Risky business: Helping boardrooms navigate climate change risk

In May, about 20 senior executives from some of Australia’s biggest companies sat down in the Melbourne CBD to learn how climate change might affect their business, how businesses in other countries were responding, and how they might follow suit. 

Executives from more than a dozen organisations, including  BHP, Westpac, Melbourne Water, and First Sentier Investors presented at or took part in Climate Change and Business Risk: Developing a Strategic Approach, a two-day course put on by Monash Sustainable Development Institute, in partnership with ClimateWorks Australia.

Demand for the course – the first of its kind in Australia -- was so strong that MSDI is putting on a second, in November. 

Around the world, awareness among business that it needs to act on climate change – and the risks to its bottom line if it doesn't – is growing. When future historians come to mark this change, they'll assign a critical place to the creation in 2015 of the Task Force on Climate-related Financial Disclosures (TCFD). 

The task force was announced by Bank of England Governor Mark Carney and Michael Bloomberg, founder of the Bloomberg financial data empire, during global negotiations over the Paris Agreement. 

The task force makes recommendations about how companies and investors should approach and disclose the financial implications of climate change over four key areas: corporate governance, strategy, risk management, and metrics and targets. All four areas are central to the MSDI course.

“Carney and Bloomberg’s work was so influential because it came from the heart of the finance community,” says Dirk Visser, lecturer in MSDI’s sustainable development education program, and director of the Climate Change and Business Risk course. 

“These influential leaders said to business, ‘This is something which can disrupt the global economy in the same way as the global financial crisis. So you have to get a handle on it, as the implications for the whole economy and for individual companies could be really, really grave.’”

The task force has developed standardised measures for disclosing climate risk to investors and lenders. Using the measures is voluntary – only France has made it mandatory. 

However, a growing number of regulators – including APRA and ASIC in Australia – and law firms strongly endorse the TCFD process, and recommend that listed companies that are exposed to climate change should disclose their potential risk, or face potential legal action. Australia already has the second-most climate change litigation cases in the world, after the United States.

Framework to shape strategy

The Climate Change and Business Risk course shows senior managers and executives how to use the TCFD framework to shape their firm’s strategy and governance, develop climate-related scenarios that inform their risk management approach, and disclose this approach to capital providers. 

Risk to business comes in three main forms – physical, transition, and legal risk, says Visser. The first includes the threats climate change presents to plant, capital holdings, supply chains – and even the productivity of employees. 

For example, infrastructure and housing portfolios might be exposed to flooding, fire and inundation. Among second-order physical risks, economic studies have shown that overall productivity declines when average temperatures increase above a certain level. 

Transition risk includes the danger that companies might have to discontinue a line of business or investment – in fossil fuels or food being flown across the world, for example – because lawmakers say that these operations are no longer possible if the global temperature rise is to be kept below two degrees. Such investments, known as “stranded assets”, are potentially worth many billions of dollars.  

The third risk includes a company’s exposure to lawsuits from shareholders and others who allege the firm has failed to sufficiently prepare for the impacts of climate change. 

"In many scenarios – all based on strong scientific and economic analyses – you're talking about several percentage points being wiped off global GDP, and if these scenarios are right, everyone cannot come out OK.”

The course provides in-depth information on all three risks, and takes participants through a series of activities in which they have to produce hypothetical scenarios as the basis of developing a climate strategy. 

Visser thinks that, while some parts of the Australian business sector are lagging behind counterparts in other high-income countries, few businesses anywhere “are acting with the speed and urgency that is commensurate to the scale of the potential impacts of climate change". 

“The expert contributors at the May seminar pointed out that no company, after doing its climate change scenario analysis, has yet said: ‘You know, this could really hurt our profitability.' Even oil and gas companies say that climate change might affect their revenues by just a few per cent.

“Yet in many scenarios – all based on strong scientific and economic analyses – you're talking about several percentage points being wiped off global GDP, and if these scenarios are right, everyone cannot come out OK.”

Huge property market losses

Visser points to a 2019 Climate Council study calculating that climate change and extreme weather could lead to property market losses of $571 billion in Australia by 2030. 

“You don’t see that reflected in the scenarios of banks, insurers, asset managers or the property sectors, so it’s a bit of a disconnect,” he says. 

Visser, an economist and accountant by training, says he's “passionate about working with business, because business has the scale and capacity to really help or hinder progress on this issue”. 

He also sees huge benefits to business and to Australia if business can address climate change promptly and effectively. “Australia is highly exposed to the impacts of climate change, but is also well-positioned to benefit greatly from a transition to a net zero economy.”