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Economics References Committee
08/03/2017
Carbon risk disclosure

DAY, Mr James, Director, Australia and New Zealand, CDP

ACTING CHAIR: Welcome. Would you like to make a short opening statement?

Mr Day : Just to introduce ourselves, CDP is an international, not-for-profit organisation that runs a global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts. CDP was formerly known as the Carbon Disclosure Project. Since its formation in 2000, CDP and the hundreds of institutional investors we work with have played a formative role in building awareness of climate risks and opportunities. Our data has helped build a business case for emissions reduction, informs investment decisions and is an integral part of information platforms used by investors such as Bloomberg, Thomson Reuters and MFCI and public interest platforms such as the UN's Non-State Actor Zone for Climate Action.

Our climate change program received global data from over 5,800 companies globally in 2016, over 500 cities around the world and over 70 states and regions. This data provides investors purchasing companies, and the world at large, with access to high-quality climate change information to effectively manage our individual and collective responses to the global climate challenge.

Here in Australia, in 2006 CDP began requesting climate change information from ASX listed companies. That was in partnership with the Investor Group on Climate Change, which I believe you heard from earlier today. In 2015, 390 Australian companies, including 94 of the ASX 200 listed companies, reported greenhouse gas emissions or other climate information to CDP. Over 60 of the 800 institutional investors that back our climate change request are based here in Australia. Their collective assets totalled over US$3.8 trillion in 2017.

Amongst Australian cities, Adelaide, Canberra, Melbourne, Perth and Sydney all participate in the CDP Cities program. Sydney, where we are today, has just been recognised by CDP for demonstrating leadership in climate change disclosure, and was ranked in the top five cities globally for the quality and detail of the climate related data that it reported. The ACT and South Australia report through CDP to the Compact of States and Regions, which they are signatories to. Our submission to this committee was also done jointly with the CDSB, and its mission is to elicit, through mainstream corporate reports, climate-related information that could be acted on by investors, trustees, directors and managers in their decision-making. CDSB has developed a framework for companies to use in reporting environmental information with the same rigour as financial information. CDSB has carried out evidence-based research on how lessons from mainstream reporting can be used to enhance the development of climate, natural capital and environmental reporting. Here in Australia, the CDSB framework is used by National Australia Bank, Caltex, Boral and others, and many others globally also use our framework.

To summarise some of the key points from our framework, CDP's climate change program requests information from companies about both climate-related risks and opportunities to generate the largest climate change reporting platform in the world. CDSB frameworks are designed to assist organisations to prepare environmental information for mainstream financial reports through principles and requirements. In terms of carbon risk disclosure frameworks, which are the subject of this inquiry, there are a number around the world, as I am sure you have probably heard already. France, in 2015, instituted the law for energy transition and green growth. The US SEC rules on non-financial disclosure include risk disclosure elements. The UK companies act 2013 also includes this, as do the EU directive on disclosure of non-financial and diversity information and the US insurer climate risk disclosure survey, which is modelled on CDP's climate change questionnaire. A number of countries have also implemented greenhouse gas emission reporting requirements, including Australia, although these schemes tend to be designed for policymakers rather than for futureproofing financial markets.

In terms of carbon risk disclosure frameworks for investors, CDP, the UN Environment Programme's finance initiative and a number of institutional investors co-founded the Portfolio Decarbonisation Coalition. It is actively driving decarbonisation of over US$600 billion in assets already. There is the Montreal carbon pledge, which over 120 global investors have signed on to to measure and publicly disclose the carbon footprint of their portfolios. There is also the Asset Owners Disclosure Project, which was started here in Australia, which has no connection to CDP.

In terms of current carbon risk disclosure practices in corporate Australia, we worked with Net Balance Foundation in 2015, and their analysis of ASX 200 disclosure practices found that the detail of climate risk disclosures made through CDP is far greater than in their mainstream reports. High-performing sectors include property, utilities and the food, beverage and tobacco sector. Only around a third to 43 per cent of ASX companies responding to CDP classify climate risk as having a medium, medium-high or high magnitude of impact on their operations. The differences between CDP and their general sustainability reporting could indicate that many companies do not identify climate risk as material risk, unfortunately.

