Transcript of Question & Answer Session Panel participation at Impact X Sydney Summit on ‘Disclosure as a Catalyst for Climate Investment and Opportunity'

Today, I'm joined on the panel with my colleagues, Louise Cantillon, the Consul General in Sydney for the UK Government. Guy Debelle, the Deputy Governor of the Reserve Bank of Australia, and Travers McLeod, the CEO of the Centre for Policy Development. Let me give you a framing for the conversation this afternoon. It's 2015, and you are all in a packed out press conference at the world's biggest and most important climate conference, which is being held by one of the world's wealthiest individuals and the Governor of one of the biggest central banks.

In any other circumstances, it would be considered a fireside chat, but they announced that they're going to pursue the realisation of this thing that is arguably the world's first finance-related tongue twister, 'The Task Force on Climate-related Financial Disclosure'. Now, not long after that, in Australia, the Centre for Policy Development in concert with an irascible but, arguably brilliant corporate barrister and a major Australian law firm decide to test the waters on whether there is now a convergence of directors' fiduciary duties and climate risk.

‘Was it possible?’ they asked, ‘that climate risk could now be also a shareholder-relevant concern and if they move fast enough and with credibility, an opportunity for companies.’ Barely 18 months later, and Australia's central bank and the key financial prudential and corporate regulators begin a dialogue with the Australian corporate and finance sector about what their thinking is and where they are heading on this thing called climate risk. And, meanwhile, across the world, similar stirrings albeit at different paces – some faster, in the EU, for example, United Kingdom and even New Zealand, some noticeably slower, although, now, catching up quite rapidly and I'm looking at you, United States – embrace a similar narrative and, more importantly, an acceleration and scaling up of systems change that will arguably embed into the global capital markets something most thought would take at least a decade to achieve, that is, valuing climate risk.

And it all reaches its current zenith with the announcement only last week that the United Kingdom will mandate TCFD for certain publicly listed companies. And, you know that it must mean something when the accounting houses bulk up their ESG assurance practices and there is a stridency of discussion about the urgent need to harmonise standards developed by groups, such as the Sustainability Accounting Standards Board, which is now the Value Reporting Foundation, the Global Reporting Initiative, the International Integrated Reporting Council, tThe Climate Disclosure Standards Board and CDP. Now, that's quite frenetic for five – oh sorry – six years' work. And so with that, we're going to be talking to the panel about what that all means. And, firstly, I'd like to throw open the discussion for you, Travers. Let's start with you and get your reflections on where we've come and why it's happened in the way it has. Over to you.

Well, thank you, Andrew and good afternoon, everyone. So, it might be helpful, Andrew, if I just provide a little bit of the history as you've just done on why disclosure is now so important and such a big driver of credible net zero transition plans and investment here in Australia. So, it was five years ago this week, you're right, from that magical mystery tour that we released the first of the legal opinions the Centre for Policy Development has commissioned from Noel Hutley, SC, and Sebastian Hartford Davis on advice from Sarah Barker and the team at Minter Ellison. And, the first of those opinions had earlier been presented to company directors, to financial regulators, including the Bank of England, to APRA and to ASIC. And, it was one, as you've alluded, that followed Mark Carney's memorable intervention a year earlier at Lloyds of London as Governor of the Bank of England, the adoption of the Paris Agreement and the formation by the Financial Stability Board of the Task Force on Climate-related Financial Disclosures.

And, the reason we commissioned the opinion is we thought it would help Australian directors and fiduciaries to be better prepared as the issues around climate risk came into sharper focus locally. And, at the time, there was quite a lot of dispute as to whether climate and climate risk was a board issue or not. So, the first of those legal opinions found very clearly that directors could and should be considering the business impacts of climate change in order to satisfy their duty of due care and diligence. And, they said it was only a matter of time before a director was found to be liable or action was taken against a director for not satisfying that duty of care with relation to climate risk. And, that was one of the reasons, just one, but a significant reason why APRA, through Geoff Summerhayes, gave two significant speeches about climate risk in 2017. The TCFD recommendations were released in June of that year.

