Ep.62 Mandatory climate disclosure: will it really combat climate change?

Maria Rampa: Hi I’m Maria Rampa and welcome to this episode of Engineering Reimagined.

Slowing the progress of climate change, and mitigating its impacts, is something governments, organisations and individuals are being challenged with every day.

Mandatory climate disclosure reporting laws for large organisations currently exist in many jurisdictions and are about to be introduced into Australia. The laws will make it mandatory for entities to disclose their sustainability performance so that stakeholders, investors, and customers can be better informed. This also extends to superannuation funds who invest in many of the world’s largest companies.

In this episode, Jeremy Cooper, non-executive director of Bennelong Funds Management, Chair of the carbon advisory board of Future Group, a former Deputy Chair of ASIC and former Chair of the wide-ranging review of the super system (the ‘Cooper Review’) in 2009, discusses the impact of these laws. He is joined by Belinda Wade, Industry Professor and Climate Change specialist from the University of Queensland. Jeremy and Belinda are interviewed by Ryan Isaacs, Senior Consultant, Sustainability and Climate Change, at Aurecon – who was also recently recognised as a ‘Future Leader’ at the Consult Australia awards. Together they discuss the challenges and opportunities of mandatory climate disclosure reporting and the real potential for large companies and superannuation funds to not only help shape the decisions being made on climate change but enable real change in halting its devasting impacts. Let’s listen.

Welcome to Engineering Reimagined. It's great to have you both on the podcast to unpack the challenges and opportunities of new mandatory climate disclosure reporting in Australia. Jeremy, can you explain what this reporting regime entails and how it impacts large corporations and super funds?

Jeremy Cooper: So basically, as the name would suggest, they involve entities of various sizes. So very large entities that have assets over A$500 million, fairly large ones that have assets over A$250 million, and smaller entities that have assets over 25 million. As will so-called asset owners, that includes super funds, which have assets over $5 billion. One of the key points is that this is aligned internationally. It's incredibly important that we stay up, if you think about the OECD effectively, we want to stay in line with what that very large group of countries is doing. These disclosure standards are really two-fold. They involve disclosing risks over various timeframes. So, short term, medium term and long term. But also importantly, this isn't just dry regulation. The twin, if you like, is not only disclosure of risks but also disclosure of opportunities. That's unusual and very important. So the aim is to ensure that business decisions, investment, lending, insurance have all now got a climate lens to them. And this helps effectively channel finance to the right places and away from the wrong places. There'll have to be various scenarios projected by these entities. Let's assume that you're going to be able to meet the 1.5 degree scenario, but there needs to be at least one other scenario as well, which is a hotter temperature. They have to really have a transition plan that gets disclosed. This will be audited. And there's a new thing called a sustainability report that entities will have to produce. Next year, in financial year 25, the very big companies will have to get on and do this. The middle-sized ones get another year and then the smaller ones a year after that. And that's a very sensible way of doing it, rather than waiting around for perfection. We spent nine years pretending that climate change didn't exist. Now we've got to catch up.

Ryan Isaacs: What do you think about us as everyday investors who have shares in large corporations, either directly or via super funds? What should we know and what should we expect from this?

Jeremy Cooper: Important point to note is that it's not the superannuation funds who are emitting the carbon. However, there is a sting to this. So while the super funds are not actually emitting this stuff, they own assets and own interests in businesses that do. Around about 16 million Australians have got super, that's a vastly bigger number than invest directly in shares. Ordinary superannuation members will be better off and be able to become informed by all of the disclosure. There's also a concept called the ‘sunshine concept’. So if you have an activity that is exposed to disclosure and scrutiny, it tends to get better. So, I also think that this is going to have a major impact on those corporates that have been laggards in this space, but also on superannuation funds. It's kind of one of these ones where all boats will rise on the rising tide. Experts say that disclosure is a necessary but not a sufficient condition. It doesn't do everything, but it certainly does achieve some things.

Ryan Isaacs: It sounds like there are good things to come. Belinda, can you tell us a little bit about what climate risk is and how it impacts corporations and the value of our investments?

