For the global sustainability community, the most effective catalyst of change has long been seen as the informed self-interest of the mainstream financial community: if banks and investors could be convinced of the proximity of environmental risk or societal impacts, then it has been assumed that capital diverted from ‘unsustainable’ practices would render all other interventions unnecessary. In practice though, the sustainability community has found the financial sector a hard nut to crack. Although recent years have seen a substantial increase in the integration of environmental, social and governance (ESG) data forming part of investment analysis, the continued emphasis on shortterm results and incentives has pushed longer-term environmental risks, such as climate change, outside of the boundary of risks contemplated by mainstream analysts. That is, until recently.

1. Let’s talk:
sustainability
Special edition on stranded assets
March 2015
Issue 4
“Stranded assets”: from fact to fiction
Disruptive innovation
Grid parity
Between a bank and a hard place
The future of global climate policy —
multilateralism or realpolitik?
Regulators put the spotlight on sustainability
disclosure: are you ready to comply?
Identifying material sustainability risks:
realising the benefits within your organisation

2. An effective sustainability strategy needs to look at all of the components that can affect your
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and assist you in taking concrete actions to identify competitive advantages, increase operational
efficiency and mitigate risk. EY has identified nine key elements that frame the discussion:
Join the conversation.
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visit ey.com/au/sustainability.
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3. ey.com/au/sustainability 1
“Stranded assets”: from fact to fiction
Foreword
History behind the ‘stranded assets’ debate
The concept of environmentally stranded assets originated in NGO campaigns against
the major fossil fuel companies that sought to demonstrate that there are more proven
reserves on the balance sheets of the world’s fossil fuel majors than could possibly be
monetised if the world was to avoid catastrophic climate change. Given that most of
the world’s governments share a stated intention to avoid catastrophic climate change,
the hypothesis was that a large number of coal, oil and gas assets must eventually be
stranded through political intervention. These campaigns called for greater disclosures
from the fossil fuel industry to attempt to force it to either acknowledge the existence
of effectively stranded assets, or the non-existence of an effective climate change
strategy. While these campaigns captured a few headlines they did not initially inspire
much concern within the financial mainstream.
Climate change | Emissions | Energy agenda
For the global sustainability community,
the most effective catalyst of change
has long been seen as the informed
self-interest of the mainstream financial
community: if banks and investors
could be convinced of the proximity of
environmental risk or societal impacts,
then it has been assumed that capital
diverted from ‘unsustainable’ practices
would render all other interventions
unnecessary. In practice though, the
sustainability community has found
the financial sector a hard nut to crack.
Although recent years have seen a
substantial increase in the integration of
environmental, social and governance
(ESG) data forming part of investment
analysis, the continued emphasis on short-
term results and incentives has pushed
longer-term environmental risks, such as
climate change, outside of the boundary
of risks contemplated by mainstream
analysts. That is, until recently.
2014 saw a remarkable increase in the
analysis of environmental and associated
geo-political risks in the wider financial
community, the primary focus of which
was on the suddenly credible prospect of
‘stranded assets’ in the fossil fuel sector.
Adam Carrel
Sydney
adam.carrel@au.ey.com
In this special edition of Let’s talk:
sustainability we seek to distinguish
‘fact from fiction’ regarding stranded
assets. It is not intended to draw a
conclusive line under the debate, which
we expect to become more rigorous over
the coming years. In part, as discussion
relies to a great degree on the accuracy
of forecasted political intervention,
and changes in global energy demand
and economic conditions. Instead, it
examines four variables driving concerns
that do have the capacity for significant
disruption, were one or more to converge
unexpectedly in the short-term.
These being:
•• The price competitiveness and
uptake of renewable electricity
generation — We consider whether
the progress of renewable forms of
generation will continue in spite of any
potential stagnation of global climate
policy, and what impact this may have.
•• Disruptive technologies — We take
a look at some x-factor technologies,
including industrial-scale energy
storage and carbon capture and
storage, to get a sense of how
proximate these potential game-
changers might actually be.
•• Debt and project finance — We
discuss the challenges facing debt
funding in light of significant tightening
of international and national
carbon policies.
•• Global and domestic climate
policy — We consider what, if any,
political consensus towards substantive
multilateral climate intervention might
be expected of the Paris Climate Summit
in December this year; or whether the
unilateral interventions of China and the
US could affect more material change.
We have seen a raft of mainstream
investors publically contemplate the
longevity of fossil fuel related assets,
with obvious and far-reaching implications
for major coal exporting nations such
as Australia.
What is most striking about some analysis
is that any political intervention
to limit, say coal-related emissions
(in particular by the world’s largest
coal consumer, China) is being portrayed
as only one frontier in a battle that might
well be lost to new forms of energy
generation with or without political
assistance. Furthermore, the diversity of
issues and perspectives regarding the rate
of change in the global energy sector has
permitted a degree of data ‘cherry picking’
on both sides of the debate which can
make it difficult to objectively evaluate
exposure at the company level.