And, at the end of that year, APRA, ASIC and the Reserve Bank and their colleagues on the Council of Financial Regulators in Australia formed a working group on climate risk. There have been some significant developments after the formation of that group, which I'm sure Dr Debelle will talk a little bit more about. But, APRA's intervention was followed very quickly by ASIC in 2018 through John Price, who said that ASIC's view was the opinion was legally sound and directors would do well to consider it. And, then, of course, Guy Debelle's speech in March 2019, where he spoke about climate change being a trend change, and that both the physical impact of climate change and the transition were likely to have first order economic effects. It was that same month that we released our second opinion from the same legal team, which found that the risk of liability was rising exponentially.

It took account of all of those developments, the regulatory developments, the TCFD, but also the scientific developments around physical and transition risk. And, last year we were encouraged through COVID to think about a third opinion, which went to the standard of care, not the existence of the duty. And, we did so in a different way, it's worth noting. So, we did it in coordination with a number of business peaks. So, coordinating quite closely with the Business Council, the Australian Institute of Company Directors and the Australian Chamber of Commerce and Industry and a number of directors, where there was an extensive workshop to look and work through the practical issues of discharging the standard. And, it was after that process that we released a third opinion in April this year, where there's a much bigger focus on how you discharge that duty, what the standard looks like.

And, it gave detailed considered to what is referred to as green washing. And, the key finding was that company directors and companies could be found to have engaged in misleading or deceptive conduct or other breaches of the law by not having had reasonable grounds to support representations made as to net zero plans or commitments about climate change. It found that net zero strategies were becoming a necessary and, in some cases, a key element of good climate governance. But, it's essential that it's not that they're done, but that they're done well. And, that net zero commitments that aren't based on reasonable grounds might constitute misleading and deceptive conduct, which would have serious consequences for those companies. And, we've seen a growing focus from the regulators on these issues and how the clarity, consistency, and accuracy of those disclosures can help to pull the transition forward.

Thanks Travers. Interesting insights there and we'll build on that in discussion now with Guy. Particularly because the RBA has weighed into this agenda in a very comprehensive way. Help us understand what has been the role of the Bank and the Australian regulators? And what does it mean for business? Over to you.

Thanks, Andrew. The Reserve Bank looks at this from the financial stability perspective, but I have a hat which is I'm the Chair of the Council of Financial Regulators Group on Climate Change in the Financial System. So let me speak at least as much from that perspective and the work that we're doing around disclosures, particularly that ASIC is. The first question I think to pose is: Why do we want disclosures? And one answer at least, is so that people can make informed investment decisions. We've got any number of estimates out there at the moment about how much investment is needed to ensure the transition to net zero, and there are very large dollars. But we want those dollars to be spent as wisely as possible and that requires usable and comparable information to be disclosed. And that's a very key motivation behind a lot of the work that's being done both here and globally around disclosures.

With the TCFD, which you highlighted earlier Andrew, the first document which came out of that work was pretty high level. It was somewhat useful, but not overly usable. But the TCFD has got a much more detailed and usable guide to disclosures, which I am confident is very much going to become the standard in this area. And so while you mention any number of streams of work going on in this space, they are beginning to coalesce, which is good because I think there has been a problem that people are saying, ‘well, which one do I actually use?’ And the answer, I think, we are very much getting to, and ASIC, and us at the CFR will reinforce, is it's the TCFD.

And particularly, the updated guidance, which is published as part of COP26. The other important development there, which you alluded to too Andrew, is that the accountants are getting on board and the IFRS Foundation is going to work directly – I think there may be an announcement possibly today if not tomorrow, in this space, Glasgow time – that they are going to work directly with the TCFD through the International Sustainability Standards Board.

