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Economics References Committee
Carbon risk disclosure

HERD, Ms Emma, Chief Executive Officer, Investor Group on Climate Change

Committee met at 09:29

ACTING CHAIR ( Senator McAllister ): Welcome. I declare open this public hearing of the Senate Economics References Committee. The committee is hearing evidence into its inquiry into carbon risk disclosure. This inquiry lapsed at the end of the 44th Parliament and was re-adopted by the Senate in the 45th Parliament. The committee is to report by 31 March 2017. The committee has received 38 submissions, which are available on the committee's website. This is a public hearing and a Hansard transcript of proceedings is being made.

Before the committee starts taking evidence, I remind all witnesses that in giving evidence to the committee they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee, and such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to a committee.

The committee prefers all evidence to be given in public. But, under the Senate's resolutions, witnesses have the right to request to be heard in private session. It is important that witnesses give the committee notice if they intend to ask to give evidence in camera. If a witness objects to answering a question, the witness should state the ground upon which the objection is taken and the committee will determine whether it will insist on an answer, having regard to the ground which is claimed. If the committee determines to insist on an answer, a witness may request that the answer be given in camera. Such a request may, of course, be made at any other time.

On behalf of the committee, I would genuinely like to thank those who have made submissions and sent representatives here today for their cooperation with the inquiry. Ms Herd, thank you very much for appearing before the committee. I invite you to make a short opening statement, if you would like to do so, and then we will ask you some questions.

Ms Herd : Thank you for the invitation to appear before the committee. I would like to make a brief opening statement to update the committee on a number of developments that have happened since we made our submission about 12 months ago and to provide some additional information for the committee in terms of some factual information around corporate reporting.

We see four major developments that have happened in the last 12 months since we provided our submission, the first being the Financial Stability Board's Task Force on Climate-related Financial Disclosures, or the TCFD, releasing their draft recommendations in December 2016. The process of the task force has been, and the recommendations will continue to be, hugely influential in terms of corporate reporting practice.

Secondly, Australia has ratified the Paris Agreement, and the Paris Agreement itself has globally entered into force formally. This is acting as a major market signal across the global economy both because it includes specific numbers around a goal of limiting global warming to less than two degrees and moving to a net zero emissions economy and because it establishes a process for ongoing action encompassing national decarbonisation plans, which are acting as investment road maps for a lot of institutional investors.

Thirdly, we have had the legal opinion of New South Wales barristers Mr Noel Hutley and Mr Sebastian Hartford Davis, released in November 2016, setting out why directors should consider climate risks as part of the duty of care and diligence they owe to the company under the Australian corporations law. As discussed in our submission, where directors consider climate risks to be material there are obligations to disclose those risks and how the company intends to manage them under the ASX Listing Rules.

Fourthly, we saw the speech by Geoff Summerhayes from APRA in February of this year, which clearly articulated that regulators expect business to engage in sophisticated scenario-based climate analysis describing how climate risk might impact their business operations and strategies. Already we are seeing this message resonating in very senior levels in both the investment community and across corporate Australia.

All four of these developments demonstrate that there is strengthening momentum behind the argument that Australian business has an obligation to identify climate change impacts for their business and disclose material risks and impacts to the market.

I am in a position to provide the committee with some additional updated information on the current state of reporting. We work quite closely with the Australian Council of Superannuation Investors, or ACSI, which is a collaboration of 29 Australian superannuation funds and six major international pension funds representing around $450 billion in assets under management. ACSI undertakes corporate engagement with the ASX 200 on a range of corporate governance issues. They have also provided a submission to this inquiry supporting the need to increase transparency around the way Australian companies are managing climate change risks.

Today I am able to share with the committee some further analysis of ASX company reporting which ACSI has undertaken for an upcoming report which will be released in May—in the next couple of months. As at 1 March 2016, an analysis of 167 ASX 200 companies found that there are large gaps in corporate reporting on climate change in Australia. Forty-one per cent publicly state that they acknowledge climate science or identify and assess climate risk, while 63 per cent report on their greenhouse gas emissions, but only 22 per cent publicly report on climate change related targets.

