Does climate change pose a risk to your business?




Melbourne city behind the Yarra River

Climate change is one of the most significant and possibly most misunderstood risks today. And that could mean serious consequences for organisations and economies across the globe.

While most of us agree climate change is real, for businesses, it’s difficult to assess when and to what extent it will impact them, with many wrongly assuming it’s a long-term issue.

Sarah Barker, special counsel with TAKE2 Founding Partner Minter Ellison, says the 2015 Paris Agreement was the “mother of all market signals” to businesses that they must take climate change seriously, understand it and figure it into their planning.

“The Paris Agreement was a watershed moment,” she says. “Virtually every government in the world was saying ‘we have to keep global warming to less than 2 degrees below pre-industrial temperatures. And we’ll introduce policy to transition the world to net zero emissions in the second half of the century.’”

That same year, Bank of England Governor Mark Carney was among the first leading international financial voices to signal that world markets can no longer consider climate change just an environmental issue, but a key threat to financial stability.

To help investors, lenders, insurers and asset managers and owners access reliable information about the potential financial risk, the G20’s Task Force on Climate-related Financial Disclosures (TCFD) recently made recommendations regarding climate change risk assessment and that it should feature in annual reports and other official company reporting.

According to Task Force chief Michael R. Bloomberg, “Climate change is not only an environmental problem, but a business challenge as well.” The Task Force believes widespread adoption of their reporting recommendations will help stabilise markets and economies.

So which industries are most at threat?

“Financial services including banks, asset owners, super and pension funds, insurers and asset managers face risk from climate change as do industries like fossil fuels, conventional energy utilities, the automotive sector, agricultural sector, chemicals and building and materials,” Barker says.

Australian CEOs and directors who fail to properly assess how climate change could impact their organisation may find themselves in trouble. “The Corporations Act 2001 requires directors act in the best interest of their organisation, which is usually interpreted as the financial best interests.

“Because climate change now undeniably brings with it a financial risk, directors must exercise due care and diligence. They must understand climate change and its potential impact on their organisation.”

Climate change also poses non-regulatory threats to business, including small to medium enterprises.

“Smaller businesses supplying larger organisations will find big business expectations are changing. You may start to find that if you can’t demonstrate the environmental sustainability of your business, you won’t get the work.” But it’s not all bad news.

“There could be big wins ahead for nimble, more flexible, smaller businesses as we move towards a low carbon economy,” says Barker. “If you can get out in front of the pack, and identify your role in that transition, there will be significant opportunities for you.”

Businesses that ignore society’s changing views and expectations because of climate change do so at their own peril. Her advice to business: Don’t wait until climate legislation requires change.

“The trajectory at which this issue is moving in markets is such that if you’re waiting for another carbon tax before you start thinking about it, then the game will be well and truly over.”

Useful resources