Business thinking has changed as temperature rises on climate change-related risk

Geoff Summerhayes
Geoff Summerhayes, Australian Prudential Regulation Authority

The Australian government has been accused of – literally – fiddling while the country burns but there has been a sea change in attitude among business leaders and investors, who are fast coming to grips with climate change.

Last winter, Geoff Summerhayes, told a Singapore insurance conference that the climate change debate in Australia in recent years had been as heated as anywhere in the world.

It had sharply divided the resource-rich nation into those demanding tough action and those arguing such action would ruin the economy, said Summerhayes, an executive board member of Australia’s independent banking regulator, the Australian Prudential Regulation Authority (APRA).

But the times, they are a changing, and even in Australia, the debate has now moved to how the world needs to respond and who should carry the costs, he said.

Back in 2017, APRA publicly warned that some climate risks were distinctly financial in nature, and that many of those risks were foreseeable, material and actionable.

Since then, the regulator has said it wants to see “continuous improvement in how organisations disclose and manage” climate change risks. The Reserve Bank of Australia (RBA) and the Australian Securities and Investments Commission have made similar public statements.

As Summerhayes drolly noted, “When a central bank, a prudential regulator and a conduct regulator, with barely a hipster beard or hemp shirt between them, start warning that climate change is a financial risk, it’s clear that position is now orthodox economic thinking.”

And its not just regulators who are responding. As we exit the world’s warmest decade and against a domestic backdrop of one of the worst droughts on record combined with an unprecedented bushfire season, the Australian business community is accelerating its efforts to factor in climate change as a major financial risk.

A new global report from consultancy Deloitte found that 81 per cent of Australia’s business leaders believe climate change will have a negative impact on their business operations. That compares with a global average of 48 per cent.

The survey, conducted well before the latest bushfires, found also that many Australian business leaders are confident they can deploy new technologies to increase their company’s positive impact on society, including dealing with climate change.

It’s a dramatic shift in attitude over the past two years, says Deloitte Australia’s chief strategy and innovation officer Robert Hillard.

Hillard says that in this year’s survey, 57 per cent of Australian executives said they believed their generation was responsible for encouraging sustainability (compared to a global average of 38 per cent), and 83 per cent of Australian business leaders (the highest percentage of all 19 countries surveyed) cited tackling climate change as their generation’s responsibility to solve.

Two years ago, only 7 per cent of Australian executives believed their companies could influence environmental sustainability to a significant degree.

People are willing to spend money on batteries in their house to support solar energy at a greater level than the pure economics

He tells The Fifth Estate the change is being driven by customers and employees who “are telling them they care more”, and also by rising confidence in the development of, investment in and consumer uptake of networked technology.

“If you look at [energy storage] battery technology, it is improving in a much stronger [than predicted] curve … people are willing to spend money on batteries in their house to support solar energy at a greater level than the pure economics that make sense if the only driver was to save money on your energy bills.”

He says a similar trend is expected for electronic vehicles.

“There is no doubt that executives are more confident [about the role of technology] and there is an optimism bias, which we have seen over and over in Australia …. Once they can see a path, people will invest in technology and they will move away from something that is negative.

“If you have a portfolio of investments, it just makes good sense to have an investment in those [areas], that your investments are weighted towards where the future will be.”

Climate cost to business is bigger than expected

In the near term, climate change represents a real cost to business. Last year, for the first time, Frontier Advisors revised its long-term outlook specifically on the effects of climate change.

It said climate change was the primary driver of its downward revision of 0.25 per cent a year of the likely returns it believed investors could expect, across all asset classes.

Clients weren’t that surprised, principal consultant Joey Alcock tells The Fifth Estate. Many of them are already aware of the risks, and have prepared themselves to answer questions from beneficiaries about any exposure to climate change.

“You will have beneficiaries who will want to know how their money is being managed with regards to the factors being taken into account,” he says. “People are voting with their feet.”

He says regulators have been driving much of the change in attitude “but it is definitely multi-faceted,” especially at a time when bushfires and climate change protests are regularly in the news.

Although APRA has stopped short of mandating the inclusion of climate change-related risk in existing prudential risk management standards, “it has made so many comments about it that it is everything but formalised”.

He says that although APRA has stopped short of mandating the inclusion of climate change-related risk in existing prudential risk management standards, “it has made so many comments about it that it is everything but formalised”.

How’s your temperature score doing?

In Europe, leading insurers and pension funds are adopting a “temperature score” that provides a snapshot of how their investments are contributing to climate change.

In France, 18 firms, including insurer AXA, are disclosing the temperature score of all or part of their portfolios. In the UK, regulators are considering requiring some banks and insurers to report temperature scores from 2021 in annual portfolio stress tests.

Head of sustainability research at BNP Paribas Asset Management, Mark Lewis, told Reuters this week, “If you thought you could ignore climate change before, you just can’t anymore”.

In Australia, the issue was first seriously highlighted back in 2016 when independent policy institute, the Centre for Policy Development, commissioned a legal opinion on how Australian law requires company directors to consider, disclose and respond to climate change.

An updated opinion issued in March, last year, said company directors who consider climate change risks actively, and “disclose them properly and respond appropriately” will reduce their exposure to liability. It warned, however that as time passes,” the benchmark is rising”.

In July, in a landmark Australian trial, the Federal Court will determine whether giant superannuation fund, REST, is in breach of its fiduciary duties by not taking enough action to mitigate climate-change-related risks. Legal experts say the case could set a world-wide legal precedent as to how pension funds manage climate change-related risk.

On the global stage, the most recent warnings come from asset managers and regulators. This week, the Bank for International Settlements (BIS) said climate change threatens to provoke so-called green swan events that could trigger a systemic financial crisis.

The BIS, which is owned by the world’s 60 largest central banks including the RBA, called on all central banks to help mitigate the financial risks posed by climate change.

Around the same time, global asset manager BlackRock pledged to change its investment strategy. Its chairman, Larry Fink says the world is on the edge “of a fundamental reshaping of finance” because of climate change.

“Climate change is almost invariably the top issue that clients around the world raise with BlackRock,” says Fink.


What to expect in 2020

  • More climate change-related litigation
  • Tougher rules from regulators about assessing and reporting climate change-related risk
  • Greater flow of investment funds away from fossil fuels
  • A tougher stance by insurers and financiers regarding projects, business and assets exposed to climate change-related risks

“From Europe to Australia, South America to China, Florida to Oregon, investors are asking how they should modify their portfolios. And because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself.”

Global coverage of Australia’s horror bushfires has further galvanised these views, says Hillard, who sits on Deloitte’s global board.

“On one sense, you look at the scientific evidence, and on another you are looking for events [that signal climate change] and this is an event that has global visibility. It is another data point in terms of the global discussion about climate change.”

Taking care of business

2020

2019

  • Sweden’s central bank sells its holdings of bonds issued by Canada’s Alberta, Queensland and Western Australia because Australia and Canada “not known for good climate work
  • APRA increases scrutiny of how banks, insurers and superannuation trustees manage climate change financial risks
  • RBA describes climate change as a “serious challenge” and a “systemic risk” to the Australian economy. Starts factoring climate change risks into how it manages its core responsibilities, such as setting interest rates
  • ASIC launches new surveillance program to ensure Australia’s biggest companies are dealing with climate change risks
  • Former High Court judge and banking royal commissioner, Kenneth Hayne, says company directors could be sued if they don’t properly deal with climate change
  • Global poll of regulators and insurers shows 70 per cent in favour of climate risk disclosure being made mandatory

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