Climate change presents business risks and opportunities
Climate change risk does not discriminate and organisations are feeling the heat.
- If managed skilfully, businesses can reduce climate risk while also improving their reputation.
- The failure of climate change adaptation and mitigation is a risk factor that could have a major impact on the global economy over the next ten years.
- CAs should become aware of climate change issues so they can factor climate change considerations into their decision-making processes.
Cyclone Debbie was the never-ending cyclone. From far north Queensland to New Zealand’s North Island, strong winds and flooding pounded communities and left clean-up costs in the billions.
Unfortunately, such extreme weather events are “playing out as predicted,” says Ian Edwards CA, climate change adaptation specialist.
While peril events — big disasters like Cyclone Debbie — make international headlines, it is the ongoing stresses of climate change such as droughts, sea level and temperature rises that “really represent what is going on”, says Edwards.
“The reality is organisations are feeling the effect of extreme weather events right now. Climate change risk doesn’t discriminate."
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But where there is risk, there is always opportunity. If managed skilfully, and with appropriate strategies for adaptation governance, businesses can not only reduce climate risk they can also improve their reputation, investment portfolios and brand proposition. “Accountants have a massive part to play,” says Edwards.
“We are trusted client advisers, we are often seen as the voice of reason. These big trends are important to understand – how they are going to impact our clients’ businesses.
”Mitigation or adaptation While mitigation focuses on the primary causes of climate change, adaptation covers a range of actions to help leaders and their organisations proactively address and capitalise on the opportunities that climate change itself creates.
“Good adaptation incorporates mitigation,” says Edwards.“Ultimately, how much we need to adapt is driven by how successful we are at mitigating.
"So if you look at energy efficiency, you can argue it’s both mitigation and adaptation because it’s both reducing greenhouse gas emissions but it’s also reducing your exposure to potential regulatory changes in the future, such as carbon prices. They are inextricably linked."
"The reality is organisations are feeling the effect of extreme weather events right now. Climate change risk doesn’t discriminate."
Since the 2015 catalytic speech of Mark Carney, Bank of England Governor, when he described “climate change [as] the tragedy of the horizon”, there has been growing international recognition of the magnitude of the challenges ahead.
In 2016, the World Economic Forum rated the failure of climate change adaptation and mitigation as the risk factor that could have the most impact on the global economy over the next ten years — above weapons of mass destruction and large-scale migration.
Globally, 192 countries signed the Paris agreement on limiting greenhouse gas emissions. Australia and New Zealand are signatories, and governmental bodies and national, state and local council level are developing plans to help mitigate climate change.
In February 2017, in a landmark speech, executive board member of the Australian Prudential Regulation Authority Geoff Summerhayes declared, “the days of viewing climate change within a purely ethical, environmental or long timeframe have passed”. Not only is climate change finally entering the financial mainstream, it is now being viewed from a hard-nosed business perspective as a risk management issue that has the potential to destabilise world markets and the entire fiscal ecosystem.
The biggest risks
“The risks extend through the full value chain… beyond direct operations to an organisation’s supply chain and markets,” write Edwards, Donovan Burton and Mark Baker-Jones in a recent white paper Climate Change Risk and the Private Sector: Adaptation and Management.
So, what are the three biggest climate change risks?
- Physical risk – sea level rise, storms or floods.
- Transition risk – as economies and societies transition to a lower-carbon economy and there is a revaluation of assets.
- Liability or legal risk – as those suffering climate change losses seek compensation from those they hold responsible.
In addition, Edwards warns that legal risks could “slip in behind the corporate veil” to impact the officers and boards responsible for the organisation’s governance. If this notion isn’t worrying leaders yet, says Edwards, it should do.
“We are moving into unchartered territory. I seriously think we are going to see serious effects of climate change in my lifetime and certainly in my son’s life. What gives me sleepless nights is not leaving my eight year old with a positive legacy.”
Inevitably, there will be winners and losers. How pro-active an organisation is in addressing risks reflects the strength of leadership and the willingness of employees to adapt.
Some industries, in particular, such as building, insurance, pension funds and banking, are already taking pro-active steps to start addressing the challenges. But what will make the biggest difference?
“You’ve a legal system that is starting to recognise that this is a legal risk. That’s what is shifting the mindset of some CEOs,” says Edwards.
“If you are not taking climate change seriously and you are not incorporating this into your governance and management processes, then you are potentially exposing the organisation that you oversee to reduced profitability and reduced operations.
“As I heard one lawyer say, ‘It doesn’t really matter whether climate change is real or not, we are well beyond that point of discussion. The market is moving as if it is’. In other words, you could lose money and you could be held personally responsible for that."
It’s not all doom and gloom, though. “If managed properly this creates a phenomenal corporate social responsibility story,” says Edwards.
Over the past year, leaders of several of the largest institutions have cited climate risk to investment portfolios as a key factor in their decisions, according to a range of analyst reports from Citigroup, HSBC and the Bank of England.
But with an estimated 400 climate change-related disclosure frameworks currently in operation, it’s a headache for investors to understand and compare climate change risk management practice.
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As a way to deal with this, the Taskforce on Climate-Related Financial Risk Disclosure (TCFD) released recommendations in 2015 on ways to “develop a singular, accessible framework for climate-related financial disclosure”. This is a voluntary framework.
“There are already banks, like ANZ, who have said that they would adopt any reasonable requirements. So if ANZ discloses its climate risk to ethical investors and other potential investors, this potentially creates a race to the top with other banks following suit.”
Over time, argue Edwards, Donovan and Baker-Jones, “forward-thinking organisations will recognise and capitalise on new markets and climate-related products while reducing climate-related risks to their own operations. Potential benefits include business continuity, cost savings, regulatory anticipation… and increased competitive advantage.”
Sometimes it can take your worldview to be shattered to make the change. Edwards knows this first hand.
In 2008, when the GFC hit, he was working as an executive director at UBS bank in Zurich.
“I was a business unit controller, so I looked after the global foreign exchange unit, which was a billion dollar industry,” he says.
“I had to lay off really good staff, who, through no fault of their own, were losing their jobs. It changed how I looked at things.”
The experience triggered a career change for Edwards, who views the GFC and climate change as failures in terms of mismanagement.
“I’d always had an interest in the environment but the environment for me was just about being outside. Then I started to study it formally.”
Edwards then worked for Swiss Re in Zurich, then Toronto, before returning to Australia where he is now setting up whydu.com with Donovan Burton from Climate Planning.
Although the magnitude and complexity of climate change can seem daunting, he encourages CAs to become aware of the issues so they can incorporate climate change considerations into their decision-making processes and governance structures. While national organisations such as CSIRO and the National Climate Change Adaptation Research Facility have done “amazing work [in the field],” he says, “you can’t rely on the federal government in Australia which has been an unmitigated disaster on climate change”.
Yet, if government and business shifted their mindset and viewed climate change as a huge opportunity, the future could start to look very different.
He says it would help to understand that mitigating, and adapting to, climate change is not just all about costs, but that there are huge benefits to society.
“If you look at the renewable energies sector, this has job-creating potential. It’s a massive risk but also a massive opportunity.”
This article first appeared in the June/July 2017 issue of Acuity Magazine.