I think what this shows is quite representative of what we have argued: that there are high levels of compliance with technical reporting frameworks such as NGERS, but low articulation and transference of that information into company reporting and company strategy, which is really what we are talking about here today. Overall, what we see is that ASX 200 company reports are very short on detail and very few disclose a strategy for dealing with climate change related issues that might affect their business. ACSI further commented to me that, through their engagement with the chairs of over 150 ASX 200 boards each year on a range of issues, including climate change, their experience is that many companies often have relatively sophisticated approaches to climate change and how they are assessing this risk, but the majority of these companies are not disclosing this work to shareholders and to broader community stakeholders.

I have two key points to reiterate from our submission. This is not necessarily about more legislation, but rather it is about better disclosure. What we see is that the foundations for effective disclosure are there, but many gaps and opportunities remain to improve application and practice, particularly since we have seen the release of the recommendations of the Task Force on Climate-related Financial Disclosures. I would also like to take the opportunity to table our submission to the task force, which was done in conjunction with the Asia Investor Group on Climate Change, which provides some additional commentary on some of the specific recommendations of the TCFD as well for the committee's information and consideration.

The final observation is that, while existing emissions and financial reporting frameworks have proven to be useful building blocks in terms of effective corporate and climate change disclosure, recent developments—such as the TCFD and the consolidation of legal and policy frameworks around company obligations—are all providing further impetus for a much more coordinated approach to climate change risk and opportunity disclosure as well. Thank you for the opportunity to make an opening statement. I will be happy to answer further questions.

ACTING CHAIR: We have a good amount of time, so we should be able to have quite a detailed discussion about the submission and your additional remarks this morning. We might start by talking about the distinction between compliance-focused reporting and strategic reporting. I think it would help the committee if you ran through what the significance of both kinds of activities is to the market and what kind of language and thinking underpins both kinds of activities from an investor perspective and a corporate perspective.

Ms Herd : The way that we have put it in our submission and the way that we think about it is that having national emissions reporting obligations—which in Australia are undertaken through the National Greenhouse and Energy Reporting Scheme, or NGERS—is part of the picture but it does not provide the whole picture of the financial implications for a corporate or for a company in terms of where the risks and opportunities are. This is for three main reasons. Firstly, it is because it is historical point-in-time data. It is emissions performance data from the last 12 months, and there is often a lag of when it is reported and then when it is disclosed. It is not necessarily as timely as the kind of financial corporate reporting that you need to be making investment decisions.

Secondly, the actual framework itself is not intended or designed for financial reporting. It is actually intended for national emissions accounting, and in that sense it does a good job because it is all about the aggregation of information and looking at what Australia's total emissions are. In that sense issues such as avoiding double counting are pivotal, whereas for an investor looking at a corporate profile, it does not really matter if two different companies are accounting for the same emissions. What you are interested in are the emissions associated with that particular company. So you do not get the level of completeness that you need for financial risk assessment at the company level.

Thirdly, it does not provide any indication of strategy or commercial response or a forward-looking position in terms of how the company is managing that risk. It is just a very blunt, 'These are our emissions,' with no actual indication of what the risks are associated with that, how the company is managing it, how well positioned it is relative to its peers, what investments it is undertaking to reduce its emissions intensity, investment in R&D and all those sorts of factors that investors look at in terms of understanding how well a company is managing that particular footprint. This can be significant because you can have three companies in a very carbon-intensive industry who have very different risk profiles on the basis of how effectively they are managing their carbon risk. One will do very well. Another one will potentially go out of business because of how they have managed that issue. Compliance-based reporting, in and of itself, does not provide you with that level of insight that you need.

One final point that I would make—that we made in our submission as well—is that NGERS is very much about operational emissions. It does not provide you any indication of equity holdings. You can have some companies who might have a very substantial stake, for example, in an aluminium manufacturing business or a coalmine that have no obligation to report the emissions associated with that investment exposure, which obviously from a financial perspective is really critical as well.

ACTING CHAIR: Where would you like to see reporting go in each of those dimensions? Are there additional forms of mandatory reporting that you think ought to be in place? I think we also ought to have a discussion about reporting about strategic risk management. But just back to that core issue about what people are required to do, presently they are required to report operational information, as you note. Are there any other areas where you think we ought to expand the scope of mandatory reporting?

