ASX climate ambition encouraging, but action must follow – ACSI research

New research from the Australian Council of Superannuation Investors (ACSI) shows that Australia’s listed companies are rapidly increasing their commitments towards a low-carbon economy, with 70% of ASX200 market capitalisation now covered by net zero commitments.  But ACSI says that investors need more detail to be confident in their long-term planning.

The annual study, Promises, Pathways & Performance: Climate Change Disclosure in ASX200 companies reveals that many ASX200 companies have significantly increased their plans to manage climate risk and transition towards net zero. This demonstrates that capital markets and companies are responding to important market signals that ratchet the global economy towards holding warming to 1.5°C.

“We welcome the increasing number of net zero commitments across the ASX200, with 95 companies having now made them – half of them in the last year alone,” Louise Davidson, ACSI CEO said.

“But companies must now go beyond commitments and outline to investors the detail underpinning those targets and how they will be met – words aren’t enough.”

Encouragingly, more than half the index now align their climate disclosures to the Taskforce for Climate-Related Disclosures (TCFD), which is critical to providing decision-useful, comparable and consistent information for investors.  This is a far cry from the 11 companies who used it from the inception of the Framework in 2017.

“Those in highly exposed industries, in particular, have high levels of TCFD adoption, and the index seems on track for two-thirds of companies to adopt TCFD.  ACSI believes it’s time TCFD became mandatory for all materially exposed listed companies,” Ms Davidson said.

“This jump in reporting puts Australian companies in good stead as global markets move to mandatory climate reporting.”

ACSI members are long-term investors and have engaged with carbon-intensive companies for over a decade to encourage them to actively manage their climate risks, adapt their businesses to a low-carbon economy and disclose this information to investors.

“We are actively looking for granular detail to be incorporated into strategic decision-making, such as the use of a shadow carbon price,”, Ms Davidson said.

“Twenty-nine companies have now moved ahead of Australian policy settings and are using a shadow carbon price in their scenario analysis.  This trend demonstrates that global movements are making it increasingly important for companies to price carbon into their decision-making.”

As the urgency of the climate crisis escalates, investor expectations have evolved to require companies to stress test their businesses, and many companies now undertake scenario analysis of the impact of various decarbonisation pathways.  However, just 39 companies use at least one scenario guided by 1.5°c.  This means that most companies are not on track to meet Paris targets.

“While many of these developments found in our research are encouraging, the rate of adaption to climate change and adoption of reporting risk must increase rapidly if businesses are to be sustainable and valuable in the long-term,” Ms Davidson said.

“Climate change presents serious and present dangers to ecosystems, society and businesses. But those companies who seize the challenge to transform to a low-carbon future – and bring investors along – will be well set for long-term success.”

Key findings:  

  • Net Zero commitments are now the norm for Australian companies with 70% of the ASX200’s collective market capitalisation adopting net zero commitments. This represents 95 companies, almost double the number from March 2021.
  • The majority of companies are now adopting and disclosing against the TCFD, with 103 companies either fully or partially aligning their disclosure to the framework. This is a dramatic lift in adoption as when the TCFD framework was first established in 2017, only 11 companies used it.
  • More detailed targets are now being set to support long-term ambitions – Reflecting a focus on 2030, medium term targets (some aiming at net zero) now dominate company-set targets. Ninety-six companies have a target focused between 2026-2039. This has more than tripled since 2019 and shows a shift away from short-term actions.
  • Climate change is increasingly being integrated into management decisions and corporate disclosure:
    • Carbon Pricing – 29 companies disclosed using a shadow carbon price in decision making, 27 of them in the ASX100. With no national price on carbon, this significant result demonstrates that global movements and regulation around carbon make it increasingly important for companies to price carbon into their decision-making.
    • Incentives – 38 companies integrate sector-relevant climate change metrics into their executive remuneration.
  • Science-based accreditation is growing as investors increasingly seek ‘verifiable’ targets. 36 companies disclosed one or more of their targets are ‘science-based’ – a clearly defined emissions reduction pathway, from a baseline year, set in line with latest climate science necessary to meet the goals of the Paris Agreement of limiting global warming to well-below 2°C above pre-industrial levels and pursuing efforts to limit warming to 1.5°C
  • Disclosure of climate scenario analysis is increasing: 88 companies, up from 62 last year, have stress-tested their business against low carbon outcomes. However, the quality of these disclosures is variable and not all provide investors with qualitative detail and quantitative outcomes.
  • The majority of companies used models that tested against less than 2°C of warming. Just This includes an increase in the use of 1.5°C scenarios by companies Despite this we only found only 39 companies using a 1.5°C model.

Promises, Pathways & Performance: Climate Change Disclosure in ASX200 companies highlights examples of best practice and gaps in reporting, provides a snapshot of Taskforce on Climate-related Financial Disclosure (TCFD) adoption rates and an insight into how companies are setting objectives for meeting the Paris Agreement. It also examines the disclosure, comparability and depths of climate scenario analysis and physical risks assessments.

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