Pressure on three sides: Australia’s boards must address their climate risks

“Treasurer Josh Frydenberg has thrown his weight behind the adoption of net zero emissions by 2050, warning that unless Australia moves, sanctions by capital markets will increase borrowing costs, affecting everything from home and business loans to major infrastructure investments.”

This grim warning was in an Australian Financial Review article on an address that the Treasurer gave to the Australian Industry Group in September. The world’s capital markets are closely following developments in climate science, most recently the release of the Sixth Assessment Report (AR6) by the Intergovernmental Panel on Climate Change (IPCC) which concluded that climate change was “widespread, rapid, and intensifying”. Together with investors, the global legal community is alert to inaction and inadequate climate risk disclosures, and worse, ‘green wash’ rendering business vulnerable to litigation.

Business in Australia is particularly exposed. Our economy is fossil-fuel intensive. Not only have we seen a decade of delays to decarbonise, climate change is here and Australia, already a hot, dry country, is challenged by rising temperatures. We are not prepared and that is not a secret to the capital markets.

Ahead of Energetics’ second climate risk literacy workshop with Governance Institute of Australia on 2 December, we discuss the need for directors and risk professionals to understand the pressure from the three critical stakeholder groups: climate science, investors and the legal community. Boards need to build their knowledge, ensure robust governance, and develop organisational capability for the breadth of climate risk management challenges.

The message from climate science: reduce emissions drastically and adapt to locked-in changes

COP26 is underway in Glasgow. It is now more than five years since the signing of the Paris Agreement and the world is not on track to limit warming to 1.5oC or even 2oC in keeping with Paris goals. In a podcast with Energetics, Dr Sarah Perkins-Kirkpatrick, chief investigator with the Centre of Excellence for Climate Extremes, reflected on the findings of AR6 and the implications for negotiators at COP26, “This is the sixth phase of the IPCC process which has been underway for about 30 years. With each report the certainty around the facts that a) the climate is changing and b) it’s because of us, has only increased. Now it’s irrefutable.” She further commented, “We only have seven or eight years with drastic cuts to emissions to limit warming to 1.5oC.”

Professor Andy Pitman AO FAA, Director of the Centre of Excellence for Climate Extremes, also in a podcast with Energetics added, “There’s at least 20 years of embedded climate change in the system. It will take about 20 years before the climate has equilibrated to the levels of CO2 in the atmosphere. Now we’re already seeing clearly in the observations, the emergence of a range of climate extremes. They will worsen for at least two decades. There’s no doubt whatsoever that you have to be thinking about adaptation.”

The message from capital markets: the money is moving and climate risk will be priced

Investors and financial institutions are pushing for net zero and companies to address climate change through the implementation of emissions reduction targets. Investment funds and asset managers are committing to net zero portfolios and/or publicly advocating for their assets to reduce emissions.

International developments:

• Net-Zero Asset Owner Alliance: 33 institutional investors representing USD$5.1 trillion in assets under management, committed to transition its investment portfolios to net zero emissions by 2050.
• In December 2020, 30 asset managers representing over USD$9 trillion of assets under management launched the Net Zero Asset Managers initiative. This group committed to supporting clients on decarbonisation goals.
• BlackRock announced that companies making “insufficient preparation for the net zero transition” will be barred from accessing the asset manager’s funds. BlackRock manages $US8.67 trillion in assets, or about 8% of the global funds under management.
• HSBC, Barclays and Australia’s big four banks have set ambitions to reduce financed emissions from their customer portfolios to net zero by 2050. The banks have experienced investor pressure to set strategies and targets to reduce exposure to fossil fuel assets
• QBE joined the Net-Zero Asset Owner Alliance, committing to a net zero emissions investment portfolio by 2050. QBE is facing investor pressure to disclose short, medium and long-term targets to reduce investment and underwriting exposure to oil and gas assets.

Australian developments:

• Macquarie Infrastructure and Real Assets (MIRA), the world’s largest infrastructure manager, announced net zero by 2040 and restricted investments in businesses with exposure to coal.
• Industry super-owned investment manager IFM Investors pledged to go net zero by 2050. HESTA, UniSuper, Cbus and REST have committed to net zero emissions for their investment portfolios by 2050.
• The Business Council of Australia has called for net zero emissions by 2050

On 10 June 2021, 457 investors managing more than US$41 trillion in assets released a joint statement to world governments urging a global race-to-the-top on climate policy, and warning that nations and businesses will miss out on trillions of dollars in investment if they aim too low and move too slow. Funds are being made available to businesses that are most likely to actively manage the transition to net zero emissions – acknowledging and rewarding shifts in business models.

The message from the legal community: climate-based litigation is on the rise

There is an increasing body of jurisprudence in Australia and internationally. Australian cases include:

• McVeigh v REST super whereby a pension fund member alleged REST breached Corporations Act by failing to provide information related to climate business risks and any plans to address those risks. Settled and REST pledged to reach net zero emissions by 2050
• Abrahams v Commonwealth Bank of Australia to shareholders suing CBA alleging that its 2016 annual report breached Corporations Act by failing to disclose climate-related business risks. Claim withdrawn after CBA acknowledged in its 2017 annual report climate risks and committed to undertaking climate change scenario analysis
• Friends of the Earth Australia vs ANZ, alleged failure by ANZ to be fully transparent about its scope 3 emissions resulting from its business lending and failing to conduct adequate climate risk assessments in its operations.

Further insights: New expert opinion cautions that ‘greenwashing’ could expose companies (and directors) to the risk of litigation.

Energetics’ climate literacy workshop, 2 December:

Climate risk literacy needs to become a priority for directors, risk and governance professionals. Energetics has advised ASX200 boards across banking and finance, infrastructure, energy, mining and agriculture. Join us on 2 December to learn about this rapidly evolving risk management challenge.

Further information:

Energetics is Australia’s leading climate risk management consultancy working with ASX200.

Energetics climate risk services