You will also, no doubt, be aware of the Task Force on Climate-related Financial Disclosures, set up by the Financial Stability Board of the G20. This was established to monitor and address vulnerabilities in the global financial system. In 2015, it was convened to review how the financial sector can take account of climate-related issues. The final recommendations from the task force are due in the second quarter of 2017, although we do have their initial recommendations.

I have not sure how we are going for time. I am happy to talk about our position on those recommendations, or we can go to questions if you prefer to do that at this stage.

ACTING CHAIR: Perhaps you ought to step through how you are thinking about that preliminary report, and then we might come to questions. That sounds good.

Mr Day : We have been very encouraged by the task force. We welcome their recommendations and we have committed to integrating their final recommendations into our disclosure platform from next year—from 2018. In terms of what our recommendations to them on what we think is needed, we think that amongst their recommendations—they have recommended things around scenario analysis; they have recommended that companies should report and disclose on how their companies are positioned in a two-degree world, for instance—we believe that, as well as that scenario, which the international community has committed to through the Paris Agreement, that companies should also disclose well below two-degree scenarios, because the international community has also expressed its commitment to that. In terms of other scenarios, we think that science-based emission reduction targets for companies should also be part of that scenario analysis.

For us to meet the global climate change challenge, all parts of society—companies, governments, civil society and individuals—all need to play their role in reducing emissions. CDP, along with a number of other organisations, including the World Resources Institute's Greenhouse Gas Protocol and WWF, has developed a methodology for companies to use to set science-based emission reduction targets. Already, over 200 companies around the world—major companies—have committed to setting emission reduction targets in line with the latest climate science. We also believe that companies should be developing and disclosing transition plans for how they are to transition from the current carbon-intensive economies that we have to the low-carbon economy, which we are already transitioning into. We believe that companies should also use a complier-explain approach as to which models they use for developing and disclosing those scenarios.

Other key things which we think should be developed by the task force around comparability. Investors purchasing companies, policymakers and many others need good comparability between the disclosures made by companies in order for that disclosure to be meaningful and for good policy to be made from those disclosures. That comparability requires great guidance and reporting infrastructure, which I can go into. We believe that the task force should also suggest company mitigations against fossil fuel subsidies, which are continuing to promote the use of fossil fuels, which are contrary to the international community's desire to reduce dangerous climate change. Other aspects that we think that the task force should look at are expanding its largely Northern Hemisphere approach to work with other regions more closely, including the Asia Pacific and Latin America. Our experience also tells us that future-proofing of these things is necessary, that it is not possible often to set these things in concrete at the start of any sort of scheme and that they need to allow evolution over time, as science evolves, as technology evolves and as the needs of investors and other stakeholders become clearer.

Other things that that I think the taskforce should look at include clarification of existing legal duties. There have been legal opinions here in Australia—you probably heard about those already this morning—by senior counsel around the duties of board directors, but there should be greater clarification of duties around the world so that all companies and investors are clear in that regard. We also think there should be further recommendations around carbon footprinting, for both financial and non-financial institutions, both forward and backward looking, measured by the science based targets that I mentioned earlier.

Finally, we also think that mandatory disclosure is required, because, while CDP has been running an effective voluntary disclosure system now for over a decade, our experience is that, while in many advanced economies, like in Europe, for instance, we are getting around 80 per cent of major listed companies reporting through us, in other regions, like Australia, it is under 50 per cent, and in other regions, like the Asia-Pacific, voluntary response rates are even lower. For us to effectively manage the climate challenge and any sort of challenge, we need good data to do that. To get good data, we believe that mandatory disclosure is required. They are some opening comments, but I am happy to go into more detail if you would like me to.

ACTING CHAIR: Thanks. I reckon we will have a lot of questions for you. Can I start by asking about the audience for your data. You mention in your submission that it is two major classes of entity: it is institutional investor signatories and it is large purchasing companies interested in their supply chain. Can you just talk us through each of those and what their primary motivation or motivations are for engaging with you in this task?

Mr Day : We started originally working with large institutional investors who were wanting to better understand the risks and opportunities that they were exposed to through their investment portfolios in relation to climate change. We started initially engaging with the 500 largest listed companies around the world, because, by definition, the largest companies are the companies that investors have most assets invested in. Over time, we expanded the number of indices that we were engaging with to include other major stock indices around the world, like the FTSE index in the UK, the S&P 500 index in the US, the ASX 100 index, initially, here in Australia, and it expanded to the ASX 200. That underlying motivation, I think, has remained the same. The range of data that we have requested from companies over time has evolved to meet the needs of those investors, as well as the purchasing companies, which we began working with later. But they were the broad underlying motives.

