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Australia's biggest companies are ignoring calls from regulators and investors to do more to mitigate the risks of climate change, with a new study finding that many of the nation's top 100 companies still do not identify climate change as a material business risk.
The report, to be released on Monday by environmental campaign group Market Forces, is based on public information from 72 big listed companies operating in sectors considered high-risk on climate change. It found that just above half (57 per cent) identify climate change as a material business risk, and just 32 per cent of the companies disclose detailed discussions of specific climate risks and opportunities facing their businesses.
Market Forces released the first iteration of its report, 'Investing in the Dark', in March 2018. The new findings take into account announcements and changes from companies that have reported or updated disclosures in the last year. Market Forces analyst Will van de Pol said despite increasing rhetoric from investors and regulators about climate change risks, on most metrics, there has been almost no progress to report.
The Market Forces study follows a report by the Australian Securities and Investments Commission (ASIC) in September that found that out of 60 listed companies in a sample of the ASX 300, just 17 per cent identified climate risk as a material risk to their business.
The ASIC review found in some cases "climate risk disclosures to be far too general, and of limited use to investors". The study also comes off the back off global guidelines to help investors understand their financial exposure to climate risk and help companies better disclose this information.
The G20-backed Task Force on Climate-related Financial Disclosures (TCFD) guidelines, released in June 2017, take into account the Paris Agreement's pledge to keep global warming to below 2 degrees.
The Market Forces study found just 14 per cent of Australia's top 100 companies have disclosed detailed scenario analysis demonstrating their viability in a 2-degree policy pathway. This is a marginal improvement from the 10 per cent recorded in March 2018. Only 24 per cent have a clear plan to reduce greenhouse gas emissions (up from 16 per cent a year earlier). Mr van de Pol said investors should demand companies produce Paris-aligned transition plans and divest from those that cannot or will not.
A number of ASX 200 companies have recently faced shareholder resolutions on their failure to address climate change risks. In October 40 per cent of Whitehaven Coal's investors supported a resolution demanding the company reveal the financial risks it faces as a result of climate change.
It was one of the biggest votes for climate action at an Australian AGM ever, and the first resolution in Australia that explicitly called for a company to ensure its strategy is aligned with the goals of the Paris Agreement on climate change.
"Whitehaven currently lags its peers when it comes to climate risk disclosure," Mr Van de Pol said.
"It discloses minimal detail about the risks it faces from climate change, or what the company is doing to address those risks."
A spokesman for Whitehaven said climate change is an issue requiring coordinated international action and the company was committed to playing a role in reducing carbon emissions.
This would happen by "promoting increased use of Whitehaven's high quality, low-emissions coal".
The company was also reviewing the TCFD recommendations and would incorporate these into its annual reporting later in the year, he said.
In May, QBE also faced pressure from investors, with a resolution calling on the company to disclose the risks to its business from climate change. It was backed by 18.6 per cent of shareholders. In August, the insurer released its plan to implement the TCFD recommendations.
According to Swiss Re, 2017 was the costliest year in the history of the insurance industry and QBE itself reported a $US1.2 billion loss, mainly due to extreme weather including floods, storms and wildfires. "QBE is falling behind its European competitors, like Axa, Allianz and Zurich, which have recognised the need for climate action," Mr Van de Pol said. But he said QBE was still an underwriter of fossil fuel projects and had invested in other companies with climate exposures.
A spokesman for QBE said, "climate change is a principal risk for our business". QBE was committed to completing the work required to implement the TCFDs recommendations. "This work is already well advanced," he said, and the company would give an update its progress in its upcoming annual report.
On Friday, Suncorp chief executive Michael Cameron said the Federal Government should force businesses to adhere to climate change action plans, after the company reported its half-year profit dived 44.7 per cent, largely as a result of extreme weather events.
Regulators have recently signalled that companies failing to take action to mitigate risks could ultimately be held liable. In a speech in June, ASIC Commissioner John Price said directors "would do well" to carefully consider a 2016 legal opinion by Noel Hutley SC and Sebastien Hartford-Davis that they could face lawsuits for failing to consider risks related to climate change.
And in November 2017, APRA executive Geoff Summerhayes warned that "should extreme weather events become more frequent and intense as scientists predict", there could be "adverse economic impacts" that threaten financial system stability.
Mr van de Pol called on ASIC to "back its rhetoric" and take "meaningful action" against companies breaking disclosure laws. He said more extreme weather events including floods, fires and droughts show that there is an urgent problem to address. "When the financial impacts hits home investors are left with a company that's devalued and will be looking for someone to blame."
The Market Forces study found 86 per cent of companies now place overall responsibility for climate risk management with the board, up from 73 per cent one year ago. The number of companies encouraging emissions reduction through remuneration has doubled to 32 per cent. This is in sync with a recent survey showing company directors are taking a more active interest in the issue.
In October, the Australian Institute of Company Directors' (AICD) survey of more than 1,200 company directors found they had for the first-time nominated climate change as the number one issue they want the Federal Government to address in the long term.