4. Let’s talk sustainability2
Challenges and opportunities in
the energy supply chain
Progress, technology, disruptive
innovation. Disruption has become a
byword for progress in the modern
economy. Yet throughout history,
innovators have developed and adapted
new technologies — sometimes supporting
new activities, sometimes displacing old
ways of doing things, sometimes both.
The potential for disruption exists across
all industry sectors, though information
technology is often front-of-mind for most.
Across the energy value chain disruptive
innovation offers new opportunities
to deliver our energy needs with lower
overall CO2
emissions; from accessing
previously untapped reserves via
fracking, to dramatic improvements
in the emissions-intensity of coal-fired
power stations through the uptake of
ultra-supercritical coal, to improving the
energy efficiency in appliances. However,
disruption can also fundamentally
challenge the business model on
which the industry currently relies.
Indeed, the “stranded assets” thesis
requires disruption. That is, if radical
decarbonisation will be needed in the
way we generate electricity (alongside
innovation in other sectors). Under such
a scenario, the use of fossil fuels could be
disrupted through innovations including:
•• Electricity storage
•• Carbon capture and storage
Electricity storage
Electricity storage can operate at large
scale, and in different physical forms.
For example, pumped hydro systems have
used electricity at times of oversupply
to pump water uphill, to then generate
electricity at a later time as the water
flows back downhill. But with electricity
storage costs falling rapidly, distributed
electricity storage is increasingly being
considered as an approach to1
:
•• Delaying transmission capacity
upgrades
•• Increasing the use of variable output
renewables such as solar photovoltaic
(PV) and wind power by better
matching supply and demand patterns
(see article: Grid parity)
To limit global warming to within 2˚C in
2050 (a broadly recognised target that
avoids the most extreme impacts from
climate change), the International Energy
Agency (IEA) forecasts2
that global wind
power capacity would increase 15-fold,
and solar PV around 60-fold, from current
levels. Electricity storage will likely be a
fundamental enabler of this massive
re-alignment of global electricity
generating capacity.
For fossil-fuel based electricity generators,
such a future could be seen as a major
challenge. For countries increasing
their electrification rates, renewable
alternatives such as domestic-scale solar
PV plus electricity storage could offer a
viable alternative to the traditional grid-
expansion-plus-centralised-generation
electricity delivery model.
1
Vassallo, T, 2014. Energy storage: from
development to deployment. Australian Institute
of Energy, v32, no.4
2
IEA, 2014. Energy Technology Perspectives 2014.
www.iea.org/etp2014
At the same time, achieving a 2˚C climate
scenario could see a 40% fall in demand
for gas, 70% fall in demand for coal, and
over 95% fall in demand for oil in global
electricity generation by 20503
. However,
this must be put in context: with overall
global energy demand increasing (in
particular from developing nations) the
total quantity of fossil fuels needed will
equate to a predicted increase in their
extraction, despite making up a smaller
percentage of the energy equation overall.
Innovation in electricity storage, then,
could underpin significant disruption
in the current electricity supply chain
over the mid- to longer-term. The key
to unlocking these disruptive changes
in supply may be the cost and capability
of battery technology, of which there is
plenty of hope.
Carbon capture and storage (CCS)
CCS has been described as “the critical
enabling technology that would reduce
CO2
emissions4
”. Ubiquitous CCS use
should be an attractive option for
industry, government and society, as it
would simultaneously address pressing
climate concerns, increase infrastructure
investment, and support the long-run
value of coal assets.
3
Fossil fuels are used far more widely than for
electricity generation: for example, oil is used
extensively in transport, gas in fertilisers, and coal
in steel production. Despite these other uses, over
80% of the reduction in coal demand forecast by
the IEA in 2050 arises from falling coal demand in
the electricity sector. Changes based on IEA 2014.
4
MIT, 2007. The future of coal: options for a
carbon-constrained world. web.mit.edu/coal/
The_Future_of_Coal_Summary_Report.pdf
Stranded assets: from fact to fiction (continued)
Disruptive innovation
Graham Sinden
Sydney
graham.sinden@au.ey.com
Kim Farrant
Melbourne
kim.farrant@au.ey.com
Climate change | Emissions | Energy agenda

5. ey.com/au/sustainability 3
Despite this potential, implementation of
CCS to date has been limited: currently,
CCS plants around the world remove
around 0.1% of the world’s annual CO2
emissions5
. For CCS to deliver an 80%
reduction in forecast CO2
from coal in the
electricity sector by 20506
, five current-
generation CCS projects would need to be
completed each week between now and
2050.
CCS also adds cost to electricity
generation and other industrial processes.