The second broad group that you mentioned was large purchasing companies. We began working initially with Walmart in the US—a large supermarket chain, as I am sure you are aware. They had received a lot of benefits from responding to the disclosure requests, initially from investors, in terms of understanding their energy use, understanding where their emissions were in their own operations, so they wanted to expand that out to their suppliers, for a range of reasons—reducing their costs, improving the sustainability of their operations and also just getting a better handle on the sorts of risks and opportunities they were exposed to in their supply chains. After that very successful pilot with Walmart, we now have around 90 major purchasing organisations, most of which are in the private sector; companies like Unilever, General Motors and most of the car makers globally. But we also have some public sector members like the state of California, the US Navy and the US government's procurement arm, the General Services Administration.

ACTING CHAIR: Mr Day, can you give us an example of one of those data users changing either their purchasing arrangements or their investment profile in response to data that has been provided through the CDP.

Mr Day : Sure. It is a good question. A lot of these things take place behind closed doors which we are not always exposed to because we are ultimately a data provider. But from our members and signatories, we have heard quite a few stories about how they are using the data and what sorts of things are changing. Some of our purchasing company members—for instance, PepsiCo, the large beverage manufacturer—initially requested information from their major suppliers and they found that some of their suppliers were doing some really good things that were making their production processes much more efficient compared to some of their other suppliers. PepsiCo, for instance, has taken some of the lessons from those more efficient suppliers and gone to other suppliers that were less efficient and said: 'Right, these are some of the lessons some of your competitors have learnt. We are willing to invest in your company to make some of these reductions and in return we would like a cut of some of the savings that result.' That has benefitted both PepsiCo itself and it has benefitted the supplier—

ACTING CHAIR: Are there any other motivations beyond financial for the decision to engage in the supply chain—

Mr Day : A lot of these companies have quite strong sustainability targets. Many of them have found that they are not able to meet those targets without engaging those targets with their supply chain. Of those 200 companies, many are also engaging with their supply chain around climate change and sustainability. Walmart, for instance, has set both a science based omission reduction target and encouraged its own suppliers to set science based targets as well. That is because they think ultimately that is in the best interests of both their company and, in the longer term, the community, and the environment more generally.

ACTING CHAIR: Can I ask about that part of your submission that speaks to Australia's exposure to climate risk and carbon risk. Are Australian companies responding adequately to this level of exposure? We know that it is here—carbon tracker identifies it. Do you see action in the Australian market to respond to this level of exposure?

Mr Day : I think the answer to that would be not generally. I think there are many exceptions to that. We have a lot of high performing companies that disclose very well and disclose high-quality information through CDP. But, as I mentioned, the overall level of disclosure, even amongst listed companies, is not as high as it should be. I think last year around 45 per cent of the ASX 200 listed companies responded.

ACTING CHAIR: Can I ask if there is a correlation in your mind between the low level of disclosure and the low level of action in reducing exposure, because they are different but related.

Mr Day : They are different things. In Australia we are blessed and cursed in equal measure with an abundance of fossil fuels, and many parts of the society more generally are reluctant to change their ways because of that. We still have a lot of money flowing into fossil fuel exploration, despite what climate science tells us, despite what the international community has signed up to through the Paris Agreement and despite Australia having its own emissions reduction target. These things often take time but I think all those things are obviously connected. Changing our response to climate change is a bit like turning a supertanker around: it is a long, slow process.

ACTING CHAIR: Slower here than elsewhere, though, Mr Day?

Mr Day : Generally, I think the answer to that is yes. If you compare Australia to, say, Europe or the US, which many Australians would compare themselves as being similar to in lots of ways. We are all advanced economies and generally highly educated societies on average. Levels of disclosure are generally much lower in Europe. They are around 80 per cent of major listed companies. In the US, it is around 70 per cent. In Australia, it is around 45 per cent. That is only amongst listed companies, but that is our target audience for the companies we are engaging with. The reasons for that are complex.

Policymakers can also play a really important role in helping to clarify the future direction for where we should all be heading. The findings of this inquiry and, hopefully, other decisions by policymakers can make it much clearer that we need to move away from fossil fuels because of that desire of the international community to respond and prevent dangerous climate change and that we need to move much more rapidly to low carbon and zero carbon energy sources.

