Boards in Australia and New Zealand need to mitigate climate change risk, but the vast majority of directors are just beginning to come to terms with the nature of the risks that threaten both their business and the community at large.
According to Graham Bradley, chair of the Sydney-based agricultural firm GrainCorp and non-executive chair of HSBC Bank Australia, the risks to a business from climate change will be mainly one of three types:
- Physical impact on assets and businesses caused by changing weather patterns.
- Regulatory risk resulting from government policies which impact adversely on business operations.
- Adverse impact from third parties such as investors or climate activists.
Bradley points out that directors have a responsibility to manage these risks, to ensure that the business does not engage in activities that could boost climate change, and that businesses join others in their communities in working to control climate change.
The Australian Securities and Investments Commission (ASIC) has recently updated its existing regulatory guidance to include the disclosure of climate change-related risks in a note.
The note makes clear that climate change is a systemic risk that could have a material impact on the future financial position, performance or prospects of entities, and may therefore need to be disclosed in an operating and financial review (a key part of reporting for listed entities). The updated guidance reflects an ongoing focus by regulators on climate change risk disclosures, and support for the use of appropriate disclosure frameworks, such as that developed by the Financial Stability Boards Taskforce on Climate-related Financial Disclosures (TCFD).
The New Zealand Institute of Directors has laid out practical risk management steps relating to climate change including:
- Adopting an organisation-wide risk management framework, with climate change included within that framework as appropriate
- Keeping the board and senior management up to date on climate change risks, for example through periodic briefings
- Ensuring there is a sufficiently diverse range of knowledge, skills and experience on the board and within management to identify and effectively address climate risk
- Seeking independent expert advice on the climate risk faced by the company and options for addressing that risk and
- Taking concrete steps to address the company’s exposure to financial risk from climate change.
What’s more, a wave of regulation to adapt to these changing conditions is already underway. For example, on June 27, 2019, the UK became the first major economy in the world to pass legislation to bring all greenhouse gas emissions to net zero by 2050, and the EU recently passed a similar measure.
Nonetheless, most boards aren’t taking action. A recent survey of Australian companies by environmental campaign group Market Forces, based on public information from 72 big listed companies operating in sectors considered high-risk on climate change, found that just above half (57%) identify climate change as a material business risk, and just 32% of the companies disclose detailed discussions of specific climate risks and opportunities facing their businesses.
In contrast, nearly 80% of Scandinavian boards have taken action on climate change consequences, according to a survey by Harvey Nash.
Yet the danger to directors is clear: “It is likely to be only a matter of time before we see litigation against a director who has failed to perceive, disclose or take steps in relation to a foreseeable climate-related risk that can be demonstrated to have caused harm to a company,” warns the Melbourne-based lawyer Noel Hutley SC.
Board evaluations are starting to include ‘climate competence”, Australia and New Zealand boards are considered to be light on science backgrounds compared with countries such as Germany. The AICD suggests that boards need to recruit NEDs or consultants with the requisite experience, particularly from other sectors which have a deep knowledge of embedding this in their strategy.
Importance of Scenario Analysis and Standards for Disclosure
Global best practice adopts more ambitious climate targets for scenario analysis, according to the International Energy Agency. Boards should work with experts to devise a variety of relevant scenarios based on the nature of their basis and its intersection with climate change.
All scenarios should be based on pathways that can keep warming to 2°C or less, the IEA says. These include a Sustainable Development Scenario that is aligned with Paris Agreement targets and also factors in further policy goals such as achieving universal global access to modern energy by 2030. The Intergovernmental Panel on Climate Change will soon release a report on mitigation and development pathways consistent with limiting warming to 1.5°C.
Some leading companies have used 1.5°C scenarios to test their exposures and strategies, and new resources are emerging for considering more disruptive technological changes, policy transitions and physical impacts. Scenarios that assume limited policy change beyond what is already announced are losing credibility, as are corporate strategies built upon them.
To set standards for this disclosure, the Task Force on Climate-Related Financial Disclosures has been set up by the Financial Stability Board (FSB) to develop voluntary, consistent climate-related financial risk disclosures for use by companies, banks, and investors in providing information to stakeholders.
“Increasing the amount of reliable information on financial institutions’ exposure to climate-related risks and opportunities will strengthen the stability of the financial system, contribute to greater understanding of climate risks and facilitate financing the transition to a more stable and sustainable economy,” the task force writes.
Boards seeking to stay up-to-date on climate change and compliance requirements should have technology support. Diligent’s Modern Governance tools can provide this support.
What Is the Board’s Role in Climate Governance?
Climate change may potentially affect a company’s strategic risk. In that sense, the board has a responsibility to manage climate risk in the same manner as any other strategic risk.
Climate change may be identified as a board director’s fiduciary duty or be listed under the corporate governance code. Either way, board directors have a responsibility to act with due care, skill, knowledge and diligence. That means that boards have a responsibility to identify, assess, address and disclose material climate risk. Board directors of companies like oil, gas, energy, transportation, agriculture, food, forestry, materials and financial services are especially vulnerable to climate risks, and such companies may face legal action for not giving their board duties due diligence.
The Importance of Having an Effective Climate Governance Structure in Place
An effective climate governance structure sets the stage for board directors to assess risks and opportunities that are related to climate change. The structure ensures that boards will make the time to incorporate climate change data into strategic decision-making. Taking the time for planning ensures that the board will be well equipped to deal with threats and communicate appropriately with shareholders about climate change matters.
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