Authored by Michael Mazengarb
With mandatory climate reporting looming on the Australian horizon, now is the best time for companies to start grappling with the requirements of effective climate disclosures.
Climate disclosures have become an increasingly challenging and difficult area to navigate, having regard to regulatory obligations, the need to manage climate-related risks over short, medium and long timescales, and the broader (evolving) sensitivities and expectations of shareholders, stakeholders and the community.
The challenge was evident at Woodside Energy Group Ltd’s (‘Woodside’) Annual General Meeting on 24 April in Perth, the company proposed an advisory resolution to support the company’s Climate Transition Action Plan and its 2023 Progress Report.
The two climate reports prepared by Woodside were opposed by 58% of shareholder votes cast, and marks the first time that a majority of shareholders have voted against an ASX listed company’s climate report.
The result highlights the difficult task for major Australian energy producers in mapping out the future of their businesses, and navigating an environment where shareholders (and other stakeholders) are demanding both greater disclosures of a company’s climate risks and impacts – disclosures that are likely to become mandatory for many energy companies for financial years starting from 1 January 2025 – and the details of credible plans for the company’s future in a net zero emissions economy.
As one of the world’s largest energy producers and exporters, Australia is home to many energy companies that are facing very serious climate transition risks, with prominent net zero emissions scenarios – such as the Net Zero by 2050 scenario produced by the International Energy Agency – calling for a rapid and dramatic reduction in oil, gas and coal consumption.
For many of these major energy companies, their direct Scope 1 and Scope 2 emissions are considerable but overshadowed by a much larger Scope 3 emissions footprint that accounts for third party emissions, especially emissions produced from the use of fuels supplied to customers.
Taking Woodside as an example, Scope 3 emissions represent the vast majority of Woodside’s overall emissions footprint. Woodside reported in its 2023 Progress Report that the scope 3 emissions produced from the use of its sold energy products amounted to 72.8 million tonnes of carbon dioxide equivalent emissions. This figure represented 88 per cent of its combined Scope 1, 2 and 3 emissions footprint of 82 million tonnes for the year.
It reflects a consistent theme across the energy sector and, understandably, Scope 3 emissions are attracting significant scrutiny from shareholders and advocacy groups focused on climate change concerns.
A related challenge is the treatment of future scenario modelling. Any failure to acknowledge the looming reality of what net zero targets and global climate action mean for energy industries will leave emissions intensive energy producers open to criticism.
The mandatory climate reporting regime currently proposed by the Australian Government will require reporters to test the resilience of their business models and value chains under climate scenarios consistent with the Australian Government’s commitment to the Paris Agreement and reaching net zero emissions by 2050.
The preparation and disclosure of climate change reports will provide greater opportunities for shareholders and interest groups to scrutinise the information included in those reports – an outcome that is one of the underlying intentions of the mandatory climate reporting regime.
There’s no reason why energy companies cannot chart a credible path in a global economy heading to net zero emissions. This may include the direction of capital and financial flows away from emission intensive energy sources, and towards emerging zero emissions alternatives, which may also improve access to equity and debt funding.
While not being legally binding, the advisory resolution on Woodside’s climate reports that was put to a vote at its 2024 AGM sought to do just that and gauge shareholder support for the company’s plan to manage future climate risks. The outcome highlights the difficulties that can be faced by companies engaged in emissions intensive or climate exposed industries in preparing a long-term climate strategy that meets the expectations of shareholders and responds to the scale of the challenge that climate change presents.
It is due to the scale of potential future climate change risks that concerns not limited to advocacy groups (who attend AGMs with proxies representing relatively small shareholdings), but are also front of mind for a growing number of institutional investors. Major institutional shareholders, including some of Australia’s largest superannuation funds and global pension funds – who all have long-term investment outlooks – are now demanding detailed transition strategies from companies in which they are invested and are using their considerable holdings in publicly listed energy companies to send that message.
An important takeaway is that climate reporting must be an iterative process, where companies will benefit from starting as early as possible to prepare their reports. Through learning-by-doing, companies can build confidence in their understanding of future climate risks, the strategies available to them to mitigate those risks, and the robustness of their transition plans, in order to win support from shareholders and other stakeholders.
As ASIC chair Joe Longo said in a speech in April:
“Yes, new climate-related reporting requirements will impose new obligations on directors and reporting entities. But they also create opportunities. More reporting requirements mean you benefit from greater visibility of the physical and transitional risks. You can also benefit from climate-related opportunities of other entities in your value chain, and more visibility on these issues across the entire economy. This will support companies to manage their own climate-related risk and opportunities over the short, medium and long term, in the best financial interests of the entity and its shareholders.”
Owl Advisory by KWM is available to assist clients with the preparation or verification of climate reports, including scenario planning and transition plans, covering both technical scientific data and regulatory requirements.
This publication is a joint publication from King & Wood Mallesons, and KWM Compliance Pty Ltd (ACN 672 547 027) trading as Owl Advisory by KWM. KWM Compliance Pty Ltd is a company wholly owned by the King & Wood Mallesons Australian partnership. KWM Compliance Pty Ltd provides non-legal compliance and governance risk advisory services for businesses. KWM Compliance Pty Ltd is not an incorporated legal practice and does not provide legal services. Laws concerning the provision of legal services do not apply to KWM Compliance Pty Ltd.
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