07/01/2017

Australian Companies' Negligence On Tackling Climate Change Will Cost Us

Fairfax - Julien Vincent

As you contemplate the coming year, what it might bring, and your own personal goals and hopes, here's a little fact to help orient your thoughts: planet Earth has just experienced its warmest year since records began.
If that news sounds familiar, it might be because that the same was also true for 2015. And 2014. Temperatures are now more than 1 degree above pre-industrial levels and on current trends are set to pass the 2 degree mark agreed to in Paris within two decades.


In other words, if you're lucky enough to have a newborn child, by the time it reaches adulthood our prospects of keeping a lid on global warming will be nil - unless dramatic changes to greenhouse gas emissions take place.
The issue of climate change has put roots down in the business pages for good reason. Everything we stand to lose due to climate change, and everything causing the problem has a value of some kind, is owned by somebody and sitting on a balance sheet somewhere.
As Paul Fisher, former deputy head of the Bank of England, pointed out on a recent visit to Australia, climate change "is potentially a systemic risk" which "could be the trigger for the next financial crisis."

Myriad of climate change risks
The Financial Stability Board (FSB) - set up by the G20 in the aftermath of the GFC to reduce risks in the global market – is aware of this and has singled out climate change as a major threat.
Last month, the FSB's 'Task Force on Climate-related Financial Disclosures' (TCFD) - chaired by New York's former billionaire mayor Michael Bloomberg - released its recommendations that highlighted to investors, managers and directors alike that climate change risks are myriad.
They range from the physical, such as extreme weather events and rising sea levels, to transition risks including changes in policy and market expectations, as well as changes in technology. And for every risk, there is at least one opportunity to be part of the solution.
Climate change will affect the entire global economy. And Australian companies are lagging behind adjusting to that fact. Photo: Jessica Shapiro
Backed by companies with a combined market value of $US1.5 trillion ($2.1 trillion) and financial institutions responsible for $US20 trillion in assets, the TCFD produced a framework for disclosing climate risks.
The business community and financial sector are starting to appreciate the gravity of the issue and major initiatives like the TCFD are not alone. Last month, a new report showed the scope of individuals and institutions that had pledged to divest from fossil fuels now has extended to over US5 trillion in assets.

Australian companies lagging behind
This is a direction at odds with many Australian companies and investors. Market Forces recently assessed 25 of Australia's largest fossil fuel companies against a set of principles produced by Oxford University, designed to test whether a company was doing the bare minimum on managing climate risk to warrant engagement from investors.
The principles set the bar low, assessing whether or not companies accepted that stabilising the climate required net zero carbon dioxide emissions, whether the company has a plan (any plan) to limit future emissions, and whether the company has laid down metrics and milestones to guide that transition plan.
Everything we stand to lose due to climate change, and everything causing the problem has a value of some kind, is owned by somebody and sitting on a balance sheet somewhere.
Twenty-four out of 25 companies contacted failed to meet those principles, effectively meaning they're doing such a poor job of managing climate risk than they don't warrant engagement from investors, and should be divested from. Nine of the companies even failed to meet a single criteria.
The gulf between global leadership in finance and business on climate change, and the state of Australian companies and many of our investors, is widening.

Costly negligence
This is negligent not just for any hopes of preserving a stable climate system but also for our collective wealth and financial stability, given that almost all of us are exposed to climate risks through our pension funds, banking relationships and sovereign wealth.
But it's also a major missed opportunity. In April 2016, Bloomberg described wind and solar as 'crushing fossil fuels' with the renewable sector receiving twice as much investment as fossil fuels.
So if you're wondering about what the year ahead might have in store, let's call it a seismic shift in expectation.
Globally, regulators are signalling that no company can expect to get away without having a transition plan. Asset owners in turn cannot expect to get away with holding companies that are failing to manage climate risk. Lenders and insurers cannot expect to get away with enabling projects that expand the fossil fuel sector.
Business leaders thinking about how they might want to better themselves in 2017 would be well advised to take an intensive course in managing climate risk.
The economy needs to move on faster than most of us realise – surely you wouldn't want to be left behind?

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