When combined with enhanced oil
recovery (EOR), oil field production
benefits can offset the additional capital
and operational costs7
. Emissions trading
schemes offer a source of revenue;
however, the political and price uncertainty
associated with ETSs to date have not
been sufficient to drive private sector
investment in commercial scale CCS. In
addition, CCS faces significant liability
challenges, principally arising from the
long-term nature of storage required.
Addressing these challenges, alongside
the development of a robust climate
finance model that creates long-term
incentives for investment, will be
necessary for CCS to become a major
disruptive force in energy and
climate policy.
5
Global CCS Institute, 2015. Large Scale CCS
Projects. www.globalccsinstitute.com/projects/
large-scale-ccs-projects
6
Assumes an 80% reduction in emissions from
coal-based electricity generation in 2050, based
on IEA forecast of coal consumption in electricity
generation in 2050 under a 6o warming scenario
7
To-date, around 90% of operational and in-
development CCS capacity (by annual CO2 capture
volume) is associated with EOR (Global CCS
Institute, 2015)
Disruption, innovation, and stranded assets
Disruptive innovation is not necessarily a universal threat to fossil fuel companies:
disruptive innovation can contribute to both sides of the stranded assets debate, and
could occur at a scale that underpins large-scale change.
The fossil fuel sector is intimately linked to each of these technologies, and therefore
to the effects of the disruption to come, yet it may have a limited ability to influence
innovation in these sectors. The development and adoption of electricity storage
have their own commercial drivers, and consumer uptake could occur at a rate
that challenges the traditional energy supply chain. Widespread CCS deployment is
strongly linked to robust and stable climate policies being adopted by government.
Recognising these challenges will best place the sector for what lies ahead.

6. Figure 1: Levelised cost of electricity ($/MWh) by generation type10
10
Bloomberg New Energy Finance, H2 2014. Levelized Cost of Electricity Update
Let’s talk sustainability4
Stranded assets: from fact to fiction (continued)
Grid parity
Jamie Mattison
Sydney
jamie.mattison@au.ey.com
Graham Sinden
Sydney
graham.sinden@au.ey.com
What is it, and how does it
impact stranded assets?
Long seen as a holy grail for
renewables, “grid parity” may be
upon us. But what is it, and how does
it relate to the stranded assets debate?
Grid parity refers to the threshold
at which an emerging electricity
generation technology is able to compete
favourably on price against grid-
electricity, in particular from coal and
gas-fired generators, without incentives or
subsidies. The significance of grid parity is
that, once reached, electricity users could
have the option, and possibly an incentive,
to move away from centralised electricity
networks and generators.
Such a move would have significant
implications for existing assets: decreased
demand from traditional electricity
sources would not only undermine the
large-scale generation market, but could
also impact on the ability of transmission
and distribution operators to recover costs.
Under current tariff arrangements, retail
prices are dominated by energy costs, yet
the underlying price structure is dominated
by fixed costs. Were energy sales to fall,
fixed capital costs would be spread over
lower energy demand, raising prices. The
electricity industry has referred to this as
the “death spiral” with higher unit costs
for electricity driving further reductions
in energy demand, which in turn increase
unit costs for energy further.
Achieving grid parity
For the death spiral to occur, the cost of
self-generation will need to reach grid
(or “socket”) parity, including the cost of
generating electricity, plus transmission,
distribution, profit, and other costs. This
threshold has already been reached by
solar systems in most parts of Continental
Europe, South West US, and Australia.
It is also predicted to do so in Japan by
2016 and in the UK and Brazil by the early
2020s8
. Other forecasts are even more
bullish9
.
However, as the retail price of electricity
includes transmission and distribution,
some commentators consider that a more
comparable challenge for renewables
(including wind and solar) would be to
achieve “wholesale parity” where energy is
able to be supplied at (significantly lower)
wholesale market prices. This would be
no mean feat, as Australian wholesale
electricity prices are currently at record
lows of around $40/MWh.
There is logic to this “wholesale parity”
view, for while technologies such as
rooftop solar PV displace energy demand
on the grid (unless they also depress peak
power demand), the fixed transmission and
distribution costs remain, and thus need
to be recovered from a reduced demand
for grid electricity. This “free rider” effect
is real, but it is not new: any electricity
consumer whose energy demand is low
compared to their peak power demand
receives such a benefit (at the expense of
other consumers).
8
Citi Research, 25 September 2014
9
Deutsche Bank predicts that 80% of countries will
be at grid parity by the end of 2017 (DB 2015
solar outlook).
A level playing field
Both falling distributed generation costs
and increasing grid prices contribute
to reaching grid parity, and over recent
years both have been occurring. Solar
PV capacity costs have fallen around
80% over the last five years, largely due
to massive investment in production
capacity in China. In sunny regions, photo-
voltaic generation costs are beginning
to drop below $100/MWh. At the same
time, retail electricity prices in Australia
have increased significantly, and now sit
at around $250/MWh. This price/cost
differential makes a compelling case for
household investment in solar PV.
