Australian Business Woefully Unprepared For Climate Change Post Paris Agreement

Fairfax - Julien Vincent*

On Friday, the Paris climate change agreement comes into legal force. It signals profound changes to energy and resources markets that, frankly, a lot of companies look woefully unprepared for.
The goal of the Paris agreement is to contain global warming to well below two degrees above pre-industrial levels.

How does the insurance industry prepare for climate change?
Elizabeth Bryan, chairman of the Insurance Australia Group, talked up the need for infrastructure investment in communities before damaging climate change related weather events happen on Wednesday's Australian Financial Review & J.P Morgan Chanticleer lunch.

The Carbon Tracker Initiative has pointed out that the amount of booked coal, oil and gas consumption is already multiples above what can be safely burned in this "below 2°C warming" scenario.
Even the International Energy Agency said five years ago that by 2017, no investment could be made in fossil fuel electricity generation unless it was zero carbon.

The vast majority of companies seem intent to continue with their current business model. Photo: Dallas Kilponen

No  new fossil fuel power stations? Stranded assets sitting on the books of coal, oil and gas companies? Sounds like cause for concern, especially when considering the rather placid response from the fossil fuel sector so far.
This concern has been underscored over the past week, first with the former Bank of England deputy Paul Fisher describing a sudden repricing of assets due to climate change action as a possible trigger for the next financial crisis.
Then this week, Sydney barrister Noel Hutley, SC, released a memorandum of opinion, explaining how directors are legally bound to consider and act upon climate change risks to their business.

Suspicious rosiness
To their credit, some companies have attempted to understand how they might fare in an economy that is aiming to hold global warming below two degrees, stress testing their assets and operations against this scenario.

Barack Obama and Leonardo DiCaprio discuss climate change in Before The Flood. Photo: National Geographic

While they all seem to turn out suspiciously rosy, that's a discussion for another day. The vast majority of companies have no plan and seem intent to continue with their current business model, regardless of the risks.
Take, for instance, three oil and gas companies with annual general meetings coming up in the next few weeks.

If investors want us to believe they can deliver real change through engagement, now would be a good time to prove it. Photo: Tanya Lake

Karoon Gas, Senex Energy and AWE are continuing to explore for additional fossil fuel reserves, embedding this practise into their DNA by offering six-figure bonuses to their CEOs for meeting exploration and reserve replacement objectives.
Already, this incentive doesn't seem to be doing the companies much good. Karoon, for instance, wrote off $150 million in exploration expenditure last year, but are still offering chief executive Bob Hosking another $450,000 to continue this unsustainable practise.

Sydney barrister Noel Hutley, SC. Photo: Michele Mossop

No surprise then to see Karoon jumping on Brazil's policy change to open up oil reserves to foreign investors, and venturing into deepwater oil exploration in the Great Australian Bight, a move that even BP has backed away from.
AMP Capital points out that remuneration structures tell us "not only who but also what a company values". Whether explicit or not, incentives like these are commonplace in the fossil fuel industry, and driving activity that is about as incompatible with the goals of the Paris agreement as you can get.
Its easy to criticise these outdated bonuses but let's remember they exist not just because boards offer them to executives, but they are voted for by investors, including super funds, which together own 20 per cent or more of all ASX300 companies.

No sense
Many of these funds shun the idea of divestment because they believe they have a better chance of reforming a company through active ownership and engagement. Sounds nice, but in lieu of evidence that's a hard one to take seriously.
Even harder when you look at the voting records of super funds that clearly appreciate the significance of climate change, but continue to vote for executive bonuses that incentivise fossil fuel exploration efforts that make as much sense as pouring a bucket of water into an overflowing sink.
Last year, the lowest vote for any of the three oil and gas companies mentioned earlier was for Senex Energy, whose remuneration report passed with 96 per cent support.
If investors want us to believe they can deliver real change through engagement, now would be a good time to prove it.
Even before the Paris agreement was signed, communities around the world made it clear that urgent action was needed to minimise the damage that climate change poses to humanity.
Now with Paris coming into force, the scrutiny on companies and their investors exposed to climate change risks will only intensify.
You've foreseen the risk. What are you going to do next?

*Julien Vincent is executive director of Market Forces 

Watch Before the Flood until 6th November.


Links

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