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Five climate change risks your board needs to talk about

Australia is perilously close to falling short of its commitment to the United Nations’ Paris Agreement.

We have already experienced temperature increases of 1.4°C over the past 110 years, exceeding the global average. Limiting further increases to just 0.1°C or starting to reverse the damage will take drastic action, including collaboration across government, industry and communities.

While the resources, energy and agriculture sectors face the greatest pressure, no organisation is immune from the consequences of climate change. Its impact stretches across value chains, employees and communities.

Institutional investors are becoming increasingly active in holding organisations accountable. In his January 2022 letter to CEOs, BlackRock Chair and CEO Larry Fink warns organisations that those who fail to plan for a carbon-free future risk being left behind. Those seen as not taking ESG responsibilities seriously will be particularly vulnerable.

In this report, we outline five important climate change risks your board could be in danger of overlooking.

The following article has been extracted from the ‘Five climate change risks your board needs to talk about’ report. For a copy of the full report, please click here.

Disclosure risk

When companies issue a prospectus as part of fund-raising, they know their sales and profit forecasts will be closely scrutinised. There are serious consequences for those who don’t do their homework, including the likelihood of regulatory action and shareholder lawsuits. The bar is often far lower when it comes to non-financial forecasts, particularly in relation to climate change.

Significant debate centres on the commitments organisations and governments make, particularly when they plan to reach net zero. However, much less attention has historically been paid to exactly how those commitments will be achieved.

Now, the tide is turning. Investors and regulators are demanding greater transparency on the specific steps and timeframes for organisations to achieve their climate goals. Those who don’t, can expect to encounter increasing activism.

Capability risk

Outsourcing climate change issues to external specialists isn’t a practical long-term solution. Organisations must develop the skills to be part of a greener future. Specialist sustainability expertise is the tip of the iceberg. Modelling and scenario analysis, supply chain management and stakeholder engagement are core capabilities that will be in increased demand.

Managing the complex, interconnected challenges associated with climate change benefits from an integrated cross-functional approach. From inventory to insurance, people need the skills to support the transition and understand how it affects their role.

Timing risk

Australia is on track to achieve a 26-28% reduction in emissions below 2005 levels by 2030, according to the latest government projections. However, our climate commitments and progress to date have attracted international criticism for falling short of our global peers.

The Australasian chapter of the latest IPCC report describes current climate change adaptation as “largely incremental and reactive.” It calls for a step-change to improve our resilience before we become more vulnerable.

Those hoping future developments will provide the step-change we need are taking a high-stakes gamble. In fact, the reverse is true, according to the IPCC report. Our options to limit the impact of climate change are narrowing over time, and will continue to do so, potentially beyond a point of no return. Innovation has a vital role to play, but not at the expense of present action.

Scope 3 emissions risk

Scope 3 emissions are the elephant in the room for most organisations when they consider their environmental footprint. These indirect emissions occur upstream and downstream from their own operations across the entire length of the value chain.

While measuring and reporting scope 3 emissions is complex and multi-faceted, they often comprise the greatest proportion of an organisation’s total emissions. This is especially the case for the mining and resources sectors, Australia’s largest exporters.

Reporting frameworks have largely treated scope 3 emissions as an optional category, instead focusing on the scope 1 and 2 emissions that directly relate to organisations’ practices. This is gradually starting to change, with investors pushing for more information and disclosure regimes being reviewed.

Profit risk

Organisations typically consider climate change through a risk-focused lens, with profit potential rarely entering the conversation. Those who discuss the size of their opportunity face being viewed as trying to re-frame how much work they still have to do. Half of Australian directors (49%) are yet to see the full opportunity of taking a proactive approach to climate change, according to the AICD’s Climate Governance Study.

But, as Larry Fink’s 2022 letter to CEOs makes clear, reducing their carbon footprint makes organisations more resilient in the long term. Failing to achieve this vision may put a target on their back for potential acquirers, not just shareholder activists.

Organisations must identify ways to create value through investments or capabilities that contribute to solving the climate crisis.

To view the full report ‘Five climate change risks your board needs to talk about’ click here.

Further information

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