So there will, with any luck, be this coalescence, not around that one common set of disclosures, because the one important thing is that they need to be both usable and comparable, so that people are talking in the same language. I think that's going to play a very important coordination device so that there is this baseline of commonality in disclosures. And that gets to the point that Trav was making a minute ago, around issues like green-washing, green bonds and the plethora of investment products that we are seeing come to market with ‘green’ as a fundamental feature. And for them to be successful and to direct investment where it's most needed, we do need this consistency and commonality of disclosures, both within Australia, but also right across the world.

Thanks for that. And Louise, let's bring you in now and build on both Travers and Guy. And can I say that the UK got pipped at the post by New Zealand in being the first to mandate TCFD. But let's face it, when it comes to size, what the UK has done will shape markets. Give us an appreciation of what's at stake here and why the government has decided to go down the route of mandating the TCFD. And in that, what's the upside for business in understanding its role in reporting and preparing the importance of TCFD reporting? Over to you.

Thank you, Andrew, and good afternoon to everybody. Yes. I think although we were pipped to the post, I think it's clear to say that the UK was one of the leading major economies to legislate for our commitment to net zero through our Climate Change Act, which was originally implemented in 2008 and then updated in 2019. And we are really aware of the challenge that this brings, right across the whole entire economy. And we know from the work that the TCFD has done, that markets and businesses require information to be effective and transparent around the risk to climate change, just as Guy was mentioning. The information needs to be usable and comparable and be consistent, not just in the UK, but across markets. So it's great that we're able to talk with our colleagues here, Guy and Travers on those subjects.

I think what that means for us as a government is that we and regulators need to create those right conditions, so that information is available, and so that we can transfer to a sustainable global investment economy. And we have just launched … I'm not sure if you're aware, but we held a Global Investment Summit just in the lead up to COP where we invited 200 of our, biggest investors to come. And at that time, we launched a new roadmap for sustainable disclosure requirements, which details more information about what we're looking for, and our expectations and the importance that we place on investor stewardship and how we want investors to speak to us about what information they need to ensure that we are allocating the right legislation, but also providing the right sustainable products. And I think that we will mandate from 2025, mandatory disclosure, but there'll be a phased approach to this. So it will start in April 2022 where we're working with about 1,300 British companies to start rolling out that mandatory disclosure. So yeah, that's just a brief update about where we are on that.

Thanks for that. Let's unpick some of the points that the three of you have made. And in our pre prep conversation, we were talking about two particular elements of the TCFD that are obviously of interest to business, and certainly interest to the investors wanting the information that the TCFD reports will provide. And the first is the question of timeframes, a sense of what's the timeframe in which the next steps need to happen for this to occur? And obviously the UK government has, in one sense, put a tent pole, which is 2025, but with a series of activities that will lead up to that. And therefore, the market will certainly be firming and understanding what's going on. But Guy, let's go first to you. What's your sense of what that short term action is going to look like going forward?

I think in the near term it's very much going to be driven by the market, and we're already seeing this, particularly around disclosure. So we already have 80 of the ASX top 200 companies – this was as of last month, and they've increased subsequently – 80 of the top ASX 200 companies make climate disclosures under TCFD already. And in most cases it's because you have no choice. I'm sure quite a lot of them are willing to do it, but actually you don't have much choice because investors are demanding it and so I actually think that will accelerate.

Louise mentioned the timeframe in the UK, but I think what you'll see is they accelerate ahead of that because of the demand coming from investors. There's a large amount of funds wanting to be deployed in this space. I would say this is one case where, at least right now, the supply of funds potentially exceeds the demand that's there currently, notwithstanding the large amount of funding needed for the transition over a number of years, but right now supply probably exceeds demand, and they want to know where they should be deploying those funds, and that requires disclosure.

So it's, from a timeframe point of view, Andrew, it's really at the moment very much being driven by the investors and the companies are responding to that. And I think really what's needed is to get that commonality in the disclosures. We've got, I think in a lot of cases, a decision of disclose or not has already been answered, both internally by the companies but also very much by their investors, and now we've moved onto the question of what to disclose and ensuring the consistency there.