And it is not just rooftop solar PV. Wind
power has also experienced significant
cost reductions, and on a standard
levelised cost of generation analysis the
cost of generating electricity in some
regions is lower from new-build onshore
wind than it is from new-build coal (refer
Figure 1).
Climate change | Emissions | Energy agenda

7. ey.com/au/sustainability 5
Yet these comparisons may still obscure
the true cost of electricity, due to direct
and indirect subsidies in electricity
generation. In Australia, the subsidy
provided by the Renewable Energy Target
has been a focus of attention; however,
traditional electricity generators also
enjoy subsidy support. Some are quite
transparent — tax and depreciation
benefits, for example — and they have
been widely documented11
.
11
OECD, 2014.
Parity in energy services
Electricity networks do not just deliver
energy, they also deliver energy services
such as reliability and reserve capacity,
as well as ‘smoothing’ demand patterns
over a large number of sites and matching
supply with demand. Renewables
alone tend not to achieve this: solar PV
generates electricity when the sun shines,
and wind power when the wind blows. This
variability can also result in over-supply,
with network operators in Queensland and
New South Wales recently implementing
grid connection rules which prevent
household systems from exporting excess
electricity back to the grid, but it can also
result in under-supply.
The grid has a role to play in managing this
variability, at the right price. But it faces
disruption from electricity storage systems,
a technology that itself is seeing rapid
cost reductions. At network level, new
electricity storage systems may provide an
alternative to traditional reserve capacity.
But stand-alone storage systems could
also deliver energy services parity, as they
allow for electricity supply to be matched
to demand (see Disruptive Innovation).
Grid parity and stranded assets
Widely adopted, small-scale storage
systems could further erode the demand
for grid-based energy (and possibly
also undermine demand for the grid).
Research by global investment bank UBS
suggests that the average Australian
household could find it cost-competitive to
go off-grid as soon as 2018. But achieving
grid parity does not necessarily spell the
end of the grid, and there may also be
different impacts for network operators
and traditional generators.
For network operators, grid parity may
drive a transition from energy delivery to
energy services, acting as a ubiquitous
battery that provides energy whenever
demand outstrips renewable output. For
generators, grid parity offers greater
challenges. Renewables directly substitute
for energy delivered by generators,
reducing demand. At the same time, wide-
scale adoption of storage could deliver
peaking and reserve services usually
provided by conventional generators.
Being not only cost competitive, but also
operating at virtually no marginal cost,
these technologies could guarantee access
to competitive markets by outbidding
traditional generators.
And while the stranded assets debate
has tended to focus on the implications
of robust climate policy for traditional
fossil fuel energy sector investments,
it is the cost-competitiveness implicit in
achieving grid parity that could present
the greatest challenge to incumbents.
For many consumers, grid parity itself
may not be a sufficient driver, as the time
and effort involved in achieving energy
self-sufficiency may not be seen as viable.
But grid parity is not an end-point for
alternatives to the grid: costs continue
to fall, potentially taking renewables
(and storage) beyond parity. A cheaper
source of electricity could be very
attractive to consumers, leaving assets
stranded and an entire industry facing
significant challenges.
“The point at which solar-
plus-battery systems reach
grid parity — already here in
some areas and imminent
in many others for millions
of U.S. customers — is well
within the 30-year planned
economic life of central power
plants and transmission
infrastructure. Such parity
and the customer defections
it could trigger would strand
those costly utility assets”.
“The Economics of Grid Defection”,
Rocky Mountain Institute,
February 2014
“As energy management options such as smart appliances,
energy management software, in-home generation and battery
storage become more available and affordable, we expect to see
a significant change in the way customers use energy and our
network… (which) will have wide-ranging implications for the way
the distribution network is planned, built and operated”.
Energex, Annual Report 2013-2014

8. Let’s talk sustainability6
Stranded assets and the
challenges facing debt funding
The last two years have seen a new front
in environmental activism emerge both in
Australia and internationally, focussing on
the potential investment risk associated
with the fossil fuel (in particular, coal)
value chain. In Australia, this divestment
argument focusses on NSW and
Queensland, with the large coal deposits
of the Galilee basin, and related coal export
infrastructure becoming the new face of
environmental activism in Australia.
While the focus of the divestment
campaign was initially on equity owners
(Superfunds, University Endowments), the
scope of the campaign has now broadened
to include debt and project finance. Over
the last six months, the campaign has
targeted a number of global banks (e.g.
