‘Promises, pathways and performance’ – ACSI’s assessment of ASX200 climate change disclosures

If you are an ASX200 company without a communicated net zero commitment you are now in the minority 30% and it may be time to reconsider.

Whatever you take on board from this year’s analysis, you should bear in mind that a number of investors now have net zero portfolio targets and will make investment decisions based on whether the underlying companies deliver to that target. As regulator initiatives globally have shown, the temptation to indulge in greenwashing is no longer feasible and ACSI is clear that investors will assess whether a company’s pathway to emissions reduction is:

  1. Credible;
  2. Ambitious – to deliver the Paris-aligned target over the short, medium and long term; and
  3. Is backed by real action.

There is also a need to meet ASX Corporate Governance Council guidelines requiring disclosure of material exposure to environmental or social risks (Recommendation 7.4).

It follows that, if material, the risks should be reflected in financial statements. Yet a closer look reveals that this is often not the case.

In reporting on emissions commitments and emissions reduction targets, a listed entity and its board must follow the forward looking statements under the Corporations Act (769C).

The ACSI report is grouped into two broad sections being:

  1. The current status of company target setting and communication on carbon reduction:
    • An assessment of net-zero commitments (best-practice and gaps)
    • Task-force on Climate-related Financial Disclosures (TCFD) adoption rates and
    • How companies are setting objectives to meet the Paris Agreement; and
  2. Scenario analysis and physical risk assessments – testing company resilience.

The sectors leading on TCFD adoption are Energy & Utilities (83%), Materials (75%), and Industrials (60%), followed by Real Estate and Consumer Staples.

Setting net zero targets is another matter, with the Health Care sector having 0%, and Consumer Discretionary, Information Technology and Communications Services sectors being around 20%.

In contrast, ACSI also identified 55 companies whose operations were already carbon neutral or who had set carbon neutrality targets – a balance of emissions reductions (the primary expectation) and purchase of carbon reduction credits.

In communicating company pathways to emissions reduction, ACSI also differentiates between short (to 2025), medium (2026 to 2039) and long term (2040+) targets, the multiple time horizons facilitating a critical assessment as to the level of ambition, including the use of a shadow carbon price to inform investment and capital decision making.

In short:

  • Scope 3 emissions and their reduction are the least developed areas of target setting. The report identifies 27 companies with quantitative scope 3 targets which are itemised in the report.
  • Investors are asking for verification to demonstrate how company targets are science based and aligned to the 1.5°C target. It would seem that a best endeavours approach is no longer supported.
  • ACSI expects to see more companies integrate decarbonisation and transformational targets into incentive plans.
  • Investors expect to see scenario analysis to test business resilience providing an assessment of the financial impact of low carbon scenarios (risks and opportunities), plausible and possible future low carbon states.
  • The physical risks posed by climate change translate to significant financial risk for businesses. Detailed physical risk analysis is growing as is the expectation that the assessments will be conducted and the strategies around adaptation and resilience discussed with shareholders.

The ACSI report can be found HERE.

© Guerdon Associates 2024
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