Climate change is already having an impact on key decisions made by financial institutions, and therefore on your business.
By Dr Judith Landsberg, Senior Consultant, Pantala
Most of us consider climate change to be a bad thing that will happen at some point in the future – and think it would be nice if someone started doing something about it today. Immediate effects of climate change, such as the fish die-off in the Murray River, the floods in Queensland, the extraordinary, and deadly, wildfires in California, may garner front-page attention, but often seem distant from our businesses and everyday concerns.
I would argue, however, that climate change is a clear and present business risk. Regardless of what the weather or fish stocks are doing climate change is already having an impact on key decisions made by financial institutions, and therefore on your business today. Insurance, investment and other financial institutions assess and price portfolio risk over decades. As a result, they are pricing climate risk into their products today, and so should you.
Mark Carney, Governor of the Bank of England, gave a speech in 2014 in which he recognised that “insurers are amongst the most determined advocates for tackling climate change sooner rather than later … while others debate the theory, [they] deal with the reality”. He went on to note that there has been a five-fold increase in insurance losses worldwide from climate related events in the last ten years compared with the 1980s.
Mr Carney recognised three ways in which climate change has an impact on businesses:
- Physical risks – immediate impact from damage to assets, for example in floods, through supply chain disruptions, or the deadly impact of heatwaves.
- Liability risks – the impacts that could arise tomorrow if parties affected seek compensation.
- Transition risk – from policy changes, supply chain changes or market disruption as economies adjust to a lower carbon economy. For example, many large companies, such as CommBank, Mars and Google, have made a commitment to 100% renewable energy, and expect their suppliers to do the same.
It is worth noting that while Federal climate policy has lagged, every state in Australia, except for Western Australia, has an explicit policy of reaching net zero carbon emissions before 2050 . This highlights the potential for transition risks as both the markets and State Governments advance a low carbon program.
Financial risk posed by climate change
In December 2014 the Task Force on Climate-Related Financial Disclosures (TCFD) was established under the chairmanship of billionaire Michael Bloomberg. This initiative, led by the financial industry, developed recommendations for voluntary climate-related financial disclosures “that are consistent, comparable, reliable, clear, and efficient, and provide decision-useful information to lenders, insurers, and investors.” In the words of Mr Carney again – this “allows investors to assess [climate-related] risk to companies’ business models and to express their views in the market”. TCFD expects companies to assess:
- “the organization’s exposure to, and anticipated effects of, specific climate-related risks and opportunities;
- the organization’s planned responses to manage (i.e., mitigate, transfer, accept, or control) its risks or seize opportunities; and
- the implications of the organization’s planned responses on its income statement, cash flow statement, and balance sheet.”
Investors are already expressing their views on the financial risk posed by climate change. Climate Action 100+ is an investor led initiative which has been signed by more than 320 investors from across dozens of countries, who collectively manage more than USD $33 trillion in assets. The organisation has identified “100 ‘systemically important emitters’, accounting for two-thirds of annual global industrial emissions, alongside more than 60 others with significant opportunity to drive the clean energy transition.” Pressure on these large companies will inevitably result in financial and transitional pressure for companies that do business with them.
The Commonwealth Bank is a signatory to the Climate Action 100+ initiative, and views climate change as ‘a significant long-term driver for financial and non-financial risks and opportunities’.
What does climate risk look like in practice? The Commonwealth Bank is a signatory to the Climate Action 100+ initiative, and views climate change as “a significant long-term driver for financial and non-financial risks and opportunities ”. In their 2018 Annual Report they assessed the climate change exposure of their entire mortgage portfolio. Their conclusion was that their exposure to high risk properties could rise 100-fold from 0.01% to 1% of the portfolio by 2060. The inevitable conclusion is that there will be changes in lending criteria. On the positive side they identified “opportunities to assist or incentivise customers to make home resilience improvements and advocating on their behalf for governments to invest in mitigation measures to respond to community level risks.”
CommBank therefore also starts to point to business opportunities that are opening up as a result of climate change.
Savings are readily available through, for example, energy efficiency and better waste management, often with funding support from State Governments. Moving to renewable energy will unlock business opportunities with large companies on a ‘green’ pathway. CommBank again: “While climate change is acknowledged as a business risk, it also provides opportunities for clients who develop low carbon solutions for energy production and transport. Our Climate Policy Position Statement includes our commitment to increase funding to low carbon projects to $15 billion by 2025. This year we increased our lending to $3.7 billion, including new solar farms in Queensland. During the year we led more than $2 billion of green or sustainability notes”
The transition to a low carbon business is a classic example of business transformation.
The transition to a low carbon business is a classic example of business transformation; Pantala is committed to help leaders and organisations navigate this path, we offer a different perspective, and welcome the opportunity to work with you to challenge the status quo, collectively generate ideas, and collaborate to achieve a low carbon future.
Dr Judith Landsberg, Senior Consultant, Pantala
You can contact Judith on email@example.com
Photo Credit: Prince Regent National Park, Australia by NASA; Melbourne, Australia by Raj Eiamworakul; and wind turbines by Appolicary Kalashnikova on Unsplash.