Belinda Wade: So the superannuation sector is really interesting because it presents this case where the money of you, of me, of Jeremy, of all Australians who contribute to super is exposed to climate risk through the investments that are made on our behalf by these super funds. When we consider climate risk, we really need to consider that it's introduced both through action and inaction on climate. So we often talk about climate risk as being broken down into physical climate risk and transitional climate risk. So we see it almost like a seesaw. Whereas if you really want to minimise your physical climate change that we see occurring globally, then we need to undergo a considerable amount of transitional changes and vice versa. So we really need to understand both types of risk and how they interact, so that when we're assessing our organisations, we can understand what that cumulative impact or risk profile would be. So when I'm talking about physical climate risk, I'm really talking about the negative impacts of climate change on the natural environment. So things like increases in extreme events such as cyclones, as well as long term changes to sort of climatic conditions, so increasing temperatures over time, for example. And if we take this back to a company level, we can see that this would impact both our assets directly, but we can also see impacts across their supply chain. For example, if there was a physical climate challenge or event that restricts or changes the costs of a company acquiring one of their key resources that they need to operate, then that is also an impact from physical climate change and a physical risk. Now, the second area of risk, which I guess we haven't talked about so much as a society, but it's really gaining focus with this concept of climate reporting and climate management and transition, and it's that of transition risk. So these are risks that we're seeing resulting from changes that we're seeking as a society to limit greenhouse gas emissions. So how we minimise climate change. So they result from things like changing technology and introduced regulations and policies, legal challenges. We as a society are expecting different things from our companies, and market preferences also change. So all these things we sort of group together in this broad category of transition risk. So for example, our energy companies moving towards renewable energy. We might have a preference for electric vehicles which grow as a society. We might decide that flying isn’t acceptable and this sort of ‘flight shaming’ takes off and we all change our travel preferences. So all of these are changes that introduce risk for organisations. So the real value that we see in introducing these clear and consistent climate standards is that we can sort of lift the lid on what's happening within companies and how they're measuring, how they're monitoring, how they're progressing their climate management and action. And because without that clarity, it's very difficult for investors to value risk. So we end up with a situation where our company valuations within our listed markets, if we're not really understanding climate risk, then we have the potential to overvalue companies. And if that's the case, and our superannuation funds have invested in companies with potentially overinflated values, then there has to be a correction at some point. And that correction comes potentially at a loss of value for our superannuation investments.

Ryan Isaacs: Our team coauthored a report examining sustainability disclosures from Australia's top ten superannuation funds and what best practice looks like. Can you outline some of the findings of our report?

Belinda Wade: So in our report, we examined the top ten largest super funds in Australia against the subset of the draft ISSB Climate Standards. So we looked at measures in areas and metrics and targets, in assessment of risk, credit strategy and governance. And what we found, at that stage, was that the majority of funds really needed a substantive uplift in all the areas we examined. It's really a major change that's required. The report also acknowledges that there are a number of challenges faced by super funds in their climate management. And we developed a set of best practices that we'd like to see in terms of climate management recommendations. So things that would not only uplift the transparency, but also the climate management of super funds. So, as we're working towards and disclosing consistent with the standards released by the ISSB.

Ryan Isaacs: We often hear the Australian Securities and Investments Commission or ASIC in the news regarding allegations of greenwashing by corporations. Jeremy, you're the former deputy chair of ASIC. What is the role of regulators, including ASIC, as part of the new sustainability standards? What is greenwashing and what are regulators doing about it?

Jeremy Cooper: So, let's deal with that in two parts. What's the role of the regulators in relation to these new standards? So, again, this has been carefully thought through and in order to get these standards implemented quickly, there's a kind of a ‘go slow’ on enforcement. So, there won't be strong enforcement at the start. And the idea is to induce corporations, and later superfunds, to just to get on with it. Directors of these entities tend to worry too much about liabilities and so on. So this is a clever move. There's a three-year period where everybody's going to be sensible about this. The disclosers are going to use their best endeavours and the regulator’s going to stand back and it can only do two things. It can't issue any penalties, so pecuniary penalties or ban directors or use any of its other vast array of powers, but it can shine light on and show what's not acceptable conduct. So that would be a court declaration that this is not in compliance with the rules. Or they can actually injunct somebody saying, well, you can't do this. We'll show you what's not right and we'll stop you doing things. But otherwise, we won’t be causing any problem. At the end of that period, the government has announced that there'll be a review of how it's all working. But in the absence of any changes the normal penalty regime will apply. Now, Greenwashing. This is actually the greenwashing by super funds that ASIC's been most agitated about, I should clarify that. So it's just a clever play on words. The very old expression of whitewashing something goes back to the 1500s and they’ve added ‘green’ to it, to cover the situation in the 21st century where in this case, super funds, are perhaps being a bit loose with the truth about how sustainable or green either their fund is or the investment option that they're talking about it. So it's basically misleading or deceptive conduct that we're talking about. And it relates to climate-related statements. Things like, “our fund doesn't invest in fossil fuels”. Now funds have been making those sorts of statements and ASIC has actually gone quite ballistic about it, as it should have. Now, this is a bit of a shock to the super system, because historically, super wasn't a big playground for a conduct regulator, an ASIC, that actually looks at corporate behaviour. To boil it all down, ASIC is basically saying this, if a super fund says we do not invest in fossil fuels, then rely on the fine print that says, "Oh well, what we mean is if the company has less than 10% and blah, blah, blah, blah, blah, blah, blah," don't do that. That's basically what ASIC's been saying.

Ryan Isaacs: And you've both mentioned that disclosure is just the first step in the journey that large corporations and super funds are on toward transparency of climate related risks and opportunities. What other steps can super funds take to support Australia's decarbonisation?

