Climate Risk and Australia’s Tragedy of the Horizon
By Felicity Richards, Consultant, ACCSR
Addressing climate change is no longer just an environmental consideration, it is a business imperative.
Climate risk is pervading boardroom discussions in Australia and is beginning to influence how businesses think about the longevity of their operations. With increased exposure expected over the coming five to ten years, failing to factor climate change risk into business models and risk management strategies will have intergenerational consequences not seen before.
Why is climate risk an issue?
In his address to Lloyd’s of London in September 2015, Governor of the Bank of England Mark Carney described what he calls the Tragedy of the Horizon. The tragedy lies in the short-term vision of many and the long-term vision of the enlightened few who recognise the broader global impact of climate change on property, food and water security as well as migration and political stability.
In order to measure and manage climate risk, Australian businesses need to understand where they are vulnerable to the three following types of climate risk.
- Physical risk – the impacts on insurance liabilities and the value of financial assets that arise from climate events such as floods and storms that damage property or disrupt trade
- Liability risks – the impacts that could arise if parties who have suffered loss or damage from the effects of climate change seek compensation from those they hold responsible
- Transition risks – the financial risks which could result from the process of adjustment towards a lower-carbon economy.
What are businesses doing to address climate risk?
Australian businesses must do much more to price in climate risk appropriately. The superannuation sector is a big player with a lot to lose. The third annual Asset Owners Disclosure Project (AODP) index of the top 500 global asset owners found that nearly half of the funds surveyed (232) did absolutely nothing to protect investments under their stewardship from the threat of climate change. Among the top performers in the index were Australia’s Local Government Super and Australian Super.
Outside superannuation and insurance, Australian businesses are wary of precedents such as the Peabody Energy bankruptcy and are coming to terms with their duties to shareholders in the face of shifting energy demands. Director’s duties are firstly fiduciary and secondly based on market risk such as failing to understand the uptake of renewable energy or carbon capture and storage. With that said, climate change is certainly a new risk to the boardroom and needs to be treated carefully with regard to mitigation and adaptation strategies. So, is your boardroom having this conversation?
Mark Carney warned that the weight on scientific evidence and the dynamics of the financial system will culminate together in threatening financial resilience and long-term prosperity.
The prosperity and resilience of Australian businesses and communities are a priority for ACCSR and inherent in everything we do. To address the growing concern of the public, businesses and shareholders, we’ve developed a Climate Risk Assessment and Mitigation Tool to identify, map and strategise climate risk mitigation opportunities.