Climate-related financial disclosures are coming
Climate change is reshaping our environment, society, and economy, and as a result the financial outlook for business. To adapt to these changes, governments worldwide are working to better incorporate sustainability into the financial system, with a key emphasis on enhancing transparency for investors through climate-related disclosures.
Climate-related disclosures provide investors with more comparable information about businesses’ exposures to climate-related financial risks and opportunities, as well as their climate-related plans and strategies. This is crucial, as transparency is a cornerstone of efficient financial markets.
Whilst sustainability reporting has been voluntary and encouraged by many governments across Asia Pacific for over a decade, mandatory disclosure requirements have also begun. Singapore’s mandatory reporting for SGX listed companies started in 2021 and continue to expand. And, most recently, the Australian Government passed the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill through the Parliament bringing into effect mandatory climate-related financial disclosures for certain entities from January 2025.
Full climate risk disclosure goes beyond exposure
Disclosing an organisation’s future exposures to climate change is a useful first step, but as board directors and senior leaders will know, it doesn’t go far enough on its own. Rather, it should serve as a foundation for businesses to address the risks and opportunities they face.
Organisations are now looking for a credible transition plan which they can communicate to investors, clients and internal stakeholders. Yet existing guidance, such as the UK’s Transition Plan Taskforce’s Disclosure Framework, tends to be high-level. It is structured around principles of ambition, action and accountability. The guidance emphasises the need for a “strategic and rounded approach”.
The challenge of managing complex trade-offs under uncertainty
The key element missing from the current frameworks is clear guidance on how to balance complex trade-offs in transition planning. For climate risks there is a need to consider response options which, at a high level are to reduce, remove, or accept the risks. These need to be considered across an organisation’s activities and geographies over time. Compounding the challenge, there are significant uncertainties around how key climate risks will affect organisations in the short to medium term. In particular, our ability to predict acute physical climate risks —like extreme rainfall, hail or coastal inundation and erosion, which can significantly drive climate change costs—remains limited.
Complex trade-offs require data and analysis.
Airlines for Australia & New Zealand (A4ANZ) | We developed a Net Zero 2050 roadmap for Airlines for Australia and New Zealand (Qantas, Virgin Australia, Air New Zealand, and REX). Modelling emissions projections and developing a range of feasible, strategic options for the sector to decarbonise by 2050.
Cost-benefit analysis helps organisations make more informed decisions on climate risk
One economic tool that cuts through this complexity is cost-benefit analysis (CBA). Although CBA’s are often used by governments to assess the economic, environmental and social impacts to the broader community of a set of response options, it can also serve as an effective framework to evaluate the costs and benefits of response options for an organisation, to respond to physical climate change risks and opportunities.
A key advantage of applying CBA is its ability to capture a range of impacts and to incorporate uncertainty about the future by producing results based on expected values. By incorporating the impacts of events on organisations or the community that may be highly uncertain, CBA (including real options analysis) enables decision-makers to identify the conditions under which:
- a more costly upfront option (say an upfront investment in heat stress resilience measures, or water security measures) makes economic or financial sense,
- a staged or adaptive approach to investment makes economic or financial sense, by minimising the exposure to large irreversible decisions to points in the future when there is greater clarity on key risks.
While uncertainty will always remain, a sound CBA framework provides a more transparent and rigorous approach to efficient climate-related investments.
For example, we provided advice on the economic, social, and environmental benefits of constructing buildings to a higher flood resilience standard in a flood prone region. Our CBA supported complex decision-making involving land use, infrastructure, climate risk, and infrastructure planning guidelines.
Take a hypothetical example of an investment to reduce flood risk for a commercial property. While a more resilient solution is more expensive upfront, because it reduces the likelihood of inundation, it avoids broader costs of flooding, including business disruption and loss to custom for tenants. In this case, investing a bit more to deliver a resilient solution could provide better net outcomes.
In our experience, taking a systematic approach to analysing costs and benefits can identify proactive investments with a positive expected value. Equally, it can identify other responses where a wait and see approach is merited given current uncertainties.
In addition to being a framework for analysing responses to physical climate-change risks, CBA can also incorporate transition risks, such as the introduction of an internal carbon price. Here analysis can assist with understanding whether there are certain investments, for example equipment replacements with associated carbon-emissions reductions, that have a value proposition under specific transition scenarios.
Port Operator | We provided advice on the design and implementation of an internal carbon price. Using proprietary modelling and detailed analysis to provide a framework aligned to the Port’s business model and capital investment program, as well as a suite of detailed recommendations to guide the practical implementation of the framework across the Port’s business units.
We’ve had the privilege to work across a range of industries, applying economics to quantify climate risk and identify how best to respond to it. Examples include:
| Water | Created a framework to assist one of Australia’s major water businesses identify and value its key climate change risks. This framework laid the groundwork for informed, prudent and proactive climate-change related investment, including enhancing the company’s capacity to respond swiftly to natural disaster events. | Resources | Provided advise to a globally significant coal terminal on its long-term physical and transitional climate-related risks and the potential impacts on its access to financing. Our analysis and recommendations strengthened the business case for climate change adaptation investments, even under conditions of material uncertainty. |
| Transport | Advised a publicly listed, carbon-intensive business on the risk of asset stranding due to climate change. We developed forward looking investment and pricing strategies to help balance the need for continued investment amid significant uncertainty in long term market conditions. | Electricity | Advised multiple electricity distribution networks in Asia-Pacific on adopting an adaptive pathways approach to infrastructure investment. This approach justifies a staged investment strategy aimed at enhancing the climate resilience of electricity networks against a variety of increasing risks. |
| Forestry | Provided extensive advice on the impact of climate change on the management of Australia’s public native forests. We have assessed the value of preserving standing forests, in terms of carbon abatement, biodiversity, and other environmental services, compared to the lower financial returns form harvesting. | Materials | Conducted a financial analysis to assess the impacts of a major materials firm implementing an internal carbon price across its global operations. This analysis helped the client understand the incremental costs of associated with decarbonisation efforts, with and without the internal carbon price. |
Reach out to our team to find out how our economic tools and analysis can help strengthen your organisation’s response to climate-related risks.