Responsible Investment Association Australasia (RIAA) chief executive Simon O'Connor said investors were increasingly setting decarbonisation targets for their investment portfolios. "Many responsible investors are rightfully concerned about this low level of disclosure," he said. The association's finance sector members would be reporting line with the TCFD recommendations.
Chief executives who care about climate change - and these days most profess to - often highlight headquarters bedecked with solar panels and other efforts to lower their carbon footprint. Last week Volkswagen, a carmaker, told its 40,000 suppliers to cut emissions or risk losing its custom. Plenty of investors, meanwhile, say they are worried about being saddled with worthless stakes in coal-fired power plants if carbon taxes eventually bite. Yet the reality is that meaningful global environmental regulations are nowhere on the horizon. The risk of severe climate change is thus rising, posing physical threats to many firms. Most remain blind to these, often wilfully so. They should start worrying about them.
Nature disrupting supply chains is nothing new. Businesses have coped with floods, droughts and storms since long before the joint-stock company became popular in the 19 th century. Two things have changed. First, supplychains have grown complex and global (just look at VW). As links have multiplied so, too, have points of possible failure. Many sit in the tropics, more given to weather extremes than the temperate West.
Second, global warming is fuelling more such extremes everywhere. In 2017 Houston experienced its third "500-year flood" in less than four decades, California suffered five of its 20 worst wildfires ever and parts of the Indian subcontinent were underwater for days following epic monsoon downpours. That year insurers paid out a monumental $135bn in compensation. Another $195bn in estimated losses was uninsured. Power plants often run slow because the river water they use for cooling is too hot. Last year commercial traffic along the Rhine, the world's busiest waterway, ran aground when rains failed to replenish its sources.
Corporate-risk managers have just about come to grips with tangled supply chains. But they are rotten at assessing their exposure to a changing climate. Unfamiliar with bleeding-edge climate models, which tell you what disruption to expect next, risk managers fall back on retrospective tools like flood maps, which are tried, tested-and wrong.
One study last year found that accounting for physical risks to corporate assets would shave 2-3% off the total market value of over 11,000 globally listed firms. That is less than many stocks move in a given day, and a fraction of the estimated 15% downward effect of a transition to cleaner energy. Unlike the energy transition, though, some physical harm to corporate assets is all but guaranteed. Not only that, but the risks rise as the world warms. And the average conceals a huge range. Some companies would lose nearly one-fifth of their enterprise value. Most have no clue where they stand.
They have few pressing incentives to find out. Markets tend to punish honesty about previously unacknowledged risks, not reward it. Rather than learn that nature poses a "material" threat- which firms are obliged to disclose to shareholders - it is safer not to look in the first place. Although credit-raters and insurers are busily reassessing climate risk, companies' premiums and credit have scarcely got more expensive. On the rare occasion markets do reprice a company's risk, they do so in a hurry. PG&E, a Californian utility, was forced into bankruptcy protection in January after insurers and creditors fled when they concluded that it could be on the hook for billion-dollar liabilities over its possible role in sparking wildfires.
Such cases would be rarer if companies were legally obliged to assess and disclose their climate vulnerabilities. An international group set up by the Financial Stability Board, a global set of regulators, issued voluntary guidelines for public companies in 2017. These should be made mandatory.
It is in businesses' long-term interest to own up to the threats they face. A post-disaster payout from a cheap insurance policy is better than nothing-but a lot worse than avoiding disruption. Adaptation could mean erecting flood barriers around factories or battening down warehouse roofs to withstand stronger gales. Insurers reckon a dollar spent on such measures saves five in reconstruction. It may involve lobbying politicians to fill the estimated $110bn-280bn shortfall in annual public spending on resilience. In extreme cases, it may require retreat from a business. If this lays bare the seriousness of global warming's effects, the world may even get serious about tackling its causes.
Climate change is often seen as the most critical environmental challenge in the present time, and the evidence is increasingly pointing to man-made carbon dioxide emissions as a source of the crisis (Intergovernmental Panel on Climate Change 2007). It is also not surprising that a great deal of attention was paid to the response of companies (Sullivan 2008). Climate change arises as a different form of security issue owing to the way it impacts all human existence and well-being in an increasingly intertwined and vulnerable environment. Changing climate is now becoming a challenge to human basic welfare and survival needs around the globe, including food production, safety, water access, and land use. Climate change is transforming how consumers, employees, and shareholders evaluate companies and interact with them (Coppola, Krick & Blohmke 2019). In some cases, this can lead to a real shift, where business models need to be reevaluated. This paper concentrates on answering the question should the businesses rethink how they approach climate-related risks by analyzing the impact of climate change on the business strategies.
