Global Commitment to 2?C Cap Has Already Triggered Investor Concerns

With a global agreement now signed to limit atmospheric warming to 2?C, shareholders will be turning attention to exactly how their superannuation investments may be impacted.

Activist shareholders, unburnable carbon, the divestment movement, and stranded assets are just some of the terms that have evolved from almost obscurity a few short years ago, to what are now mainstream investment terms. And suprisingly, its not your average "tree-huggers" using them.

When I first participated in the Carbon Disclosure Project (CDP), I too thought that some of these terms and ideas were a bit too radical, and to be perfectly frank, a bit “over-cooked”. Though I could see what the visionaries were angling at, deep down I felt it was being a shade over-zealous.But I shouldn't have doubted.

In 2006, the CDP attracted the support of 225 investment institutions globally, representing in excess of $US 31.5 trillion of funds under management. Just last year, this same CDP was represented by 767 investors holding cumulatively a cool $92 trillion.

Carbon Exposure is Now Being Managed as a Mainstream Investment Risk

Almost 10 years on, these same issues are not only still on the radar, they are much better understood, many large companies are actively managing their risk [and leveraging the opportunities they present], and critically, big investors are taking them very seriously. In some circles, they are already mainstream concepts. And I'd say they're here to stay.

Investors are becoming more aware of the necessity for high-quality information on how companies [that they are investing in] are actually mitigating against the risks from a changing climate.

These are risks which in many cases are being exacerbated by extraordinary weather events across multiple geographies, including droughts in California, typhoons in the Philippines, and extreme weather and its related knock-on effects here in Australia.  

But is all this Really Relevant to Australian Company Directors?

Our share market indices have a substantial fossil fuel industry component. A correction in the value of the fossil fuel industry would have a material impact on investments broadly – something that most people that I know of are at least a little concerned about.

In a recent unprecedented disclosure by the Bank of England's Governor, Mark Carney, was a warning of his concern for the impact of fossil fuel investments on the insurance industry.  

As the head of one of the world’s main central banks, he cautioned that the “vast majority of [fossil fuel] reserves are unburnable” if climate change is to be limited to 2°C, as pledged by the world’s governments. It is noteworthy that his bank will deliver a report to the UK government on the financial risk posed by a so-called “carbon bubble” later in 2015.

A parallel in Australia, is that APRA would also be concerned about investments made by the superannuation industry.

Despite the Media's Portrayal, Fiduciary Concern, Not Activism, is Driving the Change

Governance around climate-related risks has certainly shifted in recent years from relative obscurity to one that is much more tangible. While many climate advocacy organisations have been banging on the boardroom doors for some time, and for some it has been decades, predictably little has been achieved by way of activism, corporate negativity and subversive tactics.

It's easy to understand why the messages around climate and emissions risks haven't always got through.

The 2015 Climate Leadership Awards and Annual Conference

Planning for known risks or pending risks is prudent management. For the past 5 years, the Climate Alliance has been recognising individual companies, business leaders and their boards, for doing just that - demonstrating outstanding leadership in managing for carbon- and climate-related risks. Not banging on doors, not hugging trees, just recognising good business and governance in this particular area of risk management.

This year we are continuing the awards with our keynote speaker, Dr John Hewson AM. Dr Hewson will be sharing his views on the impact that stranded assets in the fossil fuel industry will likely have upon the investment community at the Climate Alliance Business Leaders Awards and Annual Conference on 3 September in Melbourne.

Other speakers will address the same issue from the perspective of the energy industry; the fiduciary duties of directors in light of this issue; and the financial implications on the wider Australian industry – one whose economy is heavily dependent on carbon-rich resources and therefore exposed to the 2°C global budget issue as the Governor of the Bank of England has warned about.

To join this interesting conversion with Dr Hewson and others, register now to book your place.

Nominations are due: 21 August.

Awards Presented & National Conference: 3 September.

What do you think?

In considering stranded assets at the board level, what are the decisions that your organisation should take in the short-term to ensure long-term value loss is minimised (or opportunities maximised)?

Are there any non-current assets on your organisation's balance sheet that could be reduced in their valuation as a result of an introduction of a carbon price?

What non-current assets on your organisation's balance sheet would cease to generate (or materially contribute to your organisation's revenues) when stringent carbon emission reporting is eventually introduced?

Is the procurement of renewable energy on the executive agenda? If so, have you considered the various ways your organisation could procure renewable energy?

Stranded assets don't just represent downside risk. 

What are the opportunities for your organisation? What early actions could translate to an uplift in top line growth?   

Please share your thoughts, ideas, comments on this post below.

About the Authour

Turlough Guerin is a Non-Executive Director and Environmental Manager with over 15 years board-level experience in community engagement, primary industry, sustainable transport, and heavy industry. Board highlights include the Australian Institute of Agriculture, Climate Alliance Limited, and LightFM 89.9 (Australia's largest community radio station). He has worked for and consulted to a range of Blue Chip, high tech and energy companies including Rio Tinto, Shell, Chevron, Motorola, Telstra and First Solar. He has a PhD in Agriculture, is a Graduate Member of the Australian Institute of Company Directors and is an Associate Fellow of Australian Institute of Management. 

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Opinions of those of the author & photographs are courtesy of Laura Coutts (www.lauracouttsphotography.com), Climate Alliance & www.123rf.com