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  • Writer's picture2022 Global Voices Fellow

Sustainably Financing the Transition to Net Zero

By Isabella Notarpietro UNSW Co-op Program Y20 Youth Summit, 2022



 

Executive Summary


There is increasing acceptance that anthropogenic climate change necessitates an urgent reduction in global greenhouse gas emissions, with Australia recently committing to a 43% reduction by 2030 and net zero by 2050. The transition to net zero, however, will come at a cost and there is currently an ‘investment gap’ between the existing and required financial investments in emission-reducing initiatives. With investors and businesses becoming increasingly aware of the threats and opportunities posed by climate change, climate-related financial disclosures have emerged as a key method to close the financing gap by funnelling capital away from emission-intensive activities and towards decarbonisation initiatives. Despite widespread support for climate-related financial disclosures among G20 economies, Australia currently has no plans to support the economy-wide integration of globally interoperable, high quality and transparent disclosures. This places Australian businesses and the broader community at a disadvantage in terms of attracting international capital to fund the transition to net zero. This policy paper therefore recommends; 1) in line with processes adopted by the United Kingdom, Hong Kong and European Union, the establishment of a cross-departmental and cross-regulatory taskforce to determine the most effective way to introduce climate-related financial disclosures across the Australian economy; and 2) the development of a roadmap for mandatory climate-related financial disclosures, in order to provide investors, the financial sector and the Australian community with transparent information and an effective regulatory framework


 

Problem Identification

Research by the world’s leading climate science body – the Intergovernmental Panel on Climate Change (IPCC) – has issued a stark warning: to limit global warming to 1.5oC in alignment with the Paris Agreement, greenhouse gas (GHG) emissions need to ‘peak before 2025 at the latest, and be reduced by 43% by 2030’ before hitting net zero by ‘the early 2050s’ (Intergovernmental Panel on Climate Change, 2022). This urgency has resulted in many global economies and businesses increasing targets and accelerating strategies for transitioning to net zero. In Australia, the newly elected Albanese government recently legislated a 43% emissions reduction target by 2030 and 2 announced a host of new policies aiming to accelerate the transition to a net zero economy. Realising this transition, however, will come at a significant cost, with modelling commissioned by the Australian Labor Party itself indicating that the proposed emission reduction policies will require $76 billion dollars of total investment, with only $24 billion generated publicly (RepuTex Energy, 2021). Directing capital from investment funds and businesses (also known as private finance) towards sustainable and emission-reducing activities will therefore be crucial to realise the new government’s climate change policies and targets. As highlighted by the recent IPCC (2022) report, however, existing international ‘financial flows are a factor of three to six times lower than levels needed by 2030 to limit warming to below 2°C’. This ‘investment gap’ is largely driven by the simultaneous overvaluation of activities that are emission intensive, such as coal mining, and under-pricing of the financial risks that climate change and the transition to net zero pose(Climate Change Authority, 2020; Task Force on Climate-related Financial Disclosures, 2017; The Investor Agenda, 2021). Examples of these climate-related risks include bushfires and floods increasing the risk of asset damage and insurance costs, and decarbonisation resulting in stranded fossil fuel assets. Recognition of these climate-related risks and opportunities is increasingly informing decision making processes in the financial sector, with many investor bodies eager to shift capital towards emission-reducing initiatives that pose lower risks (The Investor Agenda, 2021). To attract the required international investment, some nations are introducing new climate-related financial disclosure reporting requirements, based on internationally accepted frameworks which require companies to report on how their governance, strategy, risk management and business targets are impacted by climate change (Task Force on Climate-related Financial Disclosures, 2017). With no government plans for similar reporting requirements in Australia and current voluntary disclosures low in quantity and quality, Australian entities aiming to attract private investment in emissionreducing initiatives are at a clear disadvantage against their international competitors (Climate Change Authority, 2020; Investor Group on Climate Change, 2022; The Investor Agenda, 2021). Introducing mandatory, standardised and interoperable climate-related disclosure requirements across the Australian economy is therefore important to realise the government’s vision of ‘keep[ing] pace with our international counterparts to compete for the investment we need to drive innovation in Australia’ (Australian Labor Party, 2021).

Context - Global Context

Context - National Context

 

Policy Recommendations


The following recommendations are proposed to enable the rapid and economy-wide introduction of mandatory climate-related financial disclosures in Australia to finance the transition to net zero. The recommendations are based on actions already adopted by other key global economies competing for capital:


  1. Establish a taskforce to coordinate the introduction of climate-related financial disclosures throughout the Australian economy.

  2. Develop a Roadmap for the phase-in of mandatory climate-related disclosures, outlining the implementation mechanisms, expected coverage, timelines and required regulatory actions.



Policy Recommendation One: Establish a taskforce to coordinate the introduction of climaterelated financial disclosures throughout the Australian economy.


