ESG: The climate conundrum | Investments & Pensions Europe

Had Exxon Mobil reported its reserves differently in 2016, investors might have taken a another view of the company’s future trajectory. The company reported its Kearl oil sands as reserves, and in 2016 was ordered to debook them by the US Securities and Exchange Commission (SEC). An important shift in its disclosures ensued in March 2017, with proved reserves cut by 3.3bn oil-equivalent barrels.

In October 2016 the company admitted that, under the SEC definition of proven reserves, certain quantities of oil, such as those associated with the Kearl oil sands operation in Canada, would not qualify as proven reserves at the end of the year.

According to Tarek Soliman, senior analyst at the CDP, a non-governmental organisation based in the UK, the systematic practice of considering climate-related risk would have resulted in a different disclosure. It would transform investor perceptions if replicated across the whole oil and gas sector. “If the company were to integrate climate risk into its assessments, it would highlight that these assets show a high propensity to become impaired. They would have been downgraded to a resource rather than a reserve, and this problem would have been foreseen,” says Soliman.

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Comment: Could climate cause the next financial crisis? | IPE, Paul Fisher

Tail risks have an unfortunate habit of becoming reality. That was one of the clearest lessons of the 2008 financial crisis – an event that I lived through and had to deal with, as a senior figure in the Bank of England’s markets department.

The financial sector is all about risk. Taking it. Avoiding it. Monitoring, measuring, and limiting it. And, crucially, making money from it. When the improbable actually happened, ‘safe’ AAA-rated assets became junk, liquid markets dried up, the trust that oiled the financial system evaporated and we had to take the most extraordinary measures in response.

But new risks are emerging around climate change that are poorly understood, hard to manage and, at the extreme, pose threats to the financial system not unlike those we faced in 2008.

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Banks come out on top for climate change disclosure | Financial Standard

In its 10th annual corporate sustainability report, which assesses the level of sustainability disclosure by ASX200 companies, ACSI found  86% of banks were rated as "leading" or "detailed" in their reporting, while five out of seven banks reported on three key indicators: emissions, a policy and a target.

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Statement of Support for the TCFD Recommendations and Supportive Quotes

Could climate risk disclosure be the new bottom line for Australian companies? | The Guardian

Some of Australia’s largest listed companies, including Woodside, Rio Tinto and Santos, are likely to face sweeping changes to the way in which they model, plan for and disclose risk from climate change to investors. How they respond will affect their ability to attract funding from lenders, insurers and superannuation funds who are under pressure to stress-test investments for a carbon-constrained future.

The release last week of a report by the Financial Stability Board’s taskforce on climate-related financial disclosures is expected to add pressure on publicly listed companies to formalise their climate risk disclosure practices – particularly through scenario analysis – or risk investors pulling finance and rating agencies making assumptions about their risk profile.

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Final TCFD Recommendations Report Released

"Recognizing that climate-related financial reporting is still evolving, the Task Force’s recommendations provide a foundation to improve investors’ and others’ ability to appropriately assess and price climate-related risk and opportunities. The Task Force’s recommendations aim to be ambitious, but also practical for near-term adoption. The Task Force expects to advance the quality of mainstream financial disclosures related to the potential effects of climate change on organizations today and in the future and to increase investor engagement with boards and senior management on climate-related issues."

Disaster Alley, Climate Change Disaster and Risk | Ian Dunlop and David Spratt

The first responsibility of a government is to safeguard the people and their future well-being. The ability to do this is threatened by climate change, whose accelerating impacts will also drive political instability and conflict, posing large negative consequences to human society which may never be undone. This report looks at climate change and conflict issues through the lens of sensible risk-management to draw new conclusions about the challenge we now face. 

Shareholders described as more savvy on climate proposals | IR Magazine

Professionals say changes in wording of proposals can influence voting

One of the trends to emerge from this year’s proxy season has been the growing success of climate change-based shareholder resolutions – and speakers on a KPMG webinar this week attributed that success in part to more effective phrasing.

Environmentally conscious shareholders are learning how to catch the attention of large institutional investors by adapting the words used in the resolutions they file for AGMs, according to professionals. Specifically, they say, requesting that public companies report on the risks and business impact of climate change is helping concerned shareholders gain traction.

‘The reason we’ve seen a massive jump in support [for these proposals] is that the shareholder community putting them forward has become much more intelligent and sophisticated about the wording it uses,’ says Brendan Sheehan, managing director of Rivel Research Group.

