The impacts of climate change are increasingly being felt across businesses in all industries. 

Understanding the effects of climate change is key to the long-term commercial success of any business.

This includes understanding not only how climate change will physically affect the business, but also the risks and opportunities as markets transition to a decarbonised economy. 

Coming changes in reporting and disclosure requirements are another reason for companies to manage climate change as a strategic issue.

Proposed mandatory reporting requirements

In December 2022, the Australian Treasury issued its Climate-Related Financial Disclosure Consultation Paper, inviting submissions on the introduction of mandatory, standardised, internationally-aligned climate-related financial risk disclosure in Australia.

Under the proposal, large financial institutions and large listed companies would commence mandatory climate reporting in the 2024/2025 financial year.

Reporting requirements would gradually expand to smaller listed companies as climate reporting, independent assurance, and auditing capabilities are developed and institutionalised. 

Initially, reporting would align with the disclosure framework recommended by the Taskforce on Climate Related Financial Disclosures (TCFD).

This framework addresses governance, strategy, risk management, metrics and targets. The International Sustainability Standards Board (ISSB) is developing requirements for climate disclosure and will consolidate much of the international reporting landscape, including TCFD. Australian reporting requirements will be updated to reflect the ISSB standards once they are finalised.

Good disclosure starts with good understanding

While not yet mandatory, a large number of Australian companies have already been disclosing climate-related financial risks and opportunities in line with the recommendations of the TCFD.

A key implication from the TCFD recommendations is that reporting and disclosure should be an end product of a process that considers governance, strategy, risk management, and metrics and targets. 

The TCFD identifies three categories of climate-related risk: physical, transition and legal.

Physical risks

Physical risks are those associated with the impacts from a changing climate and can be categorised as ‘acute’ or ‘chronic’. 

Acute physical risks refer to those driven by climate change-related events, including wildfires, cyclones, hurricanes or floods. 

Chronic risks are those caused by longer-term shifts in climate patterns. An example might be risks due to sustained higher temperatures causing sea level rise, regular heat waves, and changed rainfall patterns. 

Implications for businesses from physical risks include damage to assets and supply chain disruptions. Financial performance can also be affected by changes in resource availability and the effects of extreme temperatures on operations, transport needs and employee safety.

Transition risks

Transition risks result from the global shift to net zero emissions. 

As economies decarbonise, businesses need to adjust to disruptions including policy and regulatory changes, technological innovation, market changes and shifting stakeholders preferences. 

Depending on the pace and scale of these changes, transition risks pose varying levels of financial and reputational risks to businesses.

Legal risks

Companies are at risk of litigation if they don’t adequately respond to the effects of climate change impacts and climate-related shifts in the regulatory environment. Companies, their directors and their officers are all potentially liable.

Investors and customers are demanding that corporations take sustainability seriously.

There is a growing awareness of greenwashing, which is the misrepresentation of an organisation’s sustainability and climate-related risks, policies or credentials. Greenwashing is both a reputational and a legal risk for companies. 

More recently there has been a rise in greenhushing, defined as an attempt to cease sustainability and climate-related reporting to avoid greenwashing accusations. 

Chair of ASIC Joe Longo has warned greenhushing is ‘just another form of greenwashing’.

We can help

Having robust conversations around the financial risks and opportunities that climate change poses is the first step. 

Early action to mitigate climate risks and turn them into commercial opportunities is the greater challenge. 

MSDI and Climateworks Centre’s two-day Climate change and business risk course is designed to help you understand and respond to the risks and opportunities that climate change presents to your organisation.

Working with Monash University experts and guest speakers from industry, the course will help you develop, implement, and interrogate your organisation’s approaches for incorporating climate change into strategy, and further your own career in this space.