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28 Apr 2023 - Regnan: Investors are still not getting the ESG disclosures they need

By: Pendal

Regnan: Investors are still not

getting the ESG disclosures they need

Pendal

March 2023


Companies are increasingly disclosing their exposure to climate risks. But those disclosures often do not give the investors the full picture. Regnan's ALISON EWINGS explains

  • Climate disclosures too narrow

  • System-wide effects of climate change often ignored

IT'S been five years since the Task Force on Climate-related Financial Disclosures began trialling voluntary, consistent climate-related financial risk disclosures for use by companies.

While take-up has been good, investors still need to see a lot of improvement in ESG-related disclosures, says Alison Ewings, who engages with ASX-listed companies for sustainable leader Regnan.

About 80 per cent of big global companies now disclosed in line with at least one of the taskforce's 11 recommendations.

But most companies are still taking too narrow a view of climate risks and failing to consider the underlying, system-wide interdependencies and economics risks of climate change that will impact their operations, says Ewings.

A Regnan assessment of disclosures shows they are often narrow in scope and place climate transition risks ahead of considering system-wide interdependencies and different potential economic scenarios.

Regnan is a leader in sustainable investing and an affiliate of Pendal.

Regnan's Head "Look at what's happened in Australia lately -- fire, fire, flood, flood, flood -- everyone who's dependent on the Australian economy has been affected by those things," says Ewings.

"But when you look at an individual company you see 'well we're fine'. But you're not fine. You're not an island. You're part of the broader economy.

"We think about this as an additional risk that climate change is going to add for every business.

"Some businesses are more leveraged to economic activity than others, so they're more exposed, but they're all exposed to some extent.

"So instead of saying there's no climate risk, internally we talk about it as there being a background level of risk that is not nil.

"This is something that's not being explicitly considered by companies in their TCFD disclosures and we're not sure that it's really being explicitly considered by investors, insurers and banks."

Five underlying climate risks for investors

Ewings says underlying climate risk can take five main forms.

First, general consumer behaviour will likely change as temperatures rise and extreme weather events become more common.

This could include changing preferences for food, clothing and holiday destinations, to the need to rebuild after natural disasters or even relocate for more favourable climatic conditions.

Second, businesses are all reliant in some way on the underlying infrastructure around them, from roads, telecommunications and power to access to water. Changes to the availability of infrastructure can have profound implications for a business's operations.

Third, disruptions in supply chains due to extreme weather, shifting demand or interrupted transportation.

Fourth, businesses rely on the resilience of the communities they operate in to maintain their workforce and customer base.

Assessing the health of the community should form part of a business's risk assessment.

And finally, with extreme weather no longer an infrequent, temporary phenomenon, overall economic growth is likely to be lower.

Businesses should reflect this base level reduction in demand in their planning.

"The key thing is the interdependency," says Ewings.

"Once you get outside of your organisational boundary, that's where things start to fall apart.

"For instance, companies do a good job of site-by-site analysis of the impacts of climate change to physical locations.

"But it is very rare to see consideration of the infrastructure on which they also rely on like the transport networks that move things to and from those sites.

"It's rare to see anything about the resilience of the communities in which their employees work -- it might well be that your factory is fine, but nobody can get there or nobody's feeling like coming to work.

"All of these factors should be considered."

Author: Alison Ewings, Head of Engagement


Funds operated by this manager:

Pendal Focus Australian Share FundPendal Global Select Fund - Class RPendal Horizon Sustainable Australian Share FundPendal MicroCap Opportunities FundPendal Sustainable Australian Fixed Interest Fund - Class RRegnan Global Equity Impact Solutions Fund - Class RRegnan Credit Impact Trust Fund

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