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Climate change risk through a corporate governance & liability lens | Sarah Barker

Climate change risk through a corporate governance and liability lens - presented by Sarah Barker, Special Counsel, MinterEllison at the 2017 May Director Forum in Sydney.

The heat is now on Directors when it comes to climate change | Lexology

In a recent ASIC liaison meeting, a number of corporate governance items were flagged as being a current focus of ASIC. Of particular interest is the emerging focus on climate change risk management by directors and implications for directors’ duties.

The opinion ‘Climate change and directors’ duties’ published by the Centre for Policy Development in October 2016 (download here) promoted wide spread discussion about the implications of climate change risk for directors. It argues that Australian company directors who fail to consider such risks now could be found liable for breaching their duty of care and diligence under section 180 of the Corporations Act in the future.

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Unsafe to ignore climate risks, says APRA | AFR

The prudential regulator says it is "unsafe" to ignore climate change risks just because the topic is controversial, as at least one of the major banks reviews the mortgage risk associated with rising sea levels.

Turnbull is on a 'clean coal' collision course with APRA | The AFR

Prime Minister Malcolm Turnbull is on a collision course with the Australian Prudential Regulation Authority over his government's crusade for Australia's $10 billion green bank to invest in "clean coal" power stations, experts say.

The independent banking regulator entered the climate policy debate 10 days ago with a speech by APRA member Geoff Summerhayes warning that banks and their directors could be legally liable if they fail to consider the increasing risk of carbon-intensive assets such as power stations becoming "stranded'.

APRA's dramatic intervention came days after Treasurer Scott Morrison brought a lump of coal to Parliament to champion "clean coal" power as a solution to the blackouts that have hit the electricity grid with growing shares of wind and solar energy and coal plant retirements.

Energy Minister Josh Frydenberg and other ministers say they will change the $10 billion Commonwealth-owned Clean Energy Finance Corporation's guidelines to redefine "clean energy' to include "clean coal" power in order to stabilise the grid.

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APRA channels its inner Fisher/Carney | Sarah Barker, Minter Ellison

Sarah Barker at the Climate Alliance National Conference in October 2016 talking on the subject of fiduciary duties.

As was heavily covered in the weekend press, there has been a significant shift in APRA’s position on the relevance of climate change risk to the financial sector.  In a keynote speech to the Insurance Council of Australia entitled 'Australia's New Horizon: Climate Change Challenges & Prudential Risk', Mr Geoff Summerhayes (Executive Board Member of APRA) stated:

·      APRA-regulated entities can no longer treat climate change as ‘non-financial’ issue, or one that will only crystallise in the distant future.  Associated risks extend far beyond the physical (ecological) realm to economic transition risks (regulatory, technological and societal). Many of these risks are financial in nature, foreseeable and material – and are actionable now by Australian banks, insurers, asset owners and asset managers. 

·      The speech cites three key recent developments that have influenced APRA in articulating this view: (a) the Paris Agreement, and Australia’s ratification thereof, (b) the G20 Financial Stability Board Bloomberg TCFD climate risk disclosure recommendations, and (c) a recent legal opinion on directors’ duties with regard to climate change risks by senior commercial barrister Noel Hutley SC (briefed by Sarah Barker of Minter Ellison on instruction of the Centre for Policy Development and Future Business Council). 

·      In dealing with these risks, ‘scenario planning is the new normal’. Markets and investors increasingly expect corporations to apply a sophisticated and robust approach to modelling of the potential impacts of climate-related risks under different scenarios, and over different time horizons.  This includes the sub-2°C transition scenario around which the Paris Agreement (ratified by Australia in November 2016) is anchored.  The Recommendations of the G20 Financial Stability Board’s TCFD, released on 14 December 2016, provide clear guidance in this regard.

·      A failure to proactively govern the financial risks associated with climate change, now, can present significant litigation exposures for corporations and their directors.

·      This does not mean that APRA is ‘suddenly elevating climate-related issues to the top of our priority list. But it does mean joining the wider conversation that is already going on around this issue – and being explicit that climate change is likely to have material, financial implications that should be carefully considered.’  

The full transcript of Mr Summerhayes' speech is available here.  

Legal opinion shaking up the nation's boardrooms | The Age

On February 17 Australia's prudential regulator warned that climate change could threaten the stability of the entire financial system. It follows a landmark legal opinion that company directors could face heavy fines and damages if they ignore climate change related risk.

