Out-Law Analysis 2 min. read

Australian banks must manage risk around climate-related disclosures

Green finance piggy bank with calculator-LinkedIn

Financial institutions are under increasing pressure to support the decarbonisation of industry through their lending practices but face being caught up in litigation if their actions do not match up to stated ‘green’ commitments.

The growing risk of climate-related litigation emphasises the need for Australian banks to take care to avoid ‘greenwashing’ when making public statements about their actions to address climate risk.

The approach of Australia’s biggest banks to climate risk

There is a growing focus on big banks’ actions in addressing climate risk since their lending policies are intrinsically linked to Australia’s efforts to reduce carbon emissions.

Australia’s four biggest banks – Australia and New Zealand Banking Group (ANZ), The Commonwealth Bank of Australia (CBA), National Australia Bank (NAB) and Westpac – have all committed to addressing climate risk in different ways and embraced global reporting standards set by the Task Force on Climate-related Financial Disclosures (TCFD), meaning an increasing amount of information is being made public in relation to their climate policies.

A report by Nikko Asset Management published late last year summarises the main commitments the ‘big four’ banks have made in relation to climate risk. Among other initiatives, each bank has set dates by which they plan to meet all of their electricity needs from renewable energy sources, while the institutions have outlined separate policies which will collectively have the effect of cutting financial support for fossil fuel projects.

Risks for banks

The commitments made by the banks come at a time when financial institutions globally are under increasing pressure from customers to stop lending their money for the purposes of investment in fossil fuels. The banks are, in turn, asking borrowers to diversify their portfolios and invest in renewable energy. The drive to reduce lending to the fossil fuel industry and incentivise investment in renewable energy means financing for fossil fuel projects will become harder to obtain, with there likely to be fewer such projects if the cost of capital increases.

There is an increased risk that banks that take actions that do not align with their stated climate-related commitments could face ‘greenwashing’ claims. Greenwashing is where an organisation implies that they are environmentally responsible but take action that runs contrary to that.

The increased risk of litigation is supported by data. The total number of climate change actions issued globally almost doubled between 2017 and 2020, according to data from the London School of Economics. Excluding the US, the majority of cases have been brought in Australia.

The risk of misleading advertising claims being raised against banks, or claims brought against board members for alleged breach of their directors’ duties have to be taken seriously. This merits banks exercising caution when it comes to making climate change-related goals.

However, a study carried out by KPMG last year found that while the top 100 companies listed on the Australian Securities Exchange (ASX) are, in general, more likely to have acknowledged climate change as a financial risk to their business, and to report climate-related risks in line with the TCFD recommendations, than the world’s 250 largest businesses, there are shortcomings in terms of how these companies identify climate risks.

Of particular concern is a lack of scenario analysis, which is recommended by TFCD to enable companies to anticipate different scenarios – from the ‘plausible’ to the ‘challenging’ – and make climate-related disclosures with reference to those scenarios playing out. KPMG also identified a lack of science-based reporting in some cases.

As the role of banks grows in driving decarbonisation across the whole economy, they must give careful thought as to how they balance the growing pressure and need for climate action with the risk of litigation if their actions and practices do not align with their disclosed commitments.

Co-written by Jesse McNaughton of Pinsent Masons.

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