In the parlance of climate science, a "tipping point" is a dire prospect – a critical threshold breach that triggers an abrupt and rapid change in climate.
But last week, Australia's second biggest asset manager used the phrase in a more optimistic sense – to describe a shift in how investors, regulators and companies are thinking about the varied risks that climate change poses, and what they should actually do about it.
 |
| Meeting the 1.5C climate change target will require significant ambition and innovation across sectors, says Colonial First State Global Asset Management. Credit: Nic Walker |
"Climate breakdown" has "diverse, urgent and complex" implications for companies and investors, Berrutti says. But he believes that – even amid climate policy uncertainty in Canberra – "you're seeing the greatest amount of momentum on this issue that we've ever had."
Last month, investors granted unprecedented levels of support to climate-focused shareholder campaigns at the Whitehaven Coal and Origin Energy AGMs, while Westpac narrowly avoided facing its own resolution at its upcoming AGM.
A mining industry conference in Melbourne last week was dominated by talk of sustainability and climate change.
The release last year of new climate reporting guidelines known as "TCFD", developed by a Michael Bloomberg-led G20 taskforce and framed around the Paris agreement targets, has also been significant, winning the backing of major investors, companies and regulators around the world.
And at the Responsible Investment Association of Australasia (RIAA) conference, also last week, its chief executive Simon O'Conner spoke of an "inflection point" – highlighting the recent milestone of more than half of Australia's managed investments – some $866 billion worth – now being managed as responsible investments, according to KPMG research.
You're seeing the greatest amount of momentum on this issue that we've ever had."Our hope is no longer in politics," O'Connor says. "It's in business and investment... that investors are stepping up right now and are looking to flex their ownership muscle is a really positive development."
Pablo Berrutti
The recent release of the UN's Intergovernmental Panel on Climate Change (IPCC) – which states that halting global warming to 1.5 degrees would require "rapid and far-reaching transitions" in energy, land, urban, infrastructure and industrial systems – "should focus all of our minds," Berrutti says.
Big questions lie ahead. Among investors, action on climate has often involved pushing for information from companies about the climate change-related risks they face, including physical risks to company assets and infrastructure from impacts like increased droughts, floods or storms; and "transition risks" like future regulations and technology changes impacting demand for fossil fuels.
But as companies start providing this information, what comes next?
Full agenda
O'Connor says the "historic" votes at the Origin and Whitehaven AGMs reflect investor frustration on climate issues. Such shareholder campaigns have become more common in recent years, but have traditionally struggled to win more than modest levels of support.
This AGM season, that abruptly changed.
A resolution from NGO the Australasian Centre for Corporate Responsibility, pushing Origin Energy to disclose more about its membership of lobby groups – especially those involved in Australia's climate and energy policy debate – scored a 46 per cent vote in favour at its AGM late last month, a sharp rise on the votes garnered by similar resolutions at BHP last November (10 per cent) and Rio Tinto in May (18 per cent).
At Whitehaven Coal, a Market Forces resolution called on the company to boost its disclosure of climate-related financial risks - including through so-called "scenario analysis", where a company maps out the possible impact on its business of various climate change-induced scenarios in years ahead (a process encouraged by the TCFD).
That vote secured 40 per cent shareholder approval.
Both Origin and Whitehaven called on investors to oppose the resolutions. Whitehaven said the activists behind the motion were "flawed" in their thinking, saying the miner already considered climate change risks, and had agreed to report using the TCFD recommendations. "What we've got here is the notion as a coal company we don't think about these things," its chief executive, Paul Flynn, said on the day of the AGM.
"I think we've disclosed fairly well over time but I think it was a strong message from shareholders that they'd like to see further disclosure," said Origin's chief executive, Frank Calabria, following the protest vote at its AGM.
Investors are pressuring companies on climate because they need to consider and manage investment risk – and the myriad risks posed by climate change are complex.