Deutsch Bank in Germany) and the big
four banks in Australia. The campaign
request is clear: given the significant
contribution of coal combustion to global
GHG emissions12
, and the significant local
impacts associated with the coal and
infrastructure projects (e.g. on the Great
Barrier Reef, air quality), banks are being
urged not only to shun new fossil fuel
investments, but also to publically disclose
their current exposure and risk to fossil
fuel assets that have the potential to be
“stranded” in the future due to a significant
tightening of international and national
carbon policies.
When disclosure is not enough
The extension of the fossil fuel divest
campaign to include banks and project
finance creates a number of challenges
and dilemmas for the Australian
banks in particular, and which could
ultimately result in less project finance
being available to support these large
investments. In most instances, banks
12
Coal accounts for 41% of global anthropogenic
CO2
emissions. EY analsyis, based on IEA (www.
iea.gov) and European Commission (edgar.jrc.
ec.europa.eu)
have historically relied mainly on
regulatory approvals, the application
of appropriate standards (e.g. Equator
Principles), and their own ESG risk and
credit due diligence processes to assess
participation in these projects. However,
this new operating environment is
more complex and nuanced, requiring
institutional bankers to consider a much
broader suite of issues as part of their
decision-making processes.
Long horizons, deep challenges
And these challenges will not be trivial,
as many go to the heart of the business
model. Banks are largely sector agnostic,
lending across most sectors as part of a
diversified portfolio of economic activities.
At the same time, most Australian banks
have public positions that recognise and
accept climate science, and the necessity
to move towards a low carbon economy
(i.e. maintaining global warming below a
2˚C increase on historic levels).
These two issues are not mutually
exclusive, as achieving a 2˚C scenario
would still see coal use within the
electricity sector and wider economy
in 205013
. And despite a lower overall
predicted share of the global energy
market, actual coal demand is predicted
by most to increase out over the next 40
years. This makes for interesting analysis,
where certain forms of coal will likely
outperform others, due to their thermal
calorific values, ash and sulphur content.
In a carbon-constrained world then, not all
coal is created equal.
Climate policy, or financial security
Limiting exposure to the fossil fuel sector,
and particularly the coal value chain, as
a mechanism for policy delivery would
sit uncomfortably for many, not least
the banking sector itself. That’s easy
to understand, given the significant
uncertainty in future development of
13
IEA, 2014. Energy Technology Perspectives
energy infrastructure, and what increased
role coal could play in a lower-carbon
future should supercritical and ultra
supercritical coal-fired power generation
become more prevalent, or should carbon
capture and storage become cost-
competitive and more commonplace.
These are, of course, not new
considerations for banks: any exposure
to assets should be accompanied by
an appreciation of risk, and priced
accordingly. But in the context of the
prevailing policy uncertainty and complex
operating environment faced by banks
(and other investors), a clear decision-
making framework for mitigating risks,
identifying new lending opportunities and
for enhancing decision-making processes
in respect of assessing energy sector
investments is essential. Indeed, the
framework for decision-making could well
be influenced by the tenure of investment,
with longer-term risks being significantly
discounted on short-term loans, say.
Regardless, a framework will likely include
the development of long-term views on
the evolution of the energy sector under
different climate policy environments,
together with an appreciation of the
likely path forward; communication and
consultation with key stakeholders of
the underlying rationale for the banks’
position; establishing targets consistent
with this long-term view; and integrating
these portfolio requirements into project
due diligence procedures.
And of course, revisiting the logic and
assumptions regularly. For as recent
history has shown, stakeholder concerns
and climate policy can shift rapidly.
Whether or not these changes result in
stranded assets, only time will tell; but
understanding the interaction between
climate policy, stakeholder concerns and
investment opportunity is most likely to
ensure that risk in the energy sector, and
many other sectors, continues to be priced
appropriately.
Graham Sinden
Sydney
graham.sinden@au.ey.com
Mark Lyster
Sydney
mark.lyster@au.ey.com
Stranded assets: from fact to fiction (continued)
Between a bank and a hard place
Climate change | Emissions | Energy agenda

9. ey.com/au/sustainability 7
Pip Best
Melbourne
pip.best@au.ey.com
Adam Carrel
Sydney
adam.carrel@au.ey.com
Stranded assets: from fact to fiction (continued)
The future of global climate
policy — multilateralism or
realpolitik?
Less than 25 years since the end of
the Cold War, the era of multilateralism
that it ushered in is facing challenges
on many fronts, not least of which is
climate change. As the 20th UNFCCC
Conference of the Parties (in Lima) comes
and goes with little tangible progress, the
prospects for a global climate agreement
being forged in Paris in late 2015 are
hardly clear. Of course, a global climate
agreement was always going to test the
limits of multilateralism’s potential. But
with the European Union and WTO facing
their own challenges to multilateralism,
the prospect of an enforceable successor
to the Kyoto Protocol being agreed in the
near-term could seem remote.