Ms Herd : At this stage, IGCC is not in favour of mandatory climate change risk reporting because we do not actually think that we have a clear view in Australia as to what that looks like. I think what we really need to focus on as a first priority is getting better at applying the mandatory reporting requirements that we have and to recognise that there are linkages between identification of material issues under the existing Corporations Act and reporting of climate change risks and opportunities. So under the Corporations Act and under the ASX there are requirements to report material ESG risks—environment, social and governance risks—for company performance, but there is very little guidance or clarity as to how that pertains specifically to the issue of climate change and climate risk from a financial perspective, as opposed to just meeting your regulatory requirements. So I actually think as a first step what we really need is to sit down as an industry and with policy makers and to actually work out how do our existing regulatory requirements apply to the issue of climate change now that the regulators themselves are recognising that it is a financial and material risk, and that the law is recognising that directors have an obligation to manage it. How do we join the dots on the existing requirements that we have?

ACTING CHAIR: I suspect all of the committee will want to have a longer conversation about that, but before we leave this question about existing reporting obligations, your submission does argue, I think, to use the NGERS reporting arrangements to, in part, create some greater level of transparency. I suppose my initial instinct in response to that is that, as you have remarked, it is an instrument built for a different purpose. It is for carbon accounting and understanding the physical profile of Australia's emissions rather than for a corporate reporting purpose. I think it would be interesting to hear you put the case for why scope 3 emissions ought to be bound up in this reporting process that is actually designed for something quite different.

Ms Herd : If you think of NGER as the accounting framework that is used for emissions, it is how you count the carbon. So you need to have a universal consistent approach to make sure that everybody is counting carbon in the same way. Carbon accounting is actually quite complex in where you set the boundaries, how you calculate the emissions intensity associated with the emissions that you produce, how you normalise it all back to carbon from the range of different greenhouse gases that you actually produce and who owns which tonne of carbon across a particular portfolio. In that sense, it is quite crucial.

We have made the argument that there are amendments that can be made to NGER to make it a little bit more useful in increasing the level of granularity around the data that is collated but not disclosed and potentially also around the timeliness of it. I think in that sense you need that kind of base foundation of the actual emissions to be consistent and then to be consistently reported for companies.

ACTING CHAIR: Do you it ought to become the job of NGER to tabulate scope 3 emissions?

Ms Herd : It should be the job of NGER to provide guidance as to how companies report scope 3 emissions. They do work in conjunction with other international reporting frameworks such as the GHG protocol, which is the international standard for how you account for emissions.

ACTING CHAIR: I guess that is my question. There is a reasonably well developed international standard. What could an Australian legislative response add to the GHG protocol?

Ms Herd : It could add specificity, make it specific to Australia. The GHG protocol is not quite the same as the Australian carbon accounting standard. It is a little bit more general, a little bit more high level in a lot of ways. It is the standard you use when you do not have a national emissions reporting framework. It is the global default standard rather than the nationally applicable standard. I do not think we should see it as a first option. It is definitely the backup option in that regard.

Essentially calculating scope 3 emissions is looking at which emissions in your supply chain, upstream or downstream, are associated with your business and then where you actually secure the data from and how you count it in a consistent manner. Again it is a question of how are you accurately counting the carbon and the secondary question is who owns the carbon, which is where we get into the financial disclosure component. Does that answer your question?

ACTING CHAIR: It might be something we explore through the course of the day and we will come back to you if we have any other further questions about that. We might move on to the corporate reporting arrangements and the carbon risk disclosure.

Senator WHISH-WILSON: I have some questions about Ms Herd's statement. You said that basically companies are more advanced than it appears in their internal processes and mechanisms around carbon risks. Carbon risk is a pretty broad term. The committee defines it as any climate related risks rather than just emissions. Could you tell us why companies are not disclosing these things? Why are they keeping them to themselves? What is the key reason for that?

Ms Herd : I think different companies would have a different answer to that. In my experience, it would be that sometimes they are disclosing but just not through financial reporting. Some companies are disclosing it through their response to the annual Carbon Disclosure Project survey, for example. That is where they have got one piece of their performance picture. They might be disclosing some of it through that through NGER just into straight reporting frameworks. The might have some of it on their websites, in terms of their corporate strategy or response. But it is not consolidated and given the same level of rigour and robustness as inclusion in financial accounting delivers. But secondly, I think this is—

Senator WHISH-WILSON: Do you think that they have the data to a point where they can actually include it in an integrated financial and accounting mechanism?

