Why banks, directors are concerned about climate disclosures

The overwhelming support for draft sustainability standards is no surprise, but in-principle backing hides some deeper concerns.

Banks and directors worry about new climate disclosures. Picture: NCA Newswire

This week’s overwhelming support for draft sustainability standards is no surprise, given the alternative is catastrophic climate change.

Without verifiable financial information, debt and equity investors would simply fold their wallets at a time when the transition to net zero emissions by 2050 requires $US9.2 trillion ($13.1 trillion) of annual investment in physical assets alone, according to consultancy McKinsey.

Noone, however, should interpret in-principle backing for the draft standards developed by the International Sustainability Standards Board as the end of the argument.

Peak Australian industry bodies representing more than 400 companies and 300 investors with $US33 trillion under management joined the chorus of support on Monday for the ISSB’s first two proposed standards on general sustainability and climate-related disclosure requirements.

But close examination of individual submissions to the ISSB reveal strong reservations held by some companies about certain aspects of the exposure drafts.

The extent of the inevitable compromises and efforts to placate certain industries remains to be seen, ahead of final standards scheduled for release early next year.

One example is the National Australia Bank submission, which runs to 31 pages – more than double the length of the peak Australian industry bodies’ view of the world.

NAB says in its preamble that it supports efforts to create a comprehensive global baseline for sustainability standards because it’s required to analyse climate risks and opportunities associated with its lending portfolio.

The bank says improved reporting across the economy makes it easier to understand sustainability performance and measure financed – or customer – emissions.

Having said that, NAB sounds a warning bell about forward-looking statements and the operation of Australian law, and expresses its concern about a logjam of work associated with the implementation schedule.

On forward-looking statements, the bank says information regarding future events and strategy “carries a higher risk of breaching Australian laws prohibiting misleading and deceptive conduct”.

“We are concerned that reporting entities may be exposed to increased risk of liability for misleading and deceptive conduct in complying with the requirements of the standards due to the longer-term nature of forward-looking statements that relate to sustainability-related risks and opportunities, particularly climate-related risks and opportunities,” NAB says.

“We … suggest the ISSB consider ways in which this legal risk may be mitigated.

“For example, the standards may include an express acknowledgment that any information relating to future matters is inherently uncertain, and that users of general purpose financial reporting should not place undue reliance on such information.”

NAB also urges the ISSB to consider a phased implementation of the sustainability standards, given considerable effort is required to “develop further capabilities, enhance current reporting systems, improve data collation and address skills shortages”.

The 22-page Westpac submission expresses some reservations, or “observations”, as well.

Echoing NAB’s concerns about forward-looking statements and support for a phasing-in period, Westpac also argues that meaningful scenario analysis remains a work-in-progress because the methodologies are still nascent.

“Similarly, the data availability for scope 3 emissions including financed emissions is still evolving,” it says.

“Until these methodologies have matured, entities would be forced to disclose despite the lack of appropriate data and/or methodologies. “Without a phased-in approach or set time frames to allow for methodologies to develop, comparability between reporting entities will be limited and there is increased potential for significant data inaccuracies or misstatements.

“As such, there must be a requirement for both common methodology and equitable time frames which allow for an uplift in capabilities.”

The Australian Institute of Company Directors, the world’s biggest director organisation and a signatory to the peak Australian industry bodies’ submission, warns that further work is needed on the draft standards so they are capable of reasonable and independent auditing.

Without this, the AICD says the value of the standards will be “considerably diminished”.

Some of these concerns were played out in a panel discussion at the AICD’s climate governance forum on Monday, where Herbert Smith Freehills’ global head of ESG Silke Goldberg welcomed the consolidation of 14 different climate reporting standards into the ISSB’s proposed disclosure baseline.

However, Goldberg acknowledged the training that would be required to undertake complex scenario analysis, and the legal concerns in Australia with forward-looking statements.

Karina Litvack, a non-executive director of Italian oil and gas major Eni, said it had taken three years to build the internal data collection capability so Eni could credibly report its emissions footprint, including Scope 3 emissions from customers using its products.

Litvack said Scope 3 represents about 90 per cent of Eni’s emissions, and there was “massive pressure” from high-emitting companies in the US to delay the introduction of reporting for indirect emissions in the value chain.

“I recall some very lively discussions in my boardroom when some directors could not get to grips with the point of making disclosures on our own Scope 3 emissions and, much less, around the targets we would be setting,” she said.

“The perspective was that it was double-counting and it was the responsibility of our customers to report their emissions.

“My answer – and I’m pleased to say I prevailed – was that if we don’t take responsibility for that, we face commercial extinction, because our customers are worried about this and they will go and find an alternative supplier.”

Twitter: @Gluyasr