Climate-related financial disclosures mark a significant shift in how environmental matters are considered in fiduciary systems. Rather than undesirable externalities that are only discussed in annual environmental reports, climate-related risks must be integrated within existing financial reports and used to inform business strategies. In Australia, this dynamic has generated uncertainty for existing financial regulatory bodies on how to best introduce and supervise climate-related disclosures, as despite the establishment of the CFR climate change working group in 2017 there is no clear plan for disclosure implementation. While the working group provides a good basis for cross-regulatory collaboration, more high-level government coordination is needed to effectively introduce mandatory climate-related financial disclosures across the Australian economy (Climate Change Authority, 2020; The Investor Agenda, 2021). A cross-departmental and cross-regulatory taskforce, that would include mechanisms for investor, business, and civil society participation, could provide an effective means to achieve this objective. 6 Such an approach has already been adopted in the UK, which in 2022 became the first G20 country to introduce mandatory climate-related financial disclosures. The decision represented the culmination of the work of a cross-departmental and cross-regulator taskforce established in 2019 to ‘explore the most effective approach to implementing the recommendations of the TCFD’ across the entire UK economy (HM Treasury, 2020b). The taskforce included members from all departments and regulatory bodies involved in the financial sector. Similarly, in 2020 Hong Kong established a sustainable finance cross-agency steering group, with a core component of the group’s remit to manage ‘climate and environmental risks to the financial sector’ (Hong Kong Monetary Authority, 2021). The steering committee included representatives from a broad array of public institutions including the Environmental Protection Department and stock exchange body. In both cases, the establishment of a taskforce represented a crucial first step towards the introduction of mandatory climate-related disclosures into the economy. The European Union (EU), recognising the need for input from a diverse range of stakeholders impacted by climate-related disclosures, established an additional technical expert group composed of members from civil society, academia and the private sector to provide recommendations on TCFD implementation and sustainable finance more generally (EU Technical Expert Group on Sustainable Finance, 2019; European Commission, 2022).



Structure

Australia could benefit from this international experience by establishing a taskforce that combines the approaches taken by the UK, Hong Kong, and EU. Specifically, the taskforce should have both a cross-departmental and cross-regulatory panel and an expert advisory group. The taskforce should be coordinated by Treasury, as the department already has a team dedicated to climate risks and considerable experience coordinating government taskforces. The cross-regulatory and crossdepartmental panel should include members from all CFR bodies, financial accounting and auditing bodies (AASB and AUASB) and the Australian Securities Exchange (ASX). Building upon the Hong Kong approach, the taskforce should also include members from the Department of Climate Change, Energy, the Environment and Water (DCCEEW) and the Department of Foreign Affairs and Trade (DFAT) to ensure that the integration of climate-related disclosures in Australia supports domestic environmental objectives and aligns with global TCFD-related activities respectively. As the coordinating body, Treasury would be responsible for executing the taskforce’s secretariat duties. The expert advisory group is the other crucial element of the taskforce which seeks to ensure that all stakeholders impacted by the proposed changes are actively engaged. The expert group should be composed of representatives from the private sector and investor groups. However, following the example of the EU, the expert group should also include representatives from academia and relevant civil society bodies, including youth-led and First Nations organisations. Involving 7 stakeholders with expertise in environmental and social issues will be important to ensure that climate-related disclosure requirements reflect the interests and needs of the Australian community and therefore contribute to creating a more just, inclusive and sustainable financial system.



Implementation

The taskforce’s scope should be such that it would have a finite duration of 12 to 18 months (based on the timelines from the UK and EU). Both the panel and the expert advisory group would convene monthly and consist of approximately ten members each. Between meetings, the Treasury climate risk team would provide secretariat services to the taskforce, although the increased workload will likely necessitate additional resourcing to ensure the team’s standard work and other projects can still be executed. Based on similar taskforces coordinated by Treasury, it is estimated that approximately five to ten departmental staff will be required for secretariat duties (The Australian Government the Treasury, 2017). The taskforce will cost two to four million dollars which should be funded by the Federal Government under a New Policy Proposal covering this initiative (The Commonwealth of Australia, 2018). The success of the taskforce will be measured by the production of a roadmap for the introduction of mandatory climate-related financial disclosures (see Recommendation 2) within the temporal and budgetary constraints allocated. Furthermore, subject to deliberation at the political level, it is recommended that the outputs of the taskforce enable the economy-wide introduction of mandatory climate-related disclosures by 2025 (Investor Group on Climate Change, 2022).



Limitations

There are three key limitations associated with this policy recommendation. Firstly, supportive industry bodies like ASFI may view the development of a government taskforce on climate-related disclosures as unnecessary or potentially threatening given the existence of the Australian Sustainable Finance Roadmap, which already includes some timelines and regulatory actions needed to support TCFD-aligned reporting. To address this concern, the taskforce should take the roadmap as a starting point for charting the introduction of mandatory disclosures and ASFI members should be engaged in the expert advisory panel. Secondly, while improving the quality, consistency and breadth of climate risk disclosures is a priority area for the CFR in 2021/2022, the same is not true for the Department of Treasury (The Australian Government the Treasury, 2022). Therefore, there may be reluctance in the department to provide the required resources for a new taskforce. This dynamic could be overcome through the allocation of additional funding from the Federal Government to support the establishment of the new taskforce. Thirdly and most importantly, as the introduction of strengthened climate-related disclosures is a politically contested issue, the recommendation would need to be socialised and advocated for by supportive 8 stakeholders within government prior to the establishment of the proposed taskforce and subsequent actions, as per Policy Recommendation Two below.



