SAM HURLEY AND KATE