Ms Herd : Yes, with the exception being the scenario analysis component, which we can probably talk a bit more about in terms of the TCFD. In terms of underlying performance data and a lot of the reporting that you would be talking about for the purposes of increasing disclosure, then yes, I would say that they definitely have it.

Senator WHISH-WILSON: What impact do you think the fact that we do not have a price on carbon has on this issue of disclosure or being even more pro-active? You may be able to quantify the quantity of your emissions, or through your supply chain, but if there is no value on those emissions because there is no price, is that handicapping this whole debate?

Ms Herd : It increases the level of uncertainty associated with the financial risks attributed to the carbon. You end up with a situation where, from an investment perspective, investors and often banks and other forms of lending are applying their own carbon price anyway, as a stress-testing parameter.

Senator WHISH-WILSON: Is that based on a voluntary market price? Where are they coming up with that carbon price from?

Ms Herd : It can be based on a voluntary market price, but more often than not it is a flat number that is applied. Then there is a methodology for increasing it over time, either in line with CPI or just on a forward-looking basis around expectations around tightening carbon constraints. To give you an indication, it usually starts where the former price was mandated at around $20 to $25, then you can apply it at a number of thresholds and stress-test it at $30, $40, $50 or $60 and look at what the implications are on investment outcome as a result of the introduction of carbon pricing.

ACTING CHAIR: Is that essentially the approach recommended by the TCFD?

Ms Herd : The TCFD does not specify price, but it does include that methodology of testing assumptions against policy mechanisms, which can include a carbon price. So they do include reference to it. They do not go so far as to specifically recommend a carbon price itself.

ACTING CHAIR: But is it sufficient guidance, in a country-specific environment, to make an assessment about what the possible policy parameters might be for long-lived investments?

Ms Herd : Yes. I think that, as part of the guidance on how to do a scenario analysis, it is one of the tools that they recommend as a means of undertaking the scenario analysis, as well.

Senator WHISH-WILSON: In terms of the political environment and the fact that there has been considerable uncertainty and policy instability, to put it mildly, do you think that is also affecting corporations and they are speaking out on this issue? The National Farmers' Federation has come out in recent days calling on the government to put a price on carbon and take some action in quantifying these risks. Do you think the political environment is holding Australia back?

Ms Herd : Certainly from the investment perspective. Over a decade now of policy uncertainty is a significant factor increasing investment uncertainty, particularly in impacted industry sectors and particularly the energy sector. I do not think it is any surprise to say that, and it is a position that we have also put forward in other inquiries such as the Finkel review which is currently underway, that investment uncertainty is now a major factor inhibiting investment in carbon-intensive industry sectors.

In terms of company reporting, the challenge for companies is that any statement that is made around climate change as a financial risk is then interpreted through the prism of the political debate. So companies have to be incredibly cautious about the statements that they are making and constantly apply that political lens. That is creating a level of conservatism that is inhibiting how companies talk about their strategic response to climate change. Companies are often much more prepared to talk fully and frankly to investors about what their view is than they are to talk publicly in a public debate, because it is just seen through the prism of the political debate of the last 10 years or more.

Senator WHISH-WILSON: In relation to carbon risk, we have systemic risks. I would like to ask you about what kind of work Australia has done in the macro picture. Those systemic risks impact all companies and no doubt they will need some sort of strategic response to those systemic risks. If you do not mind me being simplistic, there are the non-systemic risks that apply to individual companies, which they can manage, such as their own emissions or details around their operations. I know the two feed into each other. Could I ask you a question about the systemic risks of climate change? What kind of national policy framework does Australia have, and can you give us some benchmarks on overseas developments in this area?

Ms Herd : The question of how you understand climate change as a systemic, macroeconomic risk is a really interesting one. It is an area that is emerging concurrently with greater company understanding.

Senator WHISH-WILSON: You need one for the other, I understand.

