IAS 37 Launch your Climate Risk Reporting

IAS 37 Launch your Climate Risk Reporting – In February 2020, the Governance Institute Australia published a practical guide to reporting against ASX Corporate Governance Council’s Corporate Governance Principles and Recommendation. IAS 37 Launch your Climate Risk Reporting

Recommendation 7.4 of the new ASX Corporate Governance Council’s Principles encourages entities for the first time to consider and report upon any material exposure to climate change risk. This practical new guide helps you to identify and disclose your climate change risks. IAS 37 Launch your Climate Risk Reporting

Review the guide on the Governance Institute Australia’s website. IAS 37 Launch your Climate Risk Reporting

Here is a summary: IAS 37 Launch your Climate Risk Reporting

Directors’ duties and climate change

In addition to regulatory activity, Australian barristers Noel Hutley SC and Sebastian Hartford-Davis issued an opinion in 2016, in which they advised that s 180(1) Corporations Act (directors’ duty of care and diligence) requires directors to respond to climate change risks to the extent they intersect with the interests of the entity.

IAS 37 Launch your Climate Risk Reporting
Bushfire in Australia September 2018

In March 2019 they issued a Supplementary Memorandum of Opinion. Referring to the number of significant developments since their 2016 Opinion, they observe there is a ‘profound and accelerating shift in the way Australian regulators, firms and the public perceive climate risk’. In their opinion, these developments ‘elevate the standard of care expected of a reasonable director’. IAS 37 Launch your Climate Risk Reporting

Hutley and Hartford-Davies suggest that company directors, who consider climate change risks actively, disclose them properly and respond appropriately will reduce exposure to liability. But as time passes, the benchmark is lifting ‘and it is increasingly difficult in our view for directors of companies of scale to pretend that climate change will not intersect with the interests of their firms.

In turn, that means that the exposure of individual directors to “climate change litigation” is increasing, probably exponentially, with time.’

The opinion highlights two key learnings for governance professionals: the need to understand directors’ duties relating to the risks to business from climate change and to ensure adequate disclosure relating to material risks from climate change.

In a speech to the Anglo-Australasian Law Society, Lord Sale of the UK Supreme Court observed that the ‘direction of travel’ in both the UK and Australia is clear in that ‘environmental considerations may and, increasingly, must be taken into account by directors, particularly where there may be financial impacts on the company’. IAS 37 Launch your Climate Risk Reporting

“As investors assess how well companies are positioned in the face of climate change, they are increasingly paying attention to the climate governance systems of the companies in question as a predictor of performance. A company that puts smart governance systems in place to proactively identify, assess and manage climate risks is likely to prove resilient in the face of climate change risks.”

Veena Ramani IAS 37 Launch your Climate Risk Reporting

Program Director IAS 37 Launch your Climate Risk Reporting

Capital Markets Systems, Ceres IAS 37 Launch your Climate Risk Reporting

“The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.”

Laurence D Fink IAS 37 Launch your Climate Risk Reporting

Chief Executive IAS 37 Launch your Climate Risk Reporting

BlackRock IAS 37 Launch your Climate Risk Reporting

IAS 37 Launch your Climate Risk Reporting

IAS 37 Launch your Climate Risk Reporting

Determine relevant climate change information

The following process is derived from the IASB’s Practice Statement 2: Making Materiality Judgements. Practice Statement 2 provides non-mandatory guidance on making materiality judgments when preparing general purpose financial statements and provides a systematic process for doing so. This four-step process can also be useful for companies in assessing what climate change information is material and should be disclosed. IAS 37 Launch your Climate Risk Reporting

Four Step Process – Overview

The four steps to assessing materiality of climate-related information could be as follows:

  1. Identify climate-related factors (including information about the regions or sectors in which the companies operate) and impacts (short and longer term) that have the potential to be material. IAS 37 Launch your Climate Risk Reporting IAS 37 Launch your Climate Risk Reporting
  2. Assess whether the climate-related matters identified in step 1 are, in fact, material to the company.
  3. Organize the climate-related information in a way that communicates the information clearly and concisely in the most relevant filings, particularly those intended to address risks.
  4. Review the draft climate-related disclosures to determine whether all material information has been identified and materiality has been considered from a broad perspective, as well as at a detailed level. IAS 37 Launch your Climate Risk Reporting

The following considers each of the four steps in greater detail, in each case commenting on how the guidance in the IASB’s Practice Statement 2 could be applied to climate related disclosure specifically. IAS 37 Launch your Climate Risk Reporting IAS 37 Launch your Climate Risk Reporting

Step 1. Identify

Step 1 is a rough filter to identify types of climate-related information users might need. The information identified will be examined in greater detail in Step 2 to determine what is truly material.