Increasingly the arena of international
negotiation is circling back to regionalism
and bilateralism, with the idea of a global
liberal consensus seemingly on ice until
the global financial crisis is a distant
memory. On the face of it, this might
appear to spell doom for meaningful
climate change mitigation; however, this is
not necessarily the case.
All politics is local
The biggest sticking point of the Kyoto
saga was America’s refusal to pursue
substantive emissions reductions if the
world’s second largest economy, China,
did not act comparatively. Although
China appears in no hurry to commit
to a global climate treaty, its domestic
response has become much more active,
and much more so than the USA. While
China is still the largest GHG emitter in
gross terms, it is also the world’s largest
investor in renewable energy, and has
announced plans to roll out a national
emissions trading scheme (ETS) that
builds on the regional pilots that are
already functioning. The China ETS, once
implemented, will be over twice the size of
the European Union ETS. In addition, the
government has placed new restrictions
on stationary power generators and the
quality of imported coal as a means of
addressing China’s major air quality issues.
To some extent, these recent climate
policy developments in China remove a
barrier to action in other countries, in
particular for the USA, and at the G20
meeting in December 2014 the USA
repackaged its domestic efforts as part
of a bilateral agreement with China. This
agreement set longer term greenhouse
gas emissions targets of a 26-28%
reduction by 2025 from 2005 levels for
the USA, and a peak in absolute emissions
in China by 2030 with at least 20% of
power generation coming from non-fossil
fuel sources. It is likely that there is also
an element of ‘containment’ in China and
the USA’s newfound interest in climate
partnership, an attempt to ensure that
approaches to climate mitigation remain
within each other’s manageable range.
But these developments also build on
an increasing history of climate policy
development, whether these be domestic
schemes such as in the USA (RGGI,
WCI), Japan, Europe, NZ or elsewhere:
developments that have proceeded
without multilateral consensus.
Politically stranded
For the stranded assets debate, climate
bilateralism ahead of any multilateral
agreement may present an easier path
forward for government (even while
a globally binding climate agreement
remains a minor), and might present the
final straw for already marginal assets.
And much now hinges on the 2016 US
Presidential election. While potential
Republican candidates may be as eager
to unwind the USA’s emissions reduction
programs as they have been in Australia,
a Democrat victor (in particular, Hilary
Clinton) is likely to view the USA’s current
efforts as a line from which there can be
no retreat. And an accord between the
world’s two remaining superpowers has
a certain gravitational pull which smaller
States are likely to be drawn towards,
including Australia.
Meanwhile, unlikely sources of support
for climate science, and refocussing
investment, are emerging. Already a
central figure in the lives of over 1.4
billion people, Pope Francis is increasingly
popular in secular circles: his comments in
support of climate change mitigation have
the potential to re-wire the attitudes of a
portion of the US electorate historically
unmotivated by climate policy. Meanwhile,
the Rockefeller Brothers Fund and other
investors publicly stated their intention to
divest $50b from fossil fuel investments,
in a move that is likely to add fuel to the
stranded assets debate.
It is likely that the USA and Obama’s
new found interest in brokering global
climate agreements plays to that oldest
of Realpolitik precepts: appearing weak
when you are strong and strong when you
are weak. Either way, that climate change
mitigation has remained elevated on the
global political agenda despite the wane of
the multilateral ideal confirms that, as an
x-factor in the consideration of long-term
investment decisions, climate policy it is
most certainly here to stay.
Climate change | Emissions | Energy agenda

10. Let’s talk sustainability8
Recent additions to reporting
requirements for Australian
companies have put a new
focus on sustainability
risk disclosure. In line with
international regulatory trends
and supporting the push
from stakeholders, both the
Australian Securities Exchange
(ASX) and the Australian
Investment and Securities
Commission (ASIC) are calling
on companies to report their
sustainability risks.
Australia’s changing
regulatory environment
In March 2014, the ASX Corporate
Governance Council released version
three of its Corporate Governance
Principles and Recommendations. The
Principles and Recommendations set out
the corporate governance requirements
applicable to all ASX listed entities.
Entities are expected to prepare a
statement responding to the Principles
and Recommendations or explain why
not in accordance with the if not, why
not approach.
One of the key changes, as detailed in
Principle 7, is an increased focus on
risk management and a requirement to
disclose non-financial and sustainability
related material risks.
Changes to the ASX reporting
requirements support the ASIC’s
Regulatory Guide 247, released in March
2013. It provides guidance to directors
preparing an operating and financial
review (OFR) or directors’ report, as
required by the Corporations Act 2001,
and highlights that effective disclosure
should include environmental and
sustainability risk disclosure.
The ASX recommendations take effect for
an entity’s full financial year commencing
on or after 1 July 2014, while the ASIC
regulatory guide applied to OFRs from the
30 June 2013 reporting period.
International trends in
reporting requirements
The ASX and the ASIC reporting
requirements are reflective of an
international trend encouraging
companies to not only disclose their
sustainability risks but also explain how
they are managing those risks.