Yeah. Travers, let's bring you in here, and two things that I got from what Guy just said was this notion of coalescing, and also, I think, an appreciation that there's a maturation occurring within both the corporate and the finance world about the value of TCFD. What's your appreciation around the next steps? You indicated that you've just released that third advice. Is there a fourth? What do you think? You and I both know Hutley very well, and I'm sure would appreciate the excellent red wine that's associated with it, but more seriously, what do you see as the next important steps for the embedding of TCFD into corporate decision making, particularly in Australia?

Well, I think Guy's spot on. There's clearly a critical mass, and I think firms, funds, regulators and governments will want clarity and consistency much faster. And you're seeing not just a focus on usability and comparability, but also credibility, and that is where there is that growing liability risk about the credibility or the reliability of commitments that are made. And I think that will mean there's a much faster push for it becoming mandatory, or at least much higher levels of prescription in the standard that is required and a joint effort to build capability across the board in that tail of groups that are not disclosing or disclosing well. I think there's almost a chorus of groups asking for that, almost pleading for it, because they're reporting in multiple jurisdictions and it would make it much easier if there was that consistency comparability and everyone happy to do it.

The only thing I'd add, Andrew, is that I think we'll see much more focus on public authorities as well and the need for TCFD disclosures for public sector companies and authorities. And there are lots of them in Australia, Commonwealth, state, local level, that are not reporting in the way that firms are, and that's a problem. And I think you'll see increasingly more attention from treasuries on these questions around climate risk, as it affects public authorities as well.

You've opened up a hornet's nest in relation to local government, which I think is entirely right. Let's build on that in a different way. We've talked about the need for speed. Let's talk about what the apparatus is, or the building blocks that are going to make sure that, that particular speed in its acceleration actually lands and is, as you say, credible into the future. And one of the big challenges is that clearly activity occurring around the development of taxonomies for embedding the work that comes through from this particular risk framework.

Now, let's go to Louise, and UK government, as you indicated, has mandated this, and it has also begun an important discussion with the finance sector around what is the credibility going forward of this particular work. Give us some insight on what you see as those important building blocks, not just in the UK, obviously the European Union has also flagged that they're doing the same thing, and for that matter Australia and New Zealand have indicated and set up apparatus to do the same thing as well. Over to you.

As Travers and Guy have said, there is a real need for evidence-based and accessible, and a common understanding, really, of activities and what they're reporting on. So our taxonomy is really driven from the EU's approach, but we've also tailored it to the UK economy and that will help us then define what economic activities are green. And this is part of our commitment of … we had a 2019 Green Finance Strategy, and developing that green taxonomy was a key part of that. So I guess we've drawn from Europe, but we're still, we're keen to discuss other approaches with other countries as well and see what works well for them. It's a new area for a lot of us, and I think there's a lot that we can learn from each other.

Travers, I'll bring you back in, and Australia's a different creature, very different ethos in relation to some aspects of corporate governance. Do you see the same activity occurring? We have had the work of the Australian Sustainable Finance Initiative released late last year, and there's work being built in relation to a platform of activity around that. RIAA, the Responsible Investment Association of Australia, has also picked up that important work, but what's different is that in Australia at least we've not talked about the implementation of the TCFD as a mandatory requirement, either under the Corporations Law or, for that matter, any other further bolstering of it through the ASX corporate governance requirements. What's your thoughts in relation to what the building blocks for Australian companies really needs to be?

Well, I think ASFI have done a power of work. I think there's still a bit to be done, because the planet that ASFI are orbiting is government, and there needs to be that unity between targets, policy and regulation on issues around taxonomies and standards because I think there is a worry about fragmentation. Fragmentation across jurisdictions, having a plethora of bilateral or regional approaches that do make it more difficult, not easier, for that comparability and usability. I think tomorrow or Thursday is Finance Day at COP, where there's probably going to be more said about this. But this is one reason why I think it would be very helpful – the Treasurer gave a speech on these issues not long ago – but if the Council of Federal Financial Relations showed the same sort of leadership on these issues, post COP, that the Council of Financial Regulators have shown, I think that would add some clarity around expectations and help with consistency across jurisdictions that make it easier for investors as well.

