Are Boards Fumbling in the Dark When it Comes to Climate Risks?

If your company has not yet addressed the implications of climate-related risk to its business model, then now is probably a good time for your board to turn its attention to this issue. The Climate Alliance's 2016 National Conference on 25 October (Sydney) will shed light on this topic with one of the world's foremost authorities on climate risk and its impact on investments - Dr Paul Fisher - speaking on the issue. Dr Fisher will discuss why the debate is no longer in the realm of ideology, morals and even physical impacts: climate risk has become a core financial risk

Several years ago a colleague of mine provided sound advice when I was looking for my next challenge in the corporate sector: "Turlough - follow the money". While this seemed a little trite at the time, my colleague knew what he was talking about given he had been a banking executive for much of his working career.

When it comes to climate risk, it is important to know how it will effect the flow of money.

So far this year I published several blogs covering climate-related risks on the one hand, and regulatory risks on the other, including my proposition that Australian agriculture is over-regulated. The question of how much is enough when it comes to regulation is not an easy one. At what point is an industry or sector's ability to perform put in jeopardy because of regulation?

This short article explores how climate risk is impacting investors and invites you to two upcoming conferences in Sydney and Melbourne that will provide directors, investors and corporate executives an opportunity to have light shed on this often vexed area of risk management.

Are banks concerned?

The Bank of England has taken the lead among the global financial institutions and has partnered with the G20 Financial Stability Board (FSB) to address the disclosure aspects of the problem. The FSB is chaired by Mark Carney, the Governor of the Bank of England, has become worried about the systemic implications of climate change. One of the major risks they have identified is that the market capitalisation of fossil fuel companies and associated industries may have been substantially overvalued because of the strong likelihood that they will not be able to extract and sell much of their proven reserves. 

As investors realize this, sharp and sustained changes in asset prices could impact a wide range of investors and intermediaries and potentially cause systemic problems.

The first step in mitigating these risks will be greater disclosure so that asset managers have greater information and investors can make more informed choices.

The FSB has appointed Michael Bloomberg as Chairman of a high-powered, private sector Task Force on Climate-related Financial Disclosures (TCFD), whose goal is to improve the consistency and scope of disclosures relating to concentrations of carbon related assets in the global economy.

The TCFD will develop voluntary, consistent climate-related financial risk disclosures for use by companies in all sectors; providing information to investors, lenders, insurers and other stakeholders. 

It is very likely that these new reporting requirements will impact Australian businesses. 

So are boards fumbling in the dark when it comes to climate risks? To put it simply, if your organisation has not assessed exposure to carbon price scenarios and climate-related risks, it is time to do it now. Where climate risk sits on your organisation's risk matrix will determine the resources required and the effort that should be expended in setting the posture for how it should be addressed.

Conferences in Sydney and Melbourne Will Address Climate Risk

Climate Alliance will be hosting Dr Paul Fisher, until recently Executive Director at the Bank of England, with experience on many policy issues including climate change, to speak about these and other initiatives at its National Conferences to be held in Sydney and Melbourne (see photograph). 

Dr Fisher has recently retired from the BoE and will be free to speak broadly about the risks affecting the financial sector.

He will address the thinking behind regulators’ actions to date on climate change and the possible implications for Australian investment managers, including what actions investors should take now. 

The conference Master of Ceremony is Mr Rob Gell AM, coastal geomorphologist, company director and environmental and communications consultant.

Ms Sarah Barker, Special Counsel at Minter Ellison, will address the fiduciary duties of company director in light of this risk at the Melbourne conference. Mr Maged Girgis, Partner at Minter Ellison will address the Sydney conference. 

In addition, Climate Alliance will also announce the winners of the 2016 Leadership Awards. The awards recognise Australian business leaders and organisations that have demonstrated leadership by addressing the opportunities or risks presented by climate change.