Governments in both developed and
developing nations are requiring
sustainability disclosure through
a variety of mechanisms including
regulation and the report or if not why
not approach. Research released in 2013
by Global Reporting Initiative14
reviewed
sustainability reporting requirements
from 45 countries and found 180 policies
specific to sustainability disclosure of
which 72 percent were mandatory.
14
https://www.globalreporting.org/resourcelibrary/
Carrots-and-Sticks.pdf
In September 2014 the European Union
joined jurisdictions including Australia,
South Africa, India, Hong Kong and
Brazil and published its requirements for
non-financial disclosure with a focus on
policies, risks and outcomes regarding
environmental matters, social and
employee-related aspects, respect for
human rights, anti-corruption and bribery
issues, and diversity on boards
of directors.
Regulatory requirements are supported
by the increasing profile of international
sustainability reporting frameworks
including the Global Reporting Initiative,
Global Compact and International
Integrated Reporting Initiative, all of
which are referenced in the ASX Principles
and Recommendations.
What are the sustainability
disclosure requirements?
While the focus of the ASX and the ASIC
reporting requirements vary slightly
they are both focus on disclosure of
sustainability risk.
The key audience for the ASIC disclosure is
investors with the focus on the potential of
those risks to impact an entity’s financial
performance. The ASX recommendations
makes specific mention of the large
range of stakeholders impacted by an
organisation’s business activities including
security holders, employees, customers,
suppliers, creditors, consumers,
government and the community.
Regulators put the spotlight on sustainability disclosure
Are you ready to comply?
Reporting
Kathryn Franklin
Melbourne
kathryn.franklin@au.ey.com

11. ey.com/au/sustainability 9
ASX Principle 7: Recognise and
manage risk
Principle 7 acknowledges the
importance of a sound risk management
process. It requires companies to
have a committee, or committees, to
oversee risk (Recommendation 7.1),
supported by a regular review of the
entity’s risk management framework
(Recommendation 7.2), and an audit
function (Recommendation 7.3) to
improve risk management process.
A significant risk disclosure requirement
is detailed in Recommendation 7.4 which
requires an entity to disclose whether it
has any material exposure to economic,
environment and social sustainability risks
and, if it does, how it manages or intends
to manage those risks.
The ASX defines a material exposure
in this context as a real possibility that
the sustainability risk in question could
substantively impact the listed entity’s
ability to create or preserve value for
security holder over the short, medium
or long term. Definitions for economic,
environment and social sustainability
risks15
focus on long term impacts.
15
Economic sustainability: the ability of a listed
entity to continue operating at a particular level of
economic production over the long term.
Environmental sustainability: the ability of a listed
entity to continue operating in a manner that does
not compromise the health of the ecosystems
I which it operates over the long term.
Social sustainability: the ability of a listed entity
to continue operating in a manner that meets
accepted social norms and needs over the
long term.
While security holders are specifically
referenced, the commentary supporting
7.4 acknowledges sustainability risks have
the potential to impact a much broader
set of stakeholders including employees,
customers, suppliers, creditors,
consumers, government and the local
communities in which it operates.
ASIC Regulatory Guide 247
ASIC’s Regulatory Guide 247 provides
guidance around the content of an entity’s
OFR or directors’ report which forms
part of a listed entity’s annual report and
contains information investors would
reasonably require to make an informed
assessment of the entity’s operations,
financial position, business strategies
and future prospects.
Section 247.63 recommends that the
OFR should include a discussion of
environmental and other sustainability
risks where those risks could affect the
entity’s achievement of its financial
performance or outcomes disclosed taking
into account the nature and business of
the entity and its business strategy.
Where do companies report
their disclosure?
The OFR or directors report forms part
of an entity’s annual report as required by
the Corporations Act 2001. Therefore any
sustainability risks with the potential to
impact the entity’s financial performance
would be included in the OFR.
Under listing rule 4.10.3 ASX listed
entities need to include in their annual
report either a corporate governance
statement or make reference to where the
statement may be found on its website.
Recommendation 7.4 goes on to provide
further advice that this particular
recommendation may also be met
by a cross reference to an entity’s
sustainability report. Although
such a report is not a requirement
of this recommendation.
Are you ready to report?
In order to comply with both the ASX and
the ASIC recommended requirements,
entities need to ask some key questions:
•• Do we have a risk management
framework to meet the ASX
requirements?
•• Have I identified my key economic,
environmental and social
sustainability risks?
•• Was the approach to identifying
these risks robust and transparent?
•• Do I understand my stakeholders’
perspective on my entity’s
sustainability risks?
•• Does my board understand
sustainability and sustainability risks,
and will they be comfortable signing
off on the disclosures.
