More Australian companies are considering in detail what the Paris Agreement on climate change means for their business strategy, but serious deficiencies in consistency and quality remain in modelling impacts of climate change and responses to it. Australian organisations and the government could do better in this domain.
This is according to a report ‘Climate Horizons’, released recently by the Centre for Policy Development (CPD), an independent policy think tank based in Sydney and Melbourne and featuring inputs from ClimateWorks Australia.
The report comes a year after the report of the Financial Stability Board’s Taskforce on Climate-Related Financial Disclosures (TCFDs).
Climate Horizons outlines how companies, regulators and policymakers can build on recent progress and keep pace with international advances in sustainable finance.
Companies that don’t understand climate change are risky
“Companies that don’t understand the possible impacts of climate change and climate policy on their business, or rely on flaky assumptions and resources for this ‘scenario analysis’, overlook big risks and opportunities,” said CPD policy director Sam Hurley, a co-author of the publications.
He said that these companies expose themselves and their shareholders to substantial risk. The TCFD had identified scenario analysis as a critical tool for companies and investors that are serious about responding to climate risks. Markets, investors and regulators will look unfavourably on organisations whose climate scenario analysis is not up to scratch, especially now firms have had time to get across the TCFD recommendations, he said.
While international practices move ahead, Australia can do better
Mr Hurley noted that international best practice is moving ahead rapidly. More organisations are using ambitious scenarios that consider major emissions reductions and big policy and social changes to test their resilience.
Meanwhile, scenarios that rely on business-as-usual assumptions – and corporate strategies based around them – are becoming less and less credible.
While CPD fellow co-author and Climate-KIC Australia policy director Kate Mackenzie welcomed the fact that some of the Australia’s biggest companies and financial regulators are genuinely engaging with the implications of meeting the 1.5°C target in the Paris Agreement, she noted that as a developed economy with a large pool of pension assets, and exposures to transition and physical risks relating to climate change, “we can and should do better.”
“Some of the early scenario exercises have employed questionable climate transition assumptions, and many are still overlooking physical impacts and providing little indication that these exercises have influenced decisions,” she said.
Anna Skarbek, CEO of ClimateWorks Australia, which contributed to Climate Horizons, agreed that businesses may not yet appreciate the scale of the transformation ahead, but can take immediate steps to address this.
“Done well, scenario analysis is a vital tool for companies to think through implications for their business of a hotter world; one where we must reach net-zero emissions as fast as possible and how their business can help to achieve that. Proper analysis can show how better governance, strategy and risk-management credentials will drive long-term value and profitability,” she said.
Federal Government should appoint a high-level taskforce
The Climate Horizons report provides a resource for firms and investors coming to grips with scenario analysis, outlines how Australian financial regulators can continue to support a proactive approach to climate-related risk reporting, and calls on the Federal Government to appoint a high-level taskforce to shape a sustainable finance agenda.
“The Federal Government has a huge opportunity to work with industry and turbocharge a sustainable finance agenda at home”, said CPD CEO Travers McLeod. “It is critical to connect recent progress on climate risks to this wider agenda underway in the UK, Europe, Canada and elsewhere. A high level taskforce should be appointed and asked to report after the next federal election, otherwise Australian companies and investors will be isolated as sustainable finance standards are finalised by our trading partners.”
The report called for the following key recommendations:
- New guidance on climate risks by ASIC, the RBA and other regulators to support momentum for better disclosure of climate-related risks by Australian companies and investors.
- Close monitoring of climate-related financial disclosures over the next 12 months to assess the case for more demanding mandatory reporting requirements.
- A systematic review of sustainable finance in Australia, drawing on an emerging global policy agenda that connects green finance with a wider range of sustainability-related challenges and opportunities.
Climate Horizons can be found here.