Policy Recommendation Two: Develop a roadmap for the phase-in of mandatory climate-related disclosures, outlining the implementation mechanisms, expected coverage, timelines and required regulatory actions.


Investors have indicated the desire for a clear signal of when mandatory climate-related disclosures will become compulsory in Australia (The Investor Agenda, 2021). Similarly, many businesses are hesitant to invest the resources required for climate-related financial reporting while regulatory expectations, reporting requirements and implementation mechanisms remain murky (The Investor Agenda, 2021). There is therefore a need to develop a clear, specific, and detailed roadmap outlining when different types of financial institutions will be required to produce TCFD-aligned disclosures, the mechanisms used to implement these requirements and the associated governmental and regulatory actions that will be taken to support businesses and financial institutions. This recommendation is built upon the example of the UK TCFD taskforce. The UK has a very similar financial regulatory landscape, with multiple government agencies responsible for regulating different types of financial institutions (e.g. publicly listed companies, banks). To assist in the economy-wide implementation of disclosures while providing investors and the financial sector with clear regulatory signals, the UK TCFD taskforce was tasked with establishing a roadmap. The 14-page document, published in late 2020, outlined the ‘indicative milestones’ that regulatory agencies will implement over the next three to five years and the associated impacts on different types of financial institutions. More specifically, the roadmap outlined the policy mechanisms, phase-in dates and qualifying criteria for the proposed disclosure requirements, while outlining the key next steps that will be taken by taskforce members to both realise and build capacity for the new disclosures. Overall, the roadmap provided clear signals to the private sector of when and how disclosures would be introduced, while also maximising the efficiency of government resources by charting required actions and next steps from each agency (HM Treasury, 2020a). The taskforce established via Recommendation 1 would be tasked with developing a similar roadmap applicable to the Australian context. The roadmap should clearly outline the strategy, scope, and mechanisms for implementing mandatory disclosures and obtaining full-economy coverage by 2025 (Investor Group on Climate Change, 2022). The taskforce structure outlined in Recommendation 1 means that all government bodies that could be impacted by the new disclosures would be engaged in the roadmap development process. Similarly, the expert advisory panel will enable consultation on industry-specific phase-in timelines to account for differences in capabilities across private sector institutions. 9 The costs associated with the roadmap development have already been considered in the costs associated with establishing and running the taskforce (see Recommendation 1). Specifically, the meeting frequency, resourcing requirements and budget considered the need to develop a roadmap. The success of the roadmap will be quantified via the number of financial institutions and the amount of capital covered by mandatory, TCFD-aligned disclosures each year. In alignment with approaches adopted in similar jurisdictions and given the urgency of closing the investment gap, the roadmap should be constructed to obtain economy-wide coverage by 2025. Following completion of the roadmap, implementation progress and outcomes should be monitored and reported on annually by the relevant regulatory agencies and overseen by the climate risk team in Treasury. The costs associated with the implementation of the roadmap are beyond the scope of this policy proposal.



Limitations/Barriers

There are two key limitations associated with this policy proposal. Firstly, while there is support amongst investors for climate-related financial disclosures, many businesses are reluctant to start disclosing due to the resources required and/or the belief that environmental matters are beyond the scope of financial reporting. To overcome this challenge, it will be important for the taskforce to consult with key industry bodies throughout the development of the roadmap and clearly communicate the benefits that mandatory climate-related disclosures present to businesses. Furthermore, taskforce members should identify shortfalls in guidance material during the roadmap development process and assign actions for the publication of additional guidance material to assist businesses in producing high-quality and internationally aligned disclosures. A second key limitation relates to the scope of disclosures required under the TCFD framework. The existing reporting framework only requires the disclosure of Scope 1 and 2 emissions which derive directly from a business’ activities. Scope 3 emissions, which are produced indirectly through supply chains yet account for over 70% of emissions for most organisations (Deloitte, 2022), only need to be reported if they present a material business risk (Task Force on Climate-related Financial Disclosures, 2021). Therefore, to ensure that climate-related financial disclosures realise their full decarbonisation potential and that Australian disclosures align with increasingly stringent investor expectations around Scope 3 emission reporting, the taskforce should carefully consider Scope 3 reporting requirements and implementation timelines.



 


Conclusion


With the effects of climate change already being felt around the world, the need to rapidly decarbonise the global economy and shift towards net zero economies is clear. Realising this 10 transition is contingent on closing the investment gap and therefore redirecting investment away from emission-intensive activities towards sustainable alternatives. Climate-related disclosures have emerged as a crucial tool for organisations to provide investors with the information required to make more sustainable investment decisions. As the world’s biggest economies move towards mandatory climate-related disclosures, there is a need to implement policies that facilitate the rapid, economy-wide integration of such disclosures in Australia. This action is crucial if we are to be competitive in attracting the international capital needed to enable emission reduction targets to be met. The recommendations outlined in this proposal offer an actionable, implementable, and targeted approach that meets the demands of investors, businesses, regulators and the broader Australian public.



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