ACTING CHAIR: A final question and then I will pass to Senator Whish-Wilson. You mentioned in your remarks that there is a difference in how participating companies disclose their exposure to carbon risk to you and how they disclose it when they do so under the mandatory provisions of the Corporations Act. How should we think about that difference? What significance does it have?

Mr Day : There are a variety of potential explanations for that. When companies disclose to CDP they are disclosing to our institutional investor signatories and they are disclosing climate change information, specifically. By definition, you would expect that information to be more detailed than what they are disclosing in a multipurpose report like an annual report or other mainstream reports. That part of it is not surprising. The admission, though, in many cases, of any disclosure of climate risk from a lot of companies which are materially affected by or are material contributors to climate change is a concern. Some people have suggested a range of reasons for that. They include that some companies are telling investors what they think they want to hear in relation to, say, their CDP disclosure, and that they are not including that in their mainstream report. Part of it is a literacy issue in that there is a general lack of literacy around climate change generally, including amongst institutional investors, amongst the people that prepare company annual reports and amongst policymakers. Part of the limited literacy in that area often dismisses concerns around climate risk and opportunity.

In Australia, there has also been an unnecessary politicisation of climate change as an issue. Our response to climate change really should be like defence: it should be a long-term, bipartisan response that puts in place policy frameworks and measures that are supported by both sides—all parties—and where everybody, particularly those in industry sectors that are particularly affected, can just get on with the job of responding to climate change. Part of that politicisation has resulted because of the reluctance to effectively communicate around this sort of issue, because people's responses to it are seen to be either pro or anti climate change, and that is unhelpful. It is a long-term risk, it is a long-term challenge. We should just be responding to it and getting on with it.

Senator WHISH-WILSON: I am glad to hear that response—I am not glad that it is happening, Mr Day, but I am glad that you have acknowledged that. I think Senator McAllister has asked quite a few of the questions I had. Just a couple of things quickly. You mentioned the property sector has got good disclosure in Australia. Would that be because of their star ratings and the fact that they are required, under law, to already provide pretty significant information around prospectuses and built buildings and those kinds of things?

Mr Day : Talking to people in the property sector and externally, probably the major driver of that has been a property sector specific ratings thing called NABERS, which was initially set up here in New South Wales. It has provided a simple-to-use rating for both the owners of commercial property and the lessees, which makes it simple for them to understand what is a high-performing building and what is not. For those procurers of office space, it has provided a really simple rating. So companies that want healthy buildings, that want efficient buildings, have a really simple measurement for that.

Senator WHISH-WILSON: I am familiar with the ratings system; that is why I asked the question. I know Senator McAllister knows a fair bit about this too. I know it is fundamentally different to other industries and other sectors in the economy, but a ratings system on the back of these kinds of disclosures—do you think it has any broader applications to other industries in terms of an integrated reporting system giving companies ratings based on what they do and do not disclose?

Mr Day : Ratings can certainly make an important difference. If you look at the property sector generally, globally, they are amongst the poorer performers and the poorer disclosers in relation to their CDP. That high performance in Australia is actually unusual by international standards. That NABERS scheme, and hopefully also CDP to some extent, has helped to drive that higher performance. Having simplified ratings specific to particular industries would be helpful, and CDP itself is moving towards more of sectoral approach in its own disclosure platform so that we can ask more tailored questions of companies in particular sectors, particularly in high-impact sectors, as of next year.

Senator WHISH-WILSON: Has your company ever thought about developing a ratings system for individual companies or for industries in different countries so that investors can see that, for example, this coal company has got a very poor rating because it is not disclosing this series of metrics?

Mr Day : We do actually publish those scores. The vast majority of companies that disclose through CDP are scored using a scoring system that we have developed and evolved over time, and that scoring system involves both disclosure and performance components. It has actually been rated as the most credible corporate sustainability rating in the world.

Senator WHISH-WILSON: Do you think investors take note of it and they use it?

Mr Day : I think it is certainly used by a growing number of investors, particularly those that have made commitments around, say, footprinting of their portfolios, reducing the decarbonisation of their portfolios, and there are others that are actively interested and engaged around climate risk and opportunities.

Senator WHISH-WILSON: I know this is extending a little here into investment, merchant banking or brokering territory, but do you think stocks could ever be rated as a sell or a buy based on their carbon risk disclosures?

