Investors are pushing Australia's largest ASX-listed shares to disclose climate risks as investment firms are warned of reduced capital.
The push follows what has been described as a 'coming of age' for environmental, social, and governance (ESG) investing.
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Heating up for ASX shares
Australia's largest ASX shares may soon be forced to disclose climate risks by the Investor Group on Climate Change (IGCC), Principles for Responsible Investment, and Carbon Disclosure Project. Conjointly, the groups represent more than $2 trillion in assets.
Members of IGCC include the Westpac Banking Corp's (ASX: WBC) BT management, and Commonwealth Bank of Australia's (ASX: CBA) Colonial.
The groups have launched a plan that would begin with S&P/ASX 300 Index (ASX: XKO) companies. Initially, the plan would be voluntary under an "if not, why not" approach. However, by 2024 the IGCC wants a mandatory system.
According to IGCC's release, the scheme is a bid to improve the current Task Force on Climate-related Financial Disclosures (TCFD).
Currently, 60 of the top 200 ASX shares are already providing climate-related financial disclosures. Although, a lack of a standardised approach continues to introduce inconsistencies.
In its statement, IGCC said:
Institutional investors have reported that the quality and consistency of these company disclosures is severely lacking, leading to the underpricing of climate risks in the market.
With other major jurisdictions already shifted to mandatory systems, IGCC worries Australian companies and investors could be left beholden to multiple regulatory frameworks. This outcome would likely be detrimental to Australian investors and companies.
Climate mispricing
ASX-listed shares could face extensive climate costs in the future. The issue for fund managers and retail investors is trying to evaluate this on a company-by-company basis.
The cost of climate change to a company may include carbon pricing changes, extreme weather events, or transitory costs. Unfortunately for investors, the quality of this risk assessment differs greatly between companies.
Commenting on this, IGCC policy director Erwin Jackson said:
Companies who disclose will get better access to capital. If an investor looks into a company and they're just doing tick box exercises, the investor will say you don't understand this and you're not prepared. If they see a company doing good disclosure, leaning towards solutions, they say this is a good company to invest in.
Lastly, the plan stipulates that consultation over implementing measures will be held between 2022 and 2023. Following that, legislative measures could be put in place with full compliance required by 2024 to 2025.