Ms Herd : They are very much in a symbiotic relationship. What you are seeing, particularly around the process of the task force, which is why I said in my opening comments that it is proving to be so significant and influential, is that you have also had that dialogue going on between the corporate sector, the investment sector, financial regulators, insurance and every industry sector, talking about how you interpret these issues as financial risks; if you are an investor, how you aggregate them up at a portfolio level; then how you aggregate all of those issues up at an economy level? In terms of other jurisdictions that have been looking at this, obviously the fact that the TCFD is under the purview of the Financial Stability Board committee in the G20 is exactly where it should be, because this is a question of major economic transition that we are talking about in terms of responding to climate change.

Different regulators are responding to it in different jurisdictions. It is no secret that the Bank of England has been extremely proactive in looking at these issues. They undertook a major report on the impact on the insurance sector of climate change, both the physical risk and some of the policy responses. In Europe, as I mentioned in my submission, they have undertaken a review of the systemic risks at the European economy level and are now looking at forming an expert advisory committee to unpack and understand how to manage these issues. Different countries are looking at it in different ways. The US is slightly different. They drove it more out of their SEC reporting obligations and have run it at a more disaggregated level. Where that goes now will be interesting to see. So different countries have looked at it in different ways, but definitely this question of how you add up the risks to understand the macroeconomic risks of transition is something that has been happening concurrently with corporate reporting over the last couple of years—certainly in the last 12 months.

Senator WHISH-WILSON: We will be meeting with ASIC and APRA and these things will be ongoing. I would be interested to know whether it is feasible or reasonable for us to assume that they can even do that kind of analysis without the building blocks being done at a company level in terms of disclosure and reporting requirements? It is bit of a chicken and egg thing, but I think they are both very important issues. Whether we are looking at the regulatory transition or the physical risks, different industries will have better data on those particular issues. I do not know if you can add anything to that on where we really should be focused?

Ms Herd : The challenge for Australia will be, who owns this issue in the Australian financial regulatory system? There are arguments from a number of directions as to who is best placed to manage the financial systemic implications of climate change transition. Is it a question that there is no one single owner in the system, but rather we need to have a clearly delineated framework of ownership for different components of it. The insurance sector obviously has its own regulators, and the same with the banking industry; but how do we then look at the macroeconomic implications of transition issues like potential stranded asset risk if there is rapid decarbonisation under different portfolios. Who is looking at those issues is a question that is not clear to us at the moment.

Senator WHISH-WILSON: We had the coal-fired power inquiry a few weeks ago, which made this very clear.

ACTING CHAIR: I think recent discussions with Treasury would suggest that nobody is looking at these issues.

Senator WHISH-WILSON: I think that is a perfect summary. We asked just a week ago in estimates. There is all sorts of buck-passing as to who is supposed to be on the FSB inquiry, and no-one seems to be able to give us clear answers. The Future Fund is stepping up a bit, as you know. They seem to be taking this a bit more seriously as an investor.

Ms Herd : Every investor is applying their own modelling and looking at is, but that does not necessarily add up to a consistent approach. I sympathise with the challenge of the chicken and egg conundrum. You need the data to do the analysis, and you need the analysis to identify where the data gaps are. Investors have the exact same issue in terms of looking at their own portfolio-level emissions, which is one of the reporting requirements under TCFD. The French energy transition law is driving a lot of thinking around this, as well. How investors are thinking about it is adopting a best endeavours approach: where you can get the data, you apply the real data; where you cannot, you average it out or you assume data. This is driving a lot of corporate engagement activities with companies who do not disclose, saying, 'Either disclose your accurate data or we will do our own assumptions and we will ask you if that is correct or not; but essentially, either way we are going to be making an investment decision on the basis of performance, whether it is assumed or actual.' As a result it is in the interests of companies now to become more proactive in reporting their actual performance data.

ACTING CHAIR: Can I ask you about the role for government here. We have talked around it in the last few minutes. Some might say industry is already doing this. We have global direction through the TCFD. We have multiple global standards that have been developed through the UN and through other frameworks. We have a generic obligation in Australian corporate law to disclose material risks. What is the problem? I think it would be useful for you to answer that because there is an argument that this industry ought to get on with it and that there is no real role for government here.