Big long-term investors – so-called "universal owners" – have the most "closely aligned time horizons with the emerging impacts of climate change," RIAA's O'Connor says.
 |
| Pablo Berrutti from Colonial First State Global Asset Management. |
"It's critically important for us that market values reflect the material risks that companies are exposed to."
But there are other pressures at play. O'Connor says super funds are facing more scrutiny and pressure from members about the climate impact of their investments. And investors are themselves coming under regulator pressure to consider and disclose the climate risk embedded in their portfolios, and from a legal perspective, to be mindful of their fiduciary duties to members.
Risk waiting
But last month, the Australian Securities and Investments Commission lambasted the quality of reporting on climate change by Australian companies, noting that the information provided is often "fragmented" and of limited use to investors. It found that just 17 per cent of companies examined disclosed climate change as a "material risk".
This is stark, considering that governance research firm Regnan has concluded that 44 per cent of the ASX200 have "elevated near-term exposures" to one or more aspects of climate change risk.
Disclosure of physical risks from climate change is particularly lagging, both ASIC and Regnan have warned. "Eight out of nine of the most extremely exposed stocks that we look at, it's the physical climate impacts that are key," says Regnan's acting chief executive Alison George.
"Those exposures are near-term and should be being discussed in their disclosures now. It is a relatively small number who are fully addressing the information needs of investors at the moment."
Booraem says companies are generally becoming "more and more" responsive to investor requests for more information. "We have engaged with many more companies on climate risk than have gotten shareholder [resolutions] on climate risk," Booraem says.
But for a passive funds-heavy investor like Vanguard, a problem arises when companies won't respond to engagement like discussions and requests – which accounts for the fund manager's increased willingness to back shareholder resolutions.
Action station
One question is what actions will flow – from investors and companies – as the market absorbs an increasing volume of climate change-related disclosures.
Market Forces wants the conversation to shift beyond mere disclosure of climate-related risks. "It seems investors want companies to disclose climate risk, but not take obvious steps needed to manage that risk," says researcher Will van de Pol.
Last month, investors backed the call for Whitehaven Coal to step up its disclosure on climate risk. But they shunned another resolution pushing the company to explicitly align its strategy with the Paris agreement's goals.
When it comes to shareholder resolutions, investors are reluctant to veer too close to operational issues considered the domain of management.
But Regnan's Alison George argues that the work expected of companies through the TCFD will "inevitably" lead to changed business decisions, because it will push companies to consider the resilience of their businesses in coming years and decades.
Investors are not just talking about climate disclosure, she says. "They are also talking about action. When they have private conversations with companies, they are looking for emissions reductions, they are looking for energy efficiency responses, they are looking for companies to adopt resiliency measures to help them adapt to climate change."
Says O'Connor: "We need to start with the information on the table. Then we can have the conversation about whether we believe [companies'] assumptions, [and] whether we are comfortable with timing of the transition that's proposed."
Berrutti notes a tendency for the outcome of companies' scenario analysis to be that "the company strategy is fine, and they can continue on as they are.
"Which, if you look at the science around climate change, that's clearly not going to be the case at least for most companies. What we need to do is reduce emissions as quickly as possible... companies need to be thinking about transition planning, as opposed to just using [the scenario analysis] to reinforce existing strategy."
Some investors, including some Australian super funds, have opted for screening and divestment of fossil fuel-linked holdings. But most big investors argue against this course, and for the big passive managers like Blackrock and Vanguard, it's not an option.
"The investment community, for the most part, can't divest their way out of climate change," O'Connor says. "It's all pervading, across the economy".
Links
- 'Big change': Miners face investor pressure on sustainability
- Activists 'flawed' in thinking Whitehaven ignores climate change risk
- ASIC warns companies on climate change disclosure
- Australian businesses must do more to disclose climate change risks to investors, ASIC says
- Big investors press major companies to step up climate action
- Powerful Investors Push Big Companies to Plan for Climate Change
No comments :
Post a Comment