And Guy, let's bring you back, and my question is, you're in the unique position of in one sense sitting in the helicopter, watching what's going on around the world from a central bank point of view and that the sheer level of activity that seems to be going on around building these building blocks must both be breathtaking but very concerning in one sense because if it happens too fast then it upsets markets, if it happens too slow, clearly it upsets the planet. What's the balance that needs to be thought through in relation to how these building blocks are developed? And then ultimately, in Travers' words, not fragmented such that business goes well, there's one rule over here, this region has a different one, I can't understand why the UK won't approve my TCFD report. That's not going to be cost effective for anybody.

Yep, good point. I think what we have to acknowledge is that the EU and the Chinese taxonomies exist. So they are already out there and not necessarily completely landed but pretty close to it. And they will start driving investment decisions coming out of those jurisdictions in the very near future. That's a reality we just have to recognise here in Australia. And to Travers' point, I think that means we have to start and to some extent, the EU taxonomy is probably a starting point, but it's not fit for Australia. It's fit for the Europeans, but it's not necessarily fit for Australia. Its fundamental principle is do no harm, which I think is mostly do no harm to Europe, which doesn't necessarily mean do no harm to Australia. Sometimes they're the same, sometimes they're not, as we discovered back in the 70s with trade.

So we have to recognise that reality. As Trav mentioned and you mentioned, ASFI have been doing some work in this space, but I think over recent weeks or so the realisation's come that we, the CFR, the Council of Financial Regulators, need to play a coordinating device. It's great that the private sector initiatives are developing in this space, but I think we need to do a bit of coordinating. And to that end, I think we've got to try to make some progress on that between now and the end of the year, because I don't think we have a lot of time. But those taxonomies are going to be again driving global investment decisions and we have to be able to respond to that effectively in Australia. We are working through the G20 on that, but I think that may not necessarily land anything in the timeframe that's going to be required here.

And I suppose as I think I made this point a couple of weeks back … we may not like what the other taxonomies are, but if we don't have a credible alternative we have nothing to push back on that, or provide as that credible alternative. But the Trav's point, they have to be aligned. They can't be at cross purposes, otherwise that's not going to be effective and corporate Australia is going to find that almost impossible to work with. But from the CFR, Council of Financial Regulator's point of view that is going to be one of our main focus areas in the period ahead. It's to try and work with the industry, both the financial sector, but the corporate sector too, to try and develop a credible Australian variant on those taxonomies which are out there now.

A uniquely Australian approach to a global challenge. Thanks, Guy. Let's end the session, conscious of time. And no session in this conference really should be complete without a quick view from a couple of the panelists around their hope for COP. It's happening as we speak, although it's about to come up to daylight hours in Glasgow. So, let's start first with you, Guy and then to Louise, and then we'll round out. Guy, what's your hope for COP in, I was going to say 25 words or less, but I'm not going to hold you to a word limit.

I would stick with one, which is agreement. I think if we could get that – I'm not overly hopeful – but if we can get that, then I think that would be good.

That would be great.

But that's my hope.

Thank you for that. Travers?

I'm a McLeod, Andrew, and so the Scottish motto is hold fast. And so, not unlike Guy, I think if countries are held to more ambition, particularly around 2030 and credible transition planning so that we can get our skates on, that would be my hope.

Skating through Glasgow. Now there's a challenge. And Louise, you're the hosts. Give us that sense of hope that the COP will be as successful as your Prime Minister in his ebullient way has indicated it must be.

Well, I was going to use his four words, which were coal, cars, cash and trees. But I think, four things that we'd like to see really are keeping that 1.5 degrees inside. I agree action for and targets for 2030 and making sure that there is action from this and thinking about climate finance, seeing our current financing goal over the next four years. I think that's it. There's lots more, but in a nutshell.

As always, a work in progress. Well, thank you everyone for joining us. I hope you found it interesting, stimulating and a little bit entertaining as well.