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Australian business is waking up to climate risks

Climate change is causing resource scarcity, stricter laws on carbon emissions, and a push to decarbonise investment portfolios. A new course in Australia aims to educate companies on the risks—and opportunities—climate change presents.

As the corporate world slowly but surely wakes up to the threat that climate change poses to the long-term survival of businesses, a group of sustainable business advocates and lawyers is on a mission to educate companies in Australia on how to understand and manage these risks.

Industry association Future Business Council (FBC), law firm Norton Rose Fulbright and sustainability consultancy Point Advisory, in early June teamed up to conduct the inaugural session of the ‘Managing Climate Risk’ workshop for corporate decision-makers.

The inaugural session, held in Sydney on June 2, was a two-hour overview of the specific ways that climate change can affect private sector bottom lines; how companies can analyse their own vulnerability to climate change, and how to manage and incorporate these risks in disclosures to investors.

James Wright, chief executive officer, Future Business Council, told workshop participants—who came from local council government, private health insurance firms, and other legal professionals—that “climate change is a material risk that organisations need to consider as part of their fiduciary duties”.

The physical risks climate change poses to businesses are well documented; a recent example of this was in Phoenix, Arizona, where summer temperatures made it too hot for airplanes to fly earlier this month. The floods that struck Thailand five years ago caused widespread asset damage—such as destroying entire fleets of cars at automotive manufacturing plants which cost insurers billions.

Climate change also poses ‘transitional risks’; these are the ways in which businesses could be adversely affected by changes in regulations, investment patterns, and consumer behaviours in response to climate change.

For instance, some 195 countries signed the Paris Agreement on climate change in December 2015, and committed to reducing their carbon emissions. Strategies to do so could include passing energy efficiency-related regulations or implementing a carbon price, as Singapore has recently announced it will do

Similarly, Wright noted that financial markets are increasingly seeing carbon as a risky investment.

One initiative that demonstrates this is the Portfolio Decarbonisation Coalition, a group of 29 investors with more than US$600 billion assets under management, who have pledged to disclosing, and reducing the carbon footprint of their portfolios.

The global divestment movement—which urges investors to avoid investing in fossil fuels such as coal and oil—and moves by Norway’s pension fund to drop coal companies from its investment also attest to how market forces are bringing about a low-carbon transition.

Australian regulators are now waking up to the importance of understanding climate risks, shared Wright. Earlier this year, financial services industry regulator Australian Prudential Regulation Authority executive board member Geoff Summerhayes stressed that climate risks are “distinctly financial in nature”.

Speaking at the Insurance Council of Australia Annual Forum in February, he added: “Climate risks have potential system-wide implications that APRA and other regulators here and abroad are paying much closer attention to.”

And as a legal opinion jointly authored by FBC and think tank Centre for Policy Development in October last year proposes, board directors who fail to perceive, disclose, or act on climate risks could be held personally liable for breaching their duties of care and diligence.

Climate change is a material risk that organisations need to consider as part of their fiduciary duties.

James Wright, chief executive officer, Future Business Council

Managing through mitigation, adaptation

To help organisations better understand how to understand, manage, and disclose their risks, workshop facilitators Neil Salisbury and Ben Sichlau from Point Advisory shared strategies and frameworks that participants can use.

Where risk management is concerned, companies must simultaneously adapt to, and mitigate the onset of climate change. Adaptation strategies include undertaking research to better understand risks on the horizon, diversifying business models, or as a last option, abandoning vulnerable assets. An example of the latter is waterfront properties in areas where sea levels are expected to rise over the next few decades.

To mitigate climate change, organisations can tap on a wide range of solutions ranging from energy efficiency, renewable energy adoption, and carbon offsetting.

One framework companies can use to determine the scale of their commitment to reducing emissions is science-based targets. This is a system where companies calculate how much they need to cut emissions by, based on scientific analysis of global emissions, the sector’s contribution to this, and a company’s economic responsibility for emissions, based on its profits.

Pressure to disclose grows 

Eliza de Wit, partner, Norton Rose Fulbright, shared that in addition to internal risk management, companies can expect more pressure in coming years to disclose these risks to investors and other stakeholders. 

Pointing to a vote in May this year by oil giant Exxon’s shareholders forcing the company to disclose its climate risks—the same vote received support from only 38 per cent of shareholders last year—de Wit said there is a “seminal shift that is taking place in the corporate community”. 

“We will see change in our regulatory settings,” said de Wit. Even though there is lots of uncertainty about the future of regulation in Australia, it is inevitable; we must prepare now for what future policy could look like.”

For workshop participant Uttam Mukherjee, chief risk officer at health insurer CBHS Health Fund Limited, the course was a useful first step towards integrating climate issues into the firm’s existing risk management framework. 

“For us, the board is interested (in the issue),” he told Eco-Business. “They have been asking questions, especially of me as a chief risk officer.”

FBC’s Wright told Eco-Business that there are plans to conduct more editions of the Managing Climate Risk workshop, perhaps tailored to specific sectors. FBC is accepting expressions of interest for future workshops on its website

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