Environmental, Social & Governance Discussions

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Ch 7. Mandatory Risk Disclosure: Climate & Biodiversity Loss

 Introductory articles on emerging exposures, risk mitigation
and insurance risk transfer for clients of Omnisure.

 A compendium of introductory ESG articles on emerging exposures, risk mitigation and
insurance risk
transfer for clients of Omnisure with claims examples.

Martin Birch – March 2022

Chapter 7 – Mandatory Risk Disclosure: Climate & Biodiversity Loss

Over the past year Australian corporate regulators have begun to enforce robust reporting on climate change related risks. Failing to comply with disclosure obligations will place company directors at risk of offending the requirements of the Corporations Act 2001 (Cth), namely sections 180(1), 181(1) and 299A(1)(c).

Task Force on Nature-Related Financial Disclosures

Mandatory biodiversity loss risk disclosures is approaching fast with the creation of the Task Force on Nature-Related Financial Disclosures (TNFD). It will release its biodiversity loss risk reporting framework in the second half of 2023. This framework is anticipated to be used to inform biodiversity loss risk disclosures in the same way that the Task Force on Climate-Related Financial Disclosures (TCFD) framework informs climate change risk disclosures. Trends indicate Australian corporations will be required to make disclosures in accordance with the TNFD framework once it has been released.

Boards of regulated entities should begin preparing themselves for the impending reality of being required to disclose biodiversity loss risk in the next two to three years. Please refer to our Foundation Document 1 to read more about board ESG oversight in an Insight publication by Corrs Westgarth Chambers Lawyers (“CWC”).

Biodiversity loss risk and the TNFD

The new ESG ‘frontier’ was canvassed in the first Corrs’ Insight which discussed the meaning of biodiversity loss risk and international developments including crucially, the establishment of the TNFD. The TNFD Informal Working Group provided preliminary guidance regarding what the biodiversity-related risk reporting framework will look like. The TNFD announced that it would be include“… disclosure recommendations for both impacts and dependencies on nature”. This is a departure from the TCFD, which only requires financial institutions to disclose dependency-related risks.”  The TNFD will release iterations of its proposed framework with the final framework due in 2023. Refer to our Foundation Document for more information.

Double materiality

Bringing sustainability into financial disclosure is has already commenced, but in this context of sustainability-related financial disclosure a new concept has emerged: double materiality. Double materiality is the notion of reporting bi-directionally on both ‘dependencies’ and ‘impacts’. In the context of biodiversity loss risk, it would take the form of corporations reporting on both:

  • Financial materiality – the impact of biodiversity-related dependencies and biodiversity loss risk on the company’s financial position and ability to realise its projected performance.
  • Environmental and social materiality – the impact of the company’s activities on global biodiversity.

Dependency Risk is the risk you take on whenever you have a dependency on something (or someone) else (pretty much any resource). Impact risk is the cost of a risk if it does occur (for example an impact on the environment). The materiality of the risk depends on one’s conception of materiality. The TNFD has indicated it will adopt the concept of double materiality incorporated into Article 29. Please refer to our Foundation Document to get further information on double materiality and dependency risk.

TCFD as a base

Having a working understanding of both the climate-risk reporting framework established by the TCFD, and the operation of Article 29, would stand boards and directors in good stead in preparing for the introduction of biodiversity loss risk reporting as a component of financial disclosure. The TCFD Framework sets out four categories of disclosure regarding climate-related risks:

  • Governance;
  • Strategy;
  • Risk Management; and
  • Metrics and Targets

Disclosure under this framework is increasingly being enforced by ASIC and the ASX Corporate Governance Council as an aspect of directors’ duties under sections 180(1), 181(1) and 299A(1)(c) of the Corporations Act 2001 (Cth). This was discussed in detail in a recent Corrs’ Insight by Chambers Corrs Westgarth Lawyers (CCW), who believe that biodiversity-related risk disclosure may gain the attention of the regulator ASIC and ASX in the same way.

The lack of standardised metrics

While biodiversity-related risk reporting has been positioned as the next layer of financial disclosure, there remains a lack of robust, standardised metrics and targets for measuring biodiversity impacts. As a consequence, there is a lack of data that can be properly utilised for decision making in a corporate environment.

Significant data gaps can make it difficult for corporations to accurately and adequately assess their biodiversity-related risks and impacts. This has been acknowledged by the TNFD as follows:

“… to integrate nature-related risks in their decision-making, financial and corporates need decision-grade data, and right now, that’s not available. To close the data gap, both corporates and financial institutions must measure, track and disclose their impacts and dependencies on nature.”

In terms of tangible targets, while a corporation could adopt its own targets, as noted above, CCW think that it is likely that in the near future international biodiversity targets will be adopted, which will guide domestic policy.

1 Our Foundation Document is the original full text version of “ESG Discussions – Introductory articles on emerging exposures, risk mitigation & insurance risk transfer” for clients of Omnisure, compiled by Martin Birch. Register on our website for a full copy.

Please contact Martin Birch for a copy of the full-text Foundation Document at martin.birch@omnisure.com.au