Jeremy Cooper: A lot of funds have made 2030 and 2050 commitments. They're not uniform. So not only have not all funds done this. And they don't quite tally – they have differences about exactly what, is it the portfolio that they're making a commitment on? Is it their own operations? And the real point is, in some cases, I believe that what's effectively happening is that super funds doing this are really punting the obligations to the next generation of management. I know that's fairly harsh, but if you make a commitment like that and unless you've got annual plans of where you're going and what actions you're taking, it amounts to nothing more than puffery. The European Union is actually, in relation to its pension funds, if you make a Paris Agreement commitment, you've actually got to demonstrate your pathway to decarbonisation every year. And I believe that actually should be what we're doing. We're not quite there yet. Then we need to clarify how the super industry deals with this. Some investment options will just screen out a whole lot of carbon intensive stuff and invest in the other stuff. Another fund may say we're so large we have to be right across the economy and we're engaging in effective stewardship. Now, at the moment, I think with some exceptions, the effective stewardship in Australia is not tough enough. In particular, things like, accepting that the carbon emitters have got carbon capture and storage programs in place. This mechanism is much talked about and doesn't have a great reputation around the world. And the typical problem with carbon capture and storage is what I call the bucket and swimming pool problem. You're emitting a swimming pool’s worth of greenhouse gases, and you've got this great technology that can get rid of a bucket's worth. And super funds have got to be starting to call that out.

Belinda Wade: It's really worthwhile us stressing that, that a target is just really aspirational, it's really performance that matters. And when we're looking at the super funds, it's really their cumulative emissions. And as we pointed out in the report, not all net zero targets are created equal. It's fantastic that so many companies are setting them. But we also need to actually be able to track what they're achieving. We need things like a base year. We need interim targets. We need to know that the targets are aligned with the Paris Agreement, and that there's methodologies that have been used to assess their progress and where deficiencies have been made in progress. And we need accountability through that process. We don't want to see the buck pass to the next generation of managers. We need to keep funds and companies accountable for their progress.

Ryan Isaacs: As engineers, designers and advisors, we’re passionate about delivering projects that support sustainability. What role can we play in supporting greater transparency of reporting and commitment to change?

Belinda Wade: It could be done directly and indirectly, by upskilling the knowledge of our engineers, designers, advisors. Then when you're working on these projects or programs of work for a company, you can embed that knowledge of the issues and challenges of climate change within what you're designing or advising on, so you can have that sort of direct impact, but you also have that relationship with your clients. So you can almost be knowledge brokers. You can share with your clients the understanding of climate change and climate transition and how it could potentially impact their organisation. And I think this is particularly so if you overlay a knowledge of what they will need to be reporting on and what they are being held accountable for.

Ryan Isaacs: A final question for you both. The Australian superannuation industry is worth about $3.5 trillion. What impact do you think superannuation funds could have on Australia's decarbonisation targets and what should be done?

Belinda Wade: There's power and responsibility that lie with the superannuation sector in what investments they make but also in the influence that they have on decisions within these investee companies. There's real potential for our funds to shape the decisions that are made on climate transition in Australia's largest listed companies. And I think they really have the responsibility to be supporting this transition because they're representing all of our money.

Jeremy Cooper: I think there will be in certain special cases, super funds will, in particular, I'm thinking about energy, electricity generators that aren't making the transition quickly enough would be one species and the other one would be fossil fuel companies where, not necessarily a direct employee of a particular super fund, but a super fund or super funds will seek to appoint a suitably qualified expert director to advocate on behalf of the members of the super fund on a board of an ASX company. This is a really critical point on this whole discussion. And that's about time horizons. So let's take a female university graduate, we'll call her Emily, and she finished university last year and she just happens to be 24. So, she's just joining a super fund this year. She will only be 50 in 2050, right? She could expect, unless we cook the planet and then her life expectancy will be very different, let's assume that we managed to pull this in, she will be on average well and truly alive in 2090. Deep in retirement, let’s be fair. That is the time horizon that we're talking about with super. It's very, very, very long term. There’s no point having a whole lot of money to retire on if you can't even go outside. So, the top 50 APRA regulated funds, the overwhelming majority of those have assets over $5 billion. So 98% of them will be covered by the disclosure regime. So that's the first point to make. Late last year at a forum where the treasurer was speaking to super funds, they told him they thought the economy needed $12 billion a year between now and 2050, so that's each and every year, to transition to renewable energy. And then $40 billion a year to deal with the opportunities, if you like, new export industries, exporting green steel, green hydrogen, you name it. Or things we haven't thought of yet. Now, they sound like big numbers and they are. In financial year 2023, contributions into super funds from all of us Australian savers was $48 billion. And the eight largest super funds, they managed between them, $1.3 trillion worth of assets. And we're in the lucky position in Australia where the power and size of our pool of assets is actually almost too big for the Australian economy. And you can prove that by looking at one of the big funds at the moment. Fifty cents in every dollar is actually spent outside Australia. So, we have to be careful. It's like using a fire hose in the kitchen, you just have to be extremely careful how much pressure you put on it. But the money's there, and it's a very exciting opportunity.

Ryan Isaacs: That's been an incredible discussion that has given me, and I'm sure our listeners, plenty of food for thought.

Maria Rampa: We hope you enjoyed this episode of Engineering Reimagined. It’s reassuring to hear of the efforts being made to safeguard our future through the actions of our largest companies and our investments in superannuation.

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