To book your tickets at the Sydney event with Dr Fisher go to this Event Brite page

To book your tickets at the Melbourne event with Dr Fisher go to this Event Brite page

Further Information

• The work of the Climate Alliance and its awards program, has been to recognise more than 10 companies, executives and boards, for seizing business improvement opportunities and executing climate adaptation initiatives. One of the organisation's main activities is to acknowledge those individuals, organisations and their boards that are tackling the risks associated with a changing climate such as minimising the risks posed by the stranding of assets, their impacts on investment decisions, a wide range of other climate-related challenges. These exemplar organisations included the CEFC Board, Hydro Tasmania, Ergon Energy, NAB, Sydney Water, Pacific Hydro, AGL, Qenos, GE, Fujitsu, Origin, the University of Melbourne and Teachers Mutual Fund among others. For further information on all the past winners, please see the Climate Alliance website. To make a nomination for 2017, go to the nomination formonline.
• A good example of a resources company tackling the climate and carbon disclosure issue squarely is BHP Billiton. See their approach to the challenge which has been on diversification and competitiveness: areas that its investors, board and customers understand.
• The recent Australian Institute of Company Director's Update addressed the concern that deemed director liability may become more prevalent in the corporate regulatory arena. A high profile case concerning carbon emissions, and a catastrophic mine dam failure, were just two of the case studies briefly mentioned. It was also interesting to see that though not related to climate risk, the Australian Prudential Regulation Authority, APRA, have provided guidance on what is "sound risk management culture" (see their CPS 220 for details). Overall, the corporate governance landscape is becoming increasingly regulated around high risk areas, and it is likely that climate risk will be regulated with greater focus in due course.
• The World Economic Forum's status video on global risks puts climate risk in full view on the world economic stage, see it below:

Overall, the corporate governance landscape is becoming increasingly regulated around high risk areas, and it is likely that climate risk will be regulated with greater focus in due course.

What do you think?

Here are some questions to trigger further thinking and discussion on a board's role in understanding the impacts of its business model on climate related risk:

• Do corporations really need more disclosure requirements around carbon emissions and climate risk? Is there anything your industry could do to increase the impact of self- and co-regulatory measures in this regard?
• What is your board's posture toward climate and carbon related risk? Is there an openness at the board level to discuss the risks (and opportunities)?
• Does your company's risk appetite statement articulate in a clear manner what these risks are? [Does your organisation have a risk policy and risk appetite statement?]
• From an investment perspective, what would increase your organisation's resilience to future likely carbon- and climate-related risk?

About the Authour

Turlough Guerin is a senior leader in corporate environmental management, governance and sustainable development. He has environmental management and major project experience in the clean energy, communications technology and construction sectors. He has worked in the large resource sector corporates, Shell and Rio Tinto, and the technology leaders, Motorola and First Solar. He has a PhD from the University of Sydney, is a Graduate Member of the Australian Institute of Company Directors, an Associate Fellow of the Australian Institute of Management, Science Editor and Advisor at the Australian Institute of Agriculture, and has held several local and state government supported community board roles. He is currently the Chair of the Board of Advisors at Climate Alliance Limited and is on the Governance and Risk Committee of Australia's largest community radio station.

Recent Articles by the Authour

Power to the People: The Rise of Community Energy Projects in Australia

Nominations Will Soon be Closing for the 2016 Australian Climate Leadership Awards

Should Investors and Fund Managers be Concerned about the Stranding of Fossil Fuel Assets?

Has Regulation Become a Risk to Australian Agriculture?

How Attractive is Australia for Investment in Renewable Energy?

Five Reasons Why Wind and Solar are a Match Made in Heaven

Destroying the Myth that Profits and Sustainability are Mutually Exclusive

Future-Focused Leadership: Recognising Australian Boards, Company Secretaries & Executives

6 Things that Could Disrupt Your Asset Management Strategy

Opinions are those of the author. Photographs are courtesy of www.123rf.com, and Climate Alliance.