IGCC), said he was glad to see Australia “catching up” to the new global benchmark.

Describing the current situation, he said, “we have very large number of companies voluntarily disclosing at the moment but one company discloses one thing and another company discloses another thing and it’s really impossible for investors to get clear information to compare companies.”

Australia’s financial services sector has welcomed the government’s proposed disclosure mandate, with support from industry giants like the Australian Council of Superannuation Investors, Allianz, and the big four banks.

Business Actors and Climate Change

While there’s sustained and concentrated pressure on governments to implement progressive climate action programs, it’s not always the same for the business world. Although activists push companies to green their business, the profit-drive of the market means many people see governments as the more effective global actors to lobby.

But this doesn’t have to be the case – and in fact, pushing for more aggressive climate action among corporations can be more efficient, given their power. Treasurer Jim Chalmers is optimistic about “a new harmony between profit and planet” he sees in the global market.

And if Australia is to contribute to this harmony, the government believes “more information and greater transparency on how [businesses] are responding to climate change” is essential.

Any climate risk disclosure legislation will also have to address companies’ risk assessment needs.

We have a long way to go. Recent research by the Australian Conservation Fund found our major banks and super funds are failing – ‘abysmally’ – to assess the damage their policies are having on the environment.

Only three of the organisations surveyed had assessed risks related to the destruction of nature and their mitigation. None of the big four banks had deforestation targets, and only half of surveyed organisations had a carbon offset policy.

As ACF’s business and nature campaigner noted, this is unacceptable given that “The financial sector bears particular responsibility for reversing the nature crisis because it decides which activities are financed or insured and under what conditions.”

Hopefully the climate risk disclosure mandates – which will be implemented as early as next year – will be a step in the right direction. The consultation paper will be open for submissions from industry participants until Feb 17, 2023.

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