Ms Herd : I think I would make the observation that a patchwork quilt of voluntary initiatives is no substitute for a deliberative and coordinated approach to corporate disclosure. That would be my first observation. Secondly, when you have a patchwork quilt of voluntary initiatives companies are free to pick and choose the reporting mechanism that bests suits their current strategy and performance. Thirdly, if you have variable reporting going on both in terms of who is reporting and the level of reporting—as we have seen in terms of the statistics, very low actual corporate reporting on strategy or financial risks—then you do not actually have an economy-wide view on how Australia is economically responding to these issues, either. Whether you are talking about consistency, quality or usefulness of corporate reporting, unless you actually have some sort of government-convened or coordinated approach to corporate disclosure of this nature, you are just not going to get the quality of data you need to make informed decisions.

ACTING CHAIR: If government were simply to say, 'Now, we have a report from the G20, it sets out a pathway, that is what we want industry to do,' would that be enough? Or is there more that needs to be done in the Australia context?

Ms Herd : I think there is definitely a role for government to play a convening role here in terms of working with industry, working with the financial regulators to actually articulate how that applies in the Australia corporate reporting environment. Where it fits under the corporations law to actually go about reporting against the ASX listing requirements, there is a gap there as to the 'how'. I think we have addressed the 'why' you should do it. We have addressed the necessity; we have addressed the global imperative. But we have not addressed how Australian companies should actually be doing it.

Senator WHISH-WILSON: Can I just clarify: with the ASX and with the ESG stuff that you talked about a bit earlier, it is actually voluntary as to whether they provide that information, isn't it?

Ms Herd : Yes.

Senator WHISH-WILSON: It is there, but they are not forced every time to say, 'There are no particular risks that we need to disclose.' They can just disclose them if they feel like there is—

Ms Herd : Companies do tend to adopt the approach of saying in their chairman's statement at the front of the report, 'We did not identify any material issues during the course of the last 12 months.' In that sense, the requirement there is universally applied, but it tends to be on an 'explain why you have not identified any kind' of basis.

Senator WHISH-WILSON: I am interested—in terms of the environment, we talk about climate, but obviously there is weather, which is your short-term fluctuations. Some people still do not accept the link between changing weather and climate change. There are very real examples of listed ASX companies that are very exposed to weather and things like warming waters, for example. The Tasmanian salmon industry is an example of where, recently, unprecedented warm waters off the coast of Tasmania destroyed their production last year. The sites are saying they are right off the charts. Has there ever been a case study or an example where ASIC or others have investigated companies for not disclosing these kinds of risks? I would be interested to know if there is something the committee could look at. If not, maybe we are in uncharted territories.

Ms Herd : I am not aware of any specific case in Australia. The challenge when you are talking about physical risk associated with the actual physical impacts of climate change is that it tends to be—there are two ways to understand physical risk: one is where you have acute physical risk, which is a specific extreme weather event—

Senator WHISH-WILSON: Like a cyclone.

Ms Herd : and the other one is chronic, which is where you have rapidly changing climatic conditions with the potential to impact a piece of infrastructure or an investment over time. So then the financial materiality assessment tends to become a factor of how long your investment is or your ownership of the asset is, or over what time frame. And there is no consistent framework for measuring or understanding that physical risk. At the moment it is primarily driven through investor engagement and corporate willing participation. We have tended to see certain industry sectors have pretty high recognition of implications here, such as energy utilities.

Senator WHISH-WILSON: Like the insurance industry.

Ms Herd : Insurance—obviously weather is their business, as is disaster risk. They tend to be quite proactive around developing sophisticated models, although a lot of them are proprietary. And then, from an investor perspective, we are seeing a lot more forward-looking scenario modelling around: over the life of my investment, what are the potential physical risk implications that could impact returns?

Interestingly enough, there has been a lot of debate around stranded assets resulting from regulatory shift, but increasingly what we are seeing is the potential for partially stranded assets, from physical risk, whereby there is nothing technically wrong with the asset; it is just that their main arterial route through which they ship their goods is underwater for half the year, or the port in which they export their goods has been severely impacted and is out of action for a period of time because of unplanned or unprecedented extreme weather conditions.

