Where should TCFD disclosures be presented in the annual reports of listed entities?

Although sustainability reporting is optional in Australia, listed Australian entities should already include details in their annual report, explaining how climate risks and opportunities affect their business. This article explains the why and where of climate-related disclosures for Australian listed entities in the 30 June 2023 annual reports.

Why TCFD disclosures?

Both the ASX Corporate Governance Principles and Recommendations and the Corporations Act 2001 strongly encourage listed entities to follow the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) recommendations when disclosing information about climate risk in their annual reports.

ASX Corporate Governance Principles and Recommendations

ASX Listing Rule 4.10.3 requires all Australian listed entities to prepare a Corporate Governance Statement and disclose the extent to which it has followed the recommendations of the ASX Corporate Governance Council during the reporting period, i.e. the Fourth Edition of the Corporate Governance Principles and Recommendations.

‘A listed entity should disclose whether it has any material exposure to environmental and social risks and, if it does, how it manages or intends to manage those risks.’

Recommendation 7.4 of the Corporate Governance Principles and Recommendations

In referring to ‘environmental risks’, Recommendation 7.4 requires disclosures about climate risk in a listed entity’s Corporate Governance Statement.

Even if an entity considers its exposure to climate risk to be immaterial, we believe that the ‘if not, why not’ approach to corporate governance disclosures requires the entity to explain how it arrived at that conclusion. This is supported by the Commentary to Recommendation 7.4 which notes that ‘The Council would encourage entities that believe they do not have any material exposure to environmental or social risks to consider carefully their basis for that belief and to benchmark their disclosures in this regard against those made by their peers.’

The Commentary to Recommendation 7.4 notes that one particular source of environmental risk relates to climate change. Recommendation 7.4 also encourages listed entities to consider the recommendations of the TCFD when assessing whether they have a material exposure to climate change risk, and to make the appropriate TCFD disclosures.

Corporations Act 2001

Section 299A(1)(c) of the Corporations Act 2001 requires listed entities to include a discussion in their directors’ report or Operating and Financial Review (OFR) about the business strategies and prospects for future financial years of the entity reported on.

Although s299A(1)(c) does not specifically refer to discussing business risks in the OFR, ASIC Regulatory Guide 247 Effective disclosure in an operating and financial review (RG 247) notes that it is important that the discussion about future prospects is balanced. That is, discussing future prospects without discussing material business risks that could adversely affect the entity achieving those prospects is likely to be misleading. RG 247 also identifies climate change as a systematic risk that could have a material impact on the entity’s future financial position, performance and prospects.

Both RG 247 and ASIC’s focus areas for 30 June 2023 reporting encourage directors to consider the TCFD disclosures in the 30 June 2023 OFR because following the TCFD recommendations will help position entities for any future sustainability reporting standards developed by the International Sustainability Standards Board, i.e. IFRS S1 and IFRS S2.

Where to include TCFD disclosures?

Regarding location of disclosures, the 2017 Final Report notes that preparers should include climate-related financial disclosures in their mainstream (public) annual financial filings.

Although strongly encouraged by the ASX and ASIC, we note that TCFD disclosures are still technically voluntary in Australia. Nevertheless, in order to comply with section 299A, TCFD disclosures should be included within the 30 June 2023 annual report, and preferably within the OFR.

All information required under s299A (and therefore climate risks and TCFD disclosures) must be included in the body of the directors’ report, or in a separate OFR that is cross-referenced¹ from the directors’ report. Entities cannot cross-reference information otherwise required by s299A in the directors’ report to documents outside the annual report package.

Note 1: Cross-referencing information required in the directors’ report is permitted by ASIC Corporations (Directors’ Report Relief) Instrument 2016/188.

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