•• How and where are we going to
disclosure our sustainability risks?

12. Let’s talk sustainability10
Identifying material sustainability risks
Realising the benefits
within your organisation
Reporting | Beyond compliance
Kathryn Franklin
Melbourne
kathryn.franklin@au.ey.com
Meg Fricke
Melbourne
meg.fricke@au.ey.com
There is no disputing that external
stakeholders have driven the
sustainability disclosure agenda, as they
demand more than compliance based
financial information to provide them
with a broader understanding of overall
company performance.
Investors want assurance that companies
understand and are mitigating a wide
range of risks. Up-stream organisations
require that suppliers disclose a range
of non-financial issues including
environmental, and health and safety
performance. Customers are showing
their interest in brands with strong
sustainability platforms. And NGOs
continue to focus on the environmental
and social impacts of companies
particularly around supply chain,
human rights and the environment.
Sustainability disclosure provides
companies with the opportunity to
respond to these external stakeholders.
Regulation, usually considered a lag
indicator, is reflecting these demands
with international and local bodies,
including the ASX and ASIC, now
requiring companies to report their key
sustainability risks (See article: Regulators
put spotlight on sustainable disclosures:
are you ready to comply?). Key to this
sustainability disclosure is ability to
identify those material sustainability risks,
as well as corresponding opportunities.
While organisations use a variety of
standards and frameworks to determine
risk — be they financial, community,
employee or reputational risks — the key
differentiator between traditional and
sustainability risk assessments is the
consideration of external stakeholder and
long term perspectives that is applied to
the later.
There is no doubt that traditional risk
assessments provide a sound process
for risk management, however there is a
significant opportunity for organisations
to complement this with the outcomes of
a comprehensive assessment of material
sustainability risks.
The Global Reporting Initiative (GRI)
G4 and AA1000 Principles Standard
both provide guidance on how to define
material sustainability issues. While they
involve gathering input from internal
stakeholders within the business,
they are explicit in the need to include
contributions from a range of external
stakeholders including investors,
suppliers and customers. The AA1000
also incorporates a review of the broader
external environment looking at issues
being reported in the media (both
traditional and non-traditional), and by
peers, industry bodies and NGOs. It is
this external review that adds a different
dimension to the risk assessment and
which provides an opportunity to identify
emerging risks and potential red flags, as
well as opportunities.
This external perspective is extremely
valuable, also providing a significant
opportunity to drive internal performance
and mitigate non-financial risk.
However there are many recent examples
of companies who failed to consider
issues from a longer term and external
perspective. In the environmental space
we saw companies that had not taken
into consideration the impact of palm
oil production when it had been on
the NGO agenda for some time. These
companies then scrambled to address
the cost implications, when considered
analysis of material risks from an external
perspective would have identified
the issue early on. The importance of
understanding social risk in the supply
chain was firmly put in the spotlight
following the tragedy in the clothing
manufacturing industry in Bangladesh.
External stakeholders are telling
companies these issues are important to
them but many companies discount or
underestimate the potential impact that
these issues and external stakeholders
can have on their business when they fail
to respond.

13. ey.com/au/sustainability 11
Key steps:
•• Clearly document and communicate the process for identifying
material issues. Input from external sources is vital but also involve
senior managers to gather their perspectives but also to engage them
in the process and the outcomes. A robust process will give the board
and the executive team confidence in the outcomes and will satisfy
them that the issues identified are truly those that matter
to stakeholders.
•• Externally report on how you are managing those material issues.
Set targets. Report on targets. Give details on how you are managing
the issue.
•• Use the information to work with internal stakeholder to develop
a response to managing key sustainability issues. Set targets and
improvement opportunities. Provide frequent performance reporting
against targets to ensure feedback is timely and opportunities for
improvement, (be they behavioural or process), can be identified and
implemented. Engage with the broader workforce.
While a solid review of material
sustainability issues forms the basis
of sound sustainability disclosure, it
also presents opportunities for internal
audiences, from the board to site based
working groups, to use the information
to not only mitigate risk but to help
drive performance. Management of
these issues does not have to fit into
an annual reporting cycle. They can
be monitored and assessed as often as
required. Improvement opportunities
can be implemented as soon as they are
identified. Employees can be engaged in
the process and provide immediate input.
While an assessment of your material
sustainability issues provides a platform
for transparent disclosure to stakeholders,
it also provides the link to developing an
internal sustainability strategy, driving
associated sustainability initiatives, raising
management awareness of sustainability
risks and opportunities, and integrating
the sustainability and corporate strategy.
In the next edition of Let’s talk: sustainability we will look at how to
use the information from sustainability reports to support internal
reporting and drive improvement throughout your organisation.

14. ey.com/au/sustainability 12
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+61 3 9288 8121
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