Those are the kinds of scenarios that, from a business-continuity perspective, investors are increasingly looking at. What is your plan? How are you responding? How are you adapting over time? And they are building that into their investment decisions, including, for example, the Future Fund. They do that as well.

ACTING CHAIR: Can I ask you about the consequences for Australian businesses, should we fail to resolve this uncertainty around reporting. I am thinking particularly about the exposure of Australian businesses to global capital markets and the global nature of our investment profile.

Ms Herd : Australian business does not operate in a vacuum. It operates in a global market. Whether it comes from Australian investors or international investors, they are facing the same pressures for increased disclosure and articulation of climate change risks and opportunities. We have seen that in terms of capital flows. We know that investors themselves are increasingly looking to manage down their own portfolio-level carbon risk by tilting their portfolios away from high-risk, high-carbon investments but also by actively pursuing new, emerging opportunities in low-carbon investments and low-carbon assets.

You only have to look at the drop-off in funding in 2014 with the RET review to see precisely what happens to capital flows if you get the policy settings wrong. There was roughly an 80 per cent drop in investment in renewable energy in a 12-month period. That money did not stop investing; it just went offshore to find the low-carbon investments that it needed.

I think the other side of it, which you increasingly tend to see in Australia, is shareholder activism whereby you have these global coalitions of investors that are banding together to engage with companies to get greater disclosure going. We saw that last year with Rio Tinto where a group called the Aiming for A coalition of international investors engaged with Rio Tinto, asking them to increase their disclosure. That was negotiated through a corporate engagement program with the board. Rio Tinto agreed to increase their disclosure, and the resolution was withdrawn.

So we are already seeing that level of activity getting underway, which is coming into Australian markets and affecting Australian companies, leading them to act anyway. The challenge then becomes: how do you marry it with existing reporting obligations and reduce the pressure for business to comply with both market conditions and Australian corporate reporting requirements?

ACTING CHAIR: In a context where—as you note in your submission—there is very direct guidance being given in the United States, in the EU and particularly in France through the energy transition process, is there a risk that, through allowing uncertainty to persist, we disadvantage Australia-headquartered companies in the search for global investment?

Ms Herd : I think that is less of a disclosure issue and more of an integrated climate change policy response issue. You have to look at all of the forces at play. With the ratification of the Paris Agreement we have numbers; we can reverse-engineer those numbers to look at specific financial indications. With TCFD we have a framework for reporting against them. And then, in terms of investor activity, we see deliberate investment decisions being made on the basis of performance against those various market drivers.

Australian business, like business all around the world, is looking for clarity and certainty around the direction and the pace of travel of those decarbonisation pathways and for a plan for how we are going to get there. This is not a radical message. This is the same message that business has been delivering for over a decade. We just need to get some resolution on how all the pieces fit together so that we can then translate that into the financial response and understand how companies are positioned competitively.

Senator WHISH-WILSON: How was the speech by APRA's Mr Summerhayes, who is presenting this afternoon, received in the investment community?

Ms Herd : There is nothing like a speech by the financial regulator to raise the profile of an issue at the boardroom level, that is for sure. It was a welcome indication of the thinking going on in the financial regulator, and it provided some very useful clarity around how they are responding and viewing these issues. I think it also feeds into that quite significant director and board level recognition that companies need a plan for climate change and that they will need to be able to articulate it to the market in terms of how they are competitively positioned against it.

Senator WHISH-WILSON: Senator McAllister and I both made the cynical comment that we are not sure who is playing the active role in negotiations with the FSB and the broader framework. Do you have any quick comments you could make from your understanding of Australia's government consultation at that level?

Ms Herd : I cannot really provide any additional insight in terms of government consultation at that level. We have not seen any government convened consultation within Australia. We have seen it in industry. Industry has been convening its own reviews and consultation around TCFD. There are a couple of Australian corporate representatives who are on the task force or who are participating with it, so industry has just been engaging through that side, but I cannot say that I have seen any formal industry engagement or consultation around participation in that process from our perspective.

Senator WHISH-WILSON: Thank you. I would have loved another hour at least, but we will put some questions on notice.

Ms Herd : I am happy to provide any additional information or answer any follow-up questions as well.

ACTING CHAIR: Thank you.