The climate bombshell the politicians didn't touch | The Age

APRA declares managing climate risk a prudential obligation | Investment Magazine

After years of ambiguity, the prudential regulator has stated clearly that banks, insurers and superannuation funds have a duty to calculate the financial risks associated with climate change.

The Australian Prudential Regulation Authority (APRA) last week put the financial services industry on notice that it is worried about the financial risks climate change poses, declaring it an “important and explicit part” of the agency’s thinking.  More

TCFD Recommendations Report Overview Webinar 24 January 2017

This one hour webinar provides an overview of the main points of the Recommendations report and the implementation guidance. 

The 60-day public consultation period on the Recommendations of the Task Force on Climate-related Financial Disclosures report is currently open through to February 12, 2017. The consultation is a critical way to solicit views on the Task Force's recommendations. Results from the public consultation will be shared with the Financial Stability Board in February 2017 followed by an updated report to the Financial Stability Board in June 2017. 

You can submit feedback directly via the online questionnaire to facilitate analysis of the comments.  

Recommendations of the Task Force on Climate-related Financial Disclosures report

The report outlines a set of recommendations for voluntary, decision-useful, climate-related disclosures to be made as part of mainstream financial filings. The recommendations will help organisations identify and disclose information needed by investors, lenders, and insurance underwriters to appropriately assess and price climate-related risks and opportunities.

The recommendations are issued for public consultation which is open until February 12, 2017.

The Task Force developed four widely adoptable recommendations on climate-related financial disclosures that are applicable to organisations across sectors and jurisdictions. Importantly, the Task Force’s recommendations apply to financial-sector organisations, including banks, insurance companies, asset managers, and asset owners. Large asset owners and asset managers sit at the top of the investment chain and, therefore, have an important role to play in influencing the organisations in which they invest to provide better climate-related financial disclosures.

The Task Force structured its recommendations around four thematic areas that represent core elements of how organisations operate: governance, strategy, risk management, and metrics and targets.

The four overarching recommendations are supported by recommended disclosures that build out the framework with information that will help investors and others understand how reporting organisations think about and assess climate-related risks and opportunities. In addition, there is guidance to support all organisations in developing climate-related financial disclosures consistent with the recommendations and recommended disclosures. The guidance assists preparers by providing context and suggestions for implementing the recommended disclosures. 

Click here to download the full report. The TCFD website has additional reports relating to the project: Public Consultation, Implementing the Recommendations and a Technical Supplement.

Pension trustees could face legal challenge for ignoring climate risk – leading QC confirms | ClientEarth

In a hugely important development for the pensions industry, two leading independent UK barristers, including pensions expert Keith Bryant QC, have confirmed that pension fund trustees who fail to consider climate risk could be exposing themselves to legal challenge.

The opinion concludes that where climate risks carry material financial implications for fund performance, trustees must take those risks into account in investment decisions. Its authors state that this is “beyond reasonable argument” and that failing to do this “would not be a proper exercise of [trustees’] powers.”

You can read the opinion here.

For a summary of the opinion and what it means for pension fund trustees and pension fund members, please see ClientEarth’s briefing here.

Launch of Trillion-Dollar Transformation Initiative, Focusing on Pensions and Climate Risk | Mercer and CIEL

Trillion Dollar Transformation, a collaborative initiative by Mercer Investment Consulting (Mercer) and the Center for International Environmental Law (CIEL), is designed to educate pension fund fiduciaries on the challenges and opportunities presented by climate change.

Two cutting edge reports have been released detailing the financial and legal challenges climate change presents for pension fund trustees.  The key findings and recommendations have been summarised in this 2 page document.

Climate Change Investment Risk Management for US Public Defined Benefit Plan Trustees is a financial analysis by Mercer, identifying the various approaches trustees can use when considering investment risks from climate change. Mercer’s findings demonstrate that the average US public pension is markedly exposed to the potential for billions in lost asset value under a Transformation scenario, which is aligned with a 2oC global temperature increase outcome, the baseline goal of the 2015 Paris Climate Agreement.

In its companion legal analysis, Trillion Dollar Transformation: Fiduciary Duty, Divestment and Fossil Fuels in an Era of Climate Risk, CIEL reviews how climate change may affect the fiduciary obligations of pension fund trustees and concludes that a failure to acknowledge and respond to these financial risks may constitute breaches of trustees’ fiduciary duties.