Climate change has many impacts on businesses (Goldstein et al. 2019). On the one side, it introduces several new threats to companies. In addition to the most apparent physical risks (e.g., operational effects of severe weather events or supply shortages induced by water scarcity), businesses are exposed to transition risks arising from the reaction of society to climate change, such as technological changes, markets, and regulations that can increase business costs, undermine the viability of existing goods or services or the value of assets. Another climate-related risk for companies is the potential liability for emitting greenhouse gases (GHG). An increasing number of legal cases have been brought directly against fossil fuel companies and utilities in recent years, holding them accountable for the damaging effects of climate change (Burger & Wentz 2018).
But climate change also offers business opportunities (Seles et al. 2018). Firstly, companies can aim to improve their resource productivity (for example by increasing energy efficiency), thereby reducing their costs. Secondly, climate change can spur innovation, inspiring new products and services which are less carbon-intensive or which enable carbon reduction by others. Thirdly, companies can enhance the resilience of their supply chains, for example by reducing reliance on price-volatile fossil fuels by shifting towards renewable energy. Together, these actions can foster competitiveness and unlock new market opportunities.
To gain a better understanding of how companies perceive the issue of climate change, the latest edition of the European CFO survey asked close to 1,200 financial executives across Europe to what extent their companies are feeling the pressure to act and what precisely they are doing (Coppola, Krick & Blohmke 2019). The survey shows that most companies are feeling the pressure from various stakeholders. Clients and customers are most often named as sources of significant pressure, but employees, regulators, civil society, and investors are not far behind. The pressure felt from different stakeholders also varies across industries. In tourism, automotive, consumer goods, and energy and utilities, the share of executives reporting pressure to act is among the highest for each stakeholder group. There are some differences between these sectors, however, in the degree of influence coming from the various stakeholders. For example, in tourism, consumer goods, and automotive, pressure from clients is felt more strongly. In energy and utilities, the pressure comes more from investors and regulators.
The factor of climatic change in several ways appear just the same in various strategic issues that need to be handled by the company. Climate can change like the attitude of the customers. This is when the company can take the help of the ways and methods to address the ravages of the climate and cause a positive difference in business (Coppola Krick, Blohmke 2019). Most of the business leaders believe that change in climate is the sort of structural alteration. One can consider climate change as a strategic issue. It is the logical conclusion that companies should seriously think about the risks related to the change in climate. This can cause possible danger to the various business opportunities. One should be able to predict in advance how a change in climate can cause a difference in business. Based on the thoughts and the predictions one can decide how to protect the business strategies from the possible climatic risks. This way, one can reduce the downside risks, and there can be augmentation in the upside opportunities.
In the case of the company, the set of the perfect business strategies to future proof the business and at the same time create the long term business value at the time when making a capital investment. In this case, one can invest money in a new project, in matters of new products and also when you are trying to upgrade the existing ones (Folk 2018). The sort of climate change can be factored into several decisions, and can even maximize the possibility that companies can make decisions that cannot result in standard treasures or the lost revenues due to the regulatory or the kind of action taking place due to a change in climate. At a later stage, this will also avoid the necessity of extensive retrofits.
The companies need to develop the sort of corporate data expertise and knowledge based on climate change. There are companies to go furthest in causing integration in the change in climate as part of the various business strategies (Wright & Nyberg 2017). This, however, can emphasize the amount of time and effort being invested in the testing of the new technicalities and the set of the inventive approaches. However, before investing, companies should understand the several implications made in the business.
Thus, it can be concluded that climate change has a profound impact on businesses across the globe. Making it important for the businesses to rethink their approach towards the climate-related risks. For implementing change the business heads need to ensure that they have understood all the impacts about the climate change.
Burger, M & Wentz, J 2018, ‘Holding fossil fuel companies accountable for their contribution to climate change: Where does the law stand?’, Bulletin of the Atomic Scientists, vol. 74, no. 6, pp. 397-403.
Coppola, M, Krick, T, & Blohmke, J 2019, Feeling the heat?, Deloitte Insights, viewed on 11th June 2020, < https://www2.deloitte.com/us/en/insights/topics/strategy/impact-and-opportunities-of-climate-change-on-business.html>
Folk, E 2018, How Climate change will affect business, Renewable Energy Magazine, viewed on 11th June 2020 < https://www.renewableenergymagazine.com/emily-folk/how-climate-change-will-affect-businesses-20181109>
Goldstein, A, Turner, W R, Gladstone, J & Hole, D G 2019. ‘The private sector’s climate change risk and adaptation of blind spots’, Nature Climate Change, vol. 9, no. 1, pp. 18-25.
Intergovernmental Panel on Climate Change 2007, Climate Change 2007: The Physical Science Basis Summary for Policymakers, Intergovernmental Panel on Climate Change, viewed on 11th June 2020.
Sullivan, R 2008, Corporate responses to climate change: Achieving emissions reductions through regulation, self-regulation, and economic incentives. Sheffield, UK.
Wright, C & Nyberg, D 2017, ‘An inconvenient truth: How organizations translate climate change into business as usual’, Academy of Management Journal, vol. 60, no. 5, pp. 1633-1661.
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