Financial Climate-related Disclosures: Holding Businesses to Account
By Alexander Campbell
The Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill is currently before Select Committee and aims to shed light on the flow of finance to emissions intensive investments. Typically, the focus of climate change discussion is on new technology and government policy to reduce emissions directly. This Bill instead focusses on the information barriers which encourage investment in high-emission activities contradictory to 1.5°C of warming. The flow of finance may not be the stereotypical climate battleground, but the scale of the global transition means improving access to capital for low-emission investments is a necessity.
A seismic shift in the flow of finance towards low-emissions investments is needed to mitigate climate change. The International Energy Agency estimates over US$70 trillion worth of investment is needed by 2040 for the world to have a 50% chance of limiting warming to 2°C. The Paris agreement recognises this and highlights the need to make financial flows consistent with a low emissions future in Article 2(1)(c). However, there is currently limited disclosure of the climate risks and impact of investments.
This information barrier is driving what the Productivity Commission described as “an ongoing and systemic overvaluation of emissions-intensive activities”. The lack of disclosure makes it harder for capital to reach low-emissions investments and creates risk for investors and the global financial system. Climate-related finance disclosure therefore is important not just for big financial institutions, but all of us.
Drawing on the work of the international Task Force on Climate-Related Financial Disclosures, the Productivity Commission recommended in 2018 the implementation of a mandatory climate-related financial disclosure regime. The Government accepted this recommendation and began implementation with the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill passing its first reading on the 15th of April.
The Bill requires disclosures by certain financial entities to be made in accordance with standards issued by the External Reporting Board. These standards will be based on the framework of the Task Force which focusses on four thematic areas: governance of climate issues; actual and potential impact on strategy; risk management of climate risk; and metrics and targets. The Task Force’s framework has been recognised and implemented internationally.
Only certain large financial entities considered to have a higher level of public accountability will be required to make climate-related disclosures. This will include for example large banks and insurers. The threshold of large is defined is assets over $1 billion at the balance date of the two preceding accounting periods. Overseas entities are explicitly included as climate reporting entities.
Disclosures are mandatory on a comply or explain basis. This means entities covered within the Bill are only exempt if, in accordance with the applicable climate standards, they can show their activities are not materially affected by climate change. Other than that, disclosure is mandatory, with knowingly failing to comply an offence. For individuals, penalties will be up to five years imprisonment or a fine of up to $500,000. Otherwise, the penalty will be a fine of up to $2.5 million. The Financial Markets Authority will be responsible for oversight and enforcement.
Similar disclosure requirements have also been announced for Crown financial institutions with $1 billion or more in assets under management. These were communicated by the Minister of Finance in letters of expectation, with reporting also to be in line with the Task Force framework. Some have raised concerns that these disclosure requirements are less stringent than for private financial institutions covered by the legal regime. ACC in particular has been the focus of pressure to divest more quickly, but has committed to aligning its reporting with the Task Force framework.
The Bill received praise from international media hailing it as a world first. During consultation there was also strong support for the proposed regime from industry, with 77 per cent of respondents either supporting or largely supporting the proposals. This level of support was reiterated by Labour and Green MPs during the Bill’s first reading, albeit with some points flagged for select committee consideration by Dr Deborah Russell MP, such as the definition of a large financial institution.
While the National party voted for the Bill at first reading, it was with somewhat qualified support. The Hon Michael Woodhouse MP expressed concern that the penalties for breach of the regime were too onerous, creating the worry on his part that the Bill attempts to punish rather than encourage. Andrew Bayly MP argued that the Bill represents an overly paternalistic approach, taking exception to the idea of the Government intervening in the financial markets. While objection to the somewhat harsh penalties seem reasonable, objection to Government intervention to require disclosure of the largest financial entities in the country on the basis it will be too onerous a burden seems less well founded. Arguably, Government intervention is justified to encourage markets to prefer low-emissions investments.
The only party to vote against the Bill was the ACT party. Damien Smith MP argued that the Bill was unnecessary legislation which would not reduce emissions, and that the Emissions Trading Scheme (ETS) is the only way the Government should be reducing emissions. This position ignores the common view, and advice of the Productivity Commission, that while the ETS is important it must be implemented with other complementary policies for situations where pricing is insufficient alone because of market, government, or distributional failures.
This Bill is obviously not going to drastically move markets or reduce emissions on its own. Nevertheless, small but meaningful policy actions are important for climate change mitigation. While there are obviously still details to be worked out, perhaps the biggest criticism that can be made of this Bill – and one not made so far in the House – is that it has taken too long to get here.
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