Mr Day : I am not sure if it is going to be purely based on their carbon risk.

Senator WHISH-WILSON: I know; there could be other factors.

Mr Day : When you look at, say, decisions by a number of major investors over the last year or two, I think more and more investors are making hard investment decisions based on this sort of information.

Senator WHISH-WILSON: And I know investors are different. You might have a long-term value investor who has a different time frame to someone else who might be a momentum investor. But given the kind of evidence we have heard about the structural changes, for example, going on in thermal coal, it makes me wonder why they have any investors at all, really.

Mr Day : If you look at Norges Bank Investment Management, the largest sovereign wealth fund in the world, it announced it is divesting from, I think, over 100 coal companies last year. You have had major investment banks like Deutsche Bank and JP Morgan announcing over the last six months or so that they will not be investing in coal projects. These decisions are already happening and Australia, being more carbon exposed than most, being the second largest coal exporter in the world and the second largest—and I think soon to be the largest—LNG exporter in the world, we should be very conscious of the risks that our economy is exposed to. We are also blessed with an abundance of renewables and those renewables could turn Australia into a renewable superpower. We could be exporting energy produced from renewables either by transmission lines to places like Indonesia or in the form of, say, liquid fuels—converting renewables into things like hydrogen or other forms of liquid fuels—to Japan and other places that we currently export coal to.

Senator WHISH-WILSON: I have three other questions for you. We do not have that much time left, so if you do not know the answers, you could take them on notice. I am interested in your reaction and recommendations to the Task Force on Climate-related Financial Disclosures. Have you received any feedback from the task force or other stakeholders in relation to your recommendations?

Mr Day : I have not been directly involved in engaging with the task force.

CHAIR: If you like, you could take it on notice.

Senator WHISH-WILSON: And whether, for example, the Australian government or various government departments are aware of your recommendations; whether you have shared that information with Treasury or our supposed stakeholders in this?

Mr Day : I am not aware. We are not a lobbying organisation, so have not been actively lobbying Treasury or other organisations around that.

Senator WHISH-WILSON: It is a shame; I wish you would. That is my personal view. We have received broad evidence about issues around compatibility between countries, and I think that historically has been the case. It is the same with accounting standards generally. I am wondering what you think the barriers are to getting a unified set of global accounts that everybody would be satisfied with. Presumably, there are some political barriers but there may be other ones. Could you briefly outline your thoughts on that? I know we are getting closer—but.

Mr Day : There is a range of barriers. One is that there is an understandable desire by a lot of companies to keep their reporting burden as small as possible. We are very conscious of that and we make a lot of effort to keep that burden to a minimum. There is also, equally, a desire by a lot of policymakers to design systems that capture information which is then held in that country for their policymaking purposes and that often creates additional burden on companies. So in trying to reconcile those two, the obvious solution is for policymakers to work together with policymakers in other countries—

Senator WHISH-WILSON: That leads on to my question.

Mr Day : or to support international initiatives that are working across borders to request this information and make it available, or use global standards that have already been developed so that companies can produce information for multiple purposes, including policy-makers, including investors, including purchasing companies and others, so that they are not just devoting a lot of unnecessary time to reporting and can focus more on responding effectively to climate change and other challenges.

Senator WHISH-WILSON: In relation to those cross-border cooperations, whether on policy issues or other, we had COP21—we had a global agreement. In terms of your suggested mandatory disclosure, was there a reason that there was not a framework put up around COP21 that was mandatory? You mentioned correctly that you cannot manage what you do not monitor, and, if you do not have the data, it is going to be very difficult to manage whether people are meeting their commitments and the best way to achieve that. Was it just that it got too hard politically for that kind of detail to go with it?

Mr Day : I am not privy to those behind-the-scenes negotiations. I think a lot of people that I have spoken to that were involved in those to some extent were very pleased that the agreement was able to be reached. So I think the fact that an agreement was able to be reached, after such a long time of no agreement being reached, was fantastic, and I think it is really now, following that agreement, that we are getting more into the detail of these sorts of things. I am sure these sorts of things will follow in the future.

ACTING CHAIR: Mr Day, that is probably all we have time for, but we are very grateful for you appearing today. The secretariat will follow up around those questions that you took on notice. Thank you so much.

Mr Day : Thank you.