Under new laws that come into force on January 1, 2025, many large Australian businesses, including insurers, will need to prepare annual sustainability reports with mandatory climate-related financial disclosures.
As brokers celebrate the start of a New Year, those with bigger corporate customers need to understand the risk management and insurance implications of The Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024.
Joe Longo, chair of the Australian Securities and Investments Commission (ASIC), has described this law as part of “the biggest changes to financial reporting and disclosure standards in a generation.”
Christopher Au (pictured above) is the global broker’s climate practice and alternative risk transfer lead for Asia-Pacific.
He said local companies are already addressing these risks as part of governance requirements. However, the new laws heighten these demands and set new benchmarks for senior executives and boards.
Singapore-based Au explained why these new laws are rolling out.
“The operating landscape for companies has changed,” he said. “If we think about physical risk we are facing a world with some uncertainty, a world that fundamentally has more property damage and more business interruption than we previously had.”
He suggested that brokers need to get their customers to look at how these changing physical risks impact their business model and assets.
“How is my [the business’s] cash flow going to be affected by some of these changes to the physical environment?” Au said.
The WTW risk expert suggested that brokers need to be very clear with clients around these changes. One challenging area, he said, is transition risk.
“This is something that is really growing and important,” said Au.
According to online sources, these risks arise when economies transition to a low carbon economy.
“We do a lot of work with insurers and investors who are starting to look at areas in the economy that they believe will outperform,” said Au. “They're also starting to minimize their risk on the downsides.”
Au said WTW recently looked at the scope 1 and scope 2 emissions profiles of 10,000 public companies. The aim was to estimate their possible cash flow in 2050, the target year set by the government for the country’s transition to net zero emissions.
Scope 1 emissions are greenhouse gas emissions from sources owned or controlled by a company. Scope 2 are indirect, for example, from a company’s electricity use.
“We took a view as WTW as to whether each company would have an increase in cash flows or a decrease in cash flows if this transition happens,” said Au. “So what is the likely volume of goods and services that are delivered in a 2050 economy following government commitments, following policy pledges, following capital allocation.”
Au said WTW found that there was no correlation between emissions profile at the organisational level and the value of the firm in 2050s low carbon economy.
He gave the example of a mining company extracting the materials needed for electric vehicles and solar plants.
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“They [will] probably have an increase to cash flow if the transition happens, yet, their emissions are going to be very, very high,” said Au.
He said this firm would face many responsibilities, including around emissions and water use and even human rights issues in their supply chains.
“But if we look at it from a purely transition perspective, we actually think they have upside and they have value in their business,” said Au.
Transition risk challenges and opportunities, he suggested, require brokers and their clients to look beyond carbon taxes and emissions reductions.
“We think companies need to focus on looking at their climate risks through the lens of the AASB [Australian Accounting Standards Board] and also as a business risk,” said Au. “They should see that the landscape is changing, investor sentiment is changing, the Australian government has a net zero plan and to reach net zero emissions in 2050 there's a high prioritization on low emissions technology.”
However, brokers and their clients adapting to the new climate risk management and reporting requirements, he said, also need to be aware of what is happening on the ground, not just in regulations.
“You have to look at what is happening in the economy and what is realistic,” said Au. “As state grids decarbonize, you can only set targets that are aligned to the decarbonisation of the state grid.”
Adding a dose of broker style realpolitik, the WTW expert and his colleagues at the seminar, recommended that firms plan for two different emissions targets.
“One that aligns the Australian government plan of net zero by 2050 and one that has a bit more flexibility based around what is happening in the economy,” said Au.
Earlier this week, the Insurance Council of Australia (ICA) released its Climate Change Roadmap.
According to the report, 85% of ICA members have set net-zero targets by 2050 with 50% aiming for 2030 operational net-zero targets. The survey also found that more than 60% have linked climate metrics to executive pay.
Are you an insurance industry stakeholder? What’s your general view of Australia’s new mandatory climate-related financial disclosure requirements? Please tell us below.
