Financial institutions are under growing pressure to improve their climate related disclosures and climate risk assessments and, at the same time, they face a growing risk of litigation and other forms of shareholder backlash if they get it wrong.
Last week, the Federal Court ordered Commonwealth Bank to hand over documents to a shareholder that detail its involvement in the financing of several oil and gas projects that may not be in line with “the goals of the Paris Agreement, the discharge of certain obligations or responsibilities under CBA’s internal E&S Policy and the adoption of certain of the commitments in CBA’s 2021 annual report”.
Shareholders Guy and Kim Abrahams, as trustees of the Abrahams Family Trust, launched the case in August. Their lawyers, Equity Generation Lawyers, said the documents would reveal what work the bank did to assess the environmental and social impact of the projects and whether the financing of the projects is in line with the bank’s ESG undertakings.
The Abrahams and the bank have a history. CBA settled a case with them in 2017 over an allegation that the bank failed to disclose climate change risks in its 2016 annual report.
According to a Macquarie Securities report, Australia has the second-highest record of climate change litigation in the world, at 115 cases. Themes such a greenwashing and fiduciary duty are the focus of these cases.
While energy companies and miners have been the main targets for shareholder activism and litigation, banks are increasingly in the firing line.
Macquarie said: “While the focus currently is on direct fossil fuel exposure, scrutiny may extend to include lending to companies within the fossil fuel supply chain.”
Pressure on financial institutions to improve their disclosures is coming from a number of sources. Disclosure is proving to be a double-edged sword, allowing banks to report on positive steps they are taking implementing their ESG policies but also exposing what they are doing wrong.
The Reserve Bank has called on Australian financial institutions to improve their climate related disclosures and climate risk assessments, as the threat of divestment from Australia because of climate risks grows.
Reserve Bank deputy governor Guy Debelle said: “Most Australian financial institutions now recognise climate as a risk. The assessment of climate risks has evolved considerably over the past five years but there remains considerable scope for improvement.”
Debelle said climate change is a “first-order risk” for the financial system, with wide-ranging impact both in terms of geography and in terms of businesses and households.
He said disclosures need to be comparable and consistent across companies, both within Australia and globally, if they are to be useful as an input into risk assessment.
ASIC is encouraging companies to use the Task Force on Climate-Related Financial Disclosures as the primary reference for disclosures. Eighty of the ASX 200 companies make climate disclosures under TCFD.
Last month, the TCFD released additional guidance on metrics for reporting, such as consistent measurement of the greenhouse gas emissions financed by loans and investments, and set out the key information that should be reported about transition plans.
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