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Sources of potentially material types of climate change information may include:

  • regulations, reports and guidance issued on climate change and/or environmental issues by securities and other regulators (e.g., CSA Staff Notice 51-333 Environmental Reporting Guidance1, CSA Staff Notice 51-354 Report on Climate-related Disclosure Project2 and CSA Staff Notice 51-358 Reporting of Climate Change-related Risks3)

CSA Staff Notice 51-358 Reporting of Climate Change-related Risks (issued August 2019) includes a discussion of “guiding principles” for determining materiality, reinforcing and expanding upon the guidance included in CSA Staff Notice 51-333 Environmental Reporting Guidance.

  • legal and regulatory requirements related to climate change issues (e.g., GHG emissions reporting, carbon price, energy efficiency, building codes)

  • predicted physical climate change impacts in operating jurisdictions (e.g., floods, drought, heatwaves, hurricanes)

  • sector-specific guidance on climate-related issues and disclosure topics (e.g., Sustainability Accounting Standards Board (SASB) Materiality Map4, United Nations Environment Programme Finance Initiative (UNEP FI)5)

  • reviews of disclosures made by industry peers, investors, lenders and insurers.

    Ocean plastic polution 1
    Ocean plastic pollution

  • broader expressions of investor interest in specific climate change information, such as:

    • proxy voting guidelines used by investors IAS 37 Launch your Climate Risk Reporting

    • stated policies and practices of investors on climate-related information (e.g., climate change investment strategy)

    • investor statements of support for the Task Force on Climate-related Financial Disclosure (TCFD) recommendations6, including commitments to adopt these disclosures IAS 37 Launch your Climate Risk Reporting

    • investor participation in collaborations with peers on implementing TCFD recommendations and engaging with companies on climate-related issues (e.g., Climate Action 100+7) IAS 37 Launch your Climate Risk Reporting

  • guidance from industry associations (e.g., The Mining Association of Canada’s Towards Sustainable Mining initiative)

Examples of factors that could create company-specific climate change impacts are the industry, geographic location, method of operation and political jurisdiction. In making this determination, some questions to consider include: IAS 37 Launch your Climate Risk Reporting

  • What are the relevant climate change laws and regulations in operating jurisdictions? IAS 37 Launch your Climate Risk Reporting

  • What are the relevant climate change reporting requirements (mandatory and voluntary)? IAS 37 Launch your Climate Risk Reporting

  • What are the predicted climate change impacts in relevant geographic locations, including those for supply chains and key customers?

Investors often compare different companies when making their investment decisions. Companies should consider providing climate-change disclosures that can be compared to those of other companies in the same industry and facing similar climate-change issues. The SASB Standards8 provide recommended industry-specific disclosures on environmental, social and governance (ESG) issues (including climate change), that are likely to be material to investors. Many investors use the SASB Standards to assess material ESG issues when making investment decisions9. IAS 37 Launch your Climate Risk Reporting

Step 2. Assess

Step 2 considers which information identified in Step 1 could reasonably be expected to influence users when making current or future investment decisions. A key aspect of this step is understanding the potential size and nature of the current and expected climate change impacts on the company, which will be affected by the nature, location and activities of the company’s specific business(es). This may require considering the potential effects of climate change using variable assumptions about future climate change-driven events, future regulatory regimes and the ability to mitigate these root causes. IAS 37 Launch your Climate Risk Reporting

Refer to the process and analysis of forward looking, below, for additional information on forward-looking scenario analysis, which is recommended by TCFD as a key exercise for assessing the range of plausible impacts on a company. IAS 37 Launch your Climate Risk Reporting

Questions to be considered include: IAS 37 Launch your Climate Risk Reporting

  • Which climate-related events and developments could plausibly impact the company, its suppliers and key customers in the short, medium and longer term?

  • What is the potential impact if these climate-related events and developments occur? IAS 37 Launch your Climate Risk Reporting

  • How likely are the climate-related impacts to happen under different levels of global warming? IAS 37 Launch your Climate Risk Reporting

  • Are there interconnected causes and impacts that need to be considered in aggregate? IAS 37 Launch your Climate Risk Reporting

Step 2 should include both quantitative and qualitative considerations, such as the following: IAS 37 Launch your Climate Risk Reporting

  • direct financial implications (current and future, certain and potential and/or contingent) such as the impact on assets, liabilities, cash flows and future earnings

  • impact on reputation and relationships (e.g., license to operate, customer or client reaction, employee attraction and retention)

  • impact of low-carbon transition on business model and long-term strategy across different time horizons

  • political developments (including likelihood of adoption and retention of climate related laws and regulations; shifts in national infrastructure investment priorities)

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The greater the number of ways in which climate change might impact an entity, the greater the level of specific disclosures that might reasonably be expected to inform the decisions of users.

  • predicted physical impacts of climate change based on sector and geographic location of operations, supply chain and customer base (e.g., increased frequency and severity of extreme weather events; slow onset temperature increase impacting critical infrastructure located in coastal areas, floodplains or northern regions)

  • exacerbation of existing material risks – also known as the risk multiplier effect of climate change (e.g., a retailer with a global supply chain may have identified price volatility of inputs such as cotton as an existing risk. This risk could be increased by impacts of changing weather, such as droughts or floods in India, on the price and availability of cotton)

In assessing materiality, management should consider whether the impact of climate change issues might reasonably be expected to grow over time, in which case early disclosure is likely to be important to long-term investors, such as pension funds and insurers. Such disclosure would be particularly relevant where the company is in an industry with a longer operating or investment cycle (e.g., extractive industries, manufacturers and infrastructure providers) or where new technologies are likely to be required to meet regulatory or industry pressures (e.g., low-carbon solutions to reduce greenhouse gas emissions).

Some sources the company might consider in determining what climate change information is material to investors include:

  • company-specific input from investors, such as:

    • questions and comments received from investors at shareholders meetings, on earnings calls, and at other investor presentations and direct engagement meetings with investors

    • shareholder resolutions and proxy votes on climate change issues and disclosures

    • analyst and media reports

    • direct outreach to stakeholders

    • comments or changing requirements from bankers or other creditors

  • internal company information, such as:

    • enterprise risk assessments, including climate-related risks previously identified

    • board of director oversight of climate change matters, including agendas, meeting minutes and frequency of internal reporting on such matters to the board

    • reviews of existing climate change disclosures in other reports issued by the company (e.g., Sustainability/CSR report, CDP response)10

The TCFD recommendations were developed at the request of the G20 via the Financial Stability Board. They were released in June 2017 for voluntary use by companies in financial filings.

Increasingly, investors view the TCFD recommendations as the gold standard for consistent, comparable and reliable climate-related disclosures.

“Investors view climate-related risks as pervading all sectors and geographies. As a result, the default view is that climate-related issues are material unless otherwise demonstrated.”

Source: CPA Canada, Progressive Investors and the Unstoppable Transition to a Low Carbon, Climate Resilient Economy.

Step 3. Organize

Step 3 focuses on ensuring that climate-related information is disclosed clearly and concisely and is not obscured by immaterial information.

It would be easy for climate-related disclosures to become overly generic or boilerplate. For example, a company might set out all possible positive and negative impacts of climate change without relating these to the company’s specific circumstances or the potential impact on its assets, liabilities (including contingent liabilities), cash flow, earnings, strategy and operations. Investors are increasingly seeking more entity specific disclosures with accompanying metrics and targets that quantify (or provide a range of likely outcomes for) the potential impacts of climate change on the company.

The complexity of the different ways in which climate change might reasonably be expected to impact an entity can affect the level of specific disclosures required. The greater the detail that is required, the more important it is to focus on the clarity and understandability of the disclosures individually and as an overall story.

Possible ways to accomplish this include:

  • attention to design and formatting in bringing out the relative prominence of different elements

  • using charts, tables or other visual aids

  • cross-referencing and connectivity – all information may not need to be provided in the same location, particularly where this would only lead to duplication between different documents

Other important factors in clear and effective communication to investors are consistency in the information provided over time so investors can see what has changed since prior reporting and, to the extent possible, reporting on a consistent basis with industry peers so that investors can compare different companies.

Step 4. Review

In Step 4 the company steps back and considers the aggregate climate-related disclosures from a wider perspective. Some questions to consider include:

  • Are the relationships between different climate-related disclosures clear (within a given document, between regulatory filings and against other company issued documents, such as voluntary reports)?
  • Has some climate-related information been omitted because it is not considered material yet when combined with other information it might be material? Climate change is a significant risk multiplier, potentially impacting other material risks to the company. As a result, the risks could evolve exponentially over time (e.g., lack of availability of insurance, reduced demand for emissions-intensive products).
  • Do the disclosures overwhelm the main messages with excessive detail on secondary matters, thereby obscuring the most important information?
  • Are the disclosures balanced and objective?
  • Has some climate-related information been omitted because the impact and likelihood of the risk is not well understood and/or quantifiable? For example, physical risks are expected to increase in frequency and severity over time; however, it is challenging for companies to obtain sufficient data to quantify the potential impacts of these risks over extended time horizons. In such cases, directional information might be provided, possibly with an expected range of impacts, as well as details on key factors that will drive the impact
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“Where climate-related risks could have a significant impact on a company’s operations, information about how this has been factored into impairment calculations would be relevant to the users of the financial statements. In conclusion, as the effects of climate change become more prominent, they will become more and more visible in the financial statements.”

— Hans Hoogervorst, Chair of the IASB, Climate-Related Financial Reporting Conference,

Cambridge University, UK, April 2, 2019

IFRS – News and Events

IFRS Financial Statement implications

Climate change may affect financial statements in several different ways. For example, IAS 36 Impairment of Assets requires disclosure of the events or circumstances that led to the impairment and information on key assumptions used to determine the impairment. In addition, companies should consider the disclosure requirements of IAS 37 Provisions, Contingent Liabilities and Contingent Assets for site remediation expenses.

In both instances, the uncertainties about the amount or timing of cash outflows as a result of potential climate-related impacts (e.g., impacts of carbon pricing regulations, changing consumer preferences, supply chain disruptions) may impact the recognition, measurement and/or disclosures required.Performance

The process and analysis of forward looking

What Is Scenario Analysis?

One of the key TCFD recommendations is for companies to assess and disclose the resilience of their strategy, taking into consideration multiple climate scenarios including a 2 degree or lower scenario.

According to the final TCFD report, “Scenario analysis is a process for identifying and assessing the potential implications of a range of plausible future states under conditions of uncertainty. Scenarios are hypothetical constructs and not designed to deliver precise outcomes or forecasts. Instead, scenarios provide a way for organizations to consider how the future might look if certain trends continue or certain conditions are met. In the case of climate change, for example, scenarios allow an organization to explore and develop an understanding of how various combinations of climate-related risks, both transition and physical risks, may affect its businesses, strategies, and financial performance over time.”

Why Is Scenario Analysis Important?

The final TCFD report identifies 5 reasons for companies to consider using scenario analysis for climate change matters:

  1. Scenario analysis can help organizations consider possible outcomes that are highly uncertain, which play out over the medium to longer term and can result in disruptive business impacts.
  2. Scenario analysis can enhance strategic discussions about climate change by looking beyond business as usual.
  3. Scenario analysis can help companies assess the range of plausible impacts from climate change, helping to identify potentially material risks and opportunities if such scenarios were to occur in the future.
  4. Scenario analysis can help companies identify key indicators in the external environment to monitor over time.
  5. Scenario analysis can assist a company’s investors in understanding the robustness of a company’s response to climate-related risks and opportunities on business strategy and financial performance.

More information

CPA Canada – TCFD

CPA Canada – Climate Disclosure

SASB Materiality Map

SASB Climate Risks – Technical Bulletin

Converging on Climate Risk: CD SB, the SASB and the TCFD

TCFD Implementation Guide – Using SASB and CD SB Framework to Enhance Climate-related Disclosures

TCFD 2019 Status Report

TCFD Technical Supplement: The Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities

IAS 37 Launch your Climate Risk Reporting

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