Financial services 'structurally behind' on calculating climate-related risks

Although financial services firms have formed "solid" governance structures to acknowledge climate-related risks, the action taken on them tells a very different story, a new analysis shows.

Sustainability consultancy ERM has analysed 33 disclosures under the Australian Sustainability Reporting Standards, which commenced on 1 January 2025, and found that less than one third of businesses have provided quantified financial impact on earnings, balance sheet or cash flows.

Despite disclosing significant climate exposures, most companies allocated little to no capital to address them - and it's rarely connected to executive remuneration, capital deployment or internal pricing mechanisms, ERM said.

Notably, most companies (around three-quarters) have also used first year exemptions to defer complex value chain related Scope 3 emission reporting, a measure of indirect greenhouse gases released outside of their control, including supply chain, employee commute, and product disposal.

"Australia's mandatory climate reporting regime is doing exactly what it is designed to do, it's getting the climate conversation tabled in the boardroom. Now companies have publicly acknowledged the financial risks associated with climate change, the next step is to build a strategy to remain profitable in world that is decarbonising and physically changing, and back their commitments with a credible transition plan," ERM lead partner corporate sustainability and climate change Mary Stewart said.

"Investors in particular need decision-useful information, and the onus is on reporters to quantify the risks they are declaring as material, including financial impacts, and explain how they intend to mitigate them."

Specifically, financial services businesses are "structurally behind" their peers in energy and resources sectors, which Stewart said should worry investors.

"Governance structures are solid but on metrics and targets, the pillar that captures whether climate risk is being managed, not just acknowledged, the sector scores lowest in the analysis," Stewart said.

"Climate disclosure maturity reflects proximity to risk. Energy and mining companies have been living with transition pressure for years, and that shows up in a more sophisticated understanding of climate risk and a more strategic approach to managing it.

"For financial services the exposure is just as real, but the urgency to act just isn't there from some of the early reporters. This should worry investors."

She added the current gap between identified climate risk and capital deployed to address the issue is stark, reflecting that companies haven't fully translated internal work into public accountability.

As a solution, she is encouraging investors to use AGM season to seek clarity on how seriously businesses are taking climate risk.

"What these first mandatory climate disclosures reveal is both encouraging and confronting. Governance is in place, but translating risk into strategy, capital and accountability has just begun. Companies are recognising climate risk but still treating it as a future problem, or viewing transition and physical risk as challenges to be tackled one after the other. They are not. Both demand a response now," Stewart said.

"If you are heading into AGM season holding a company that has disclosed material climate risk but not quantified it or allocated capital to address it, you have the question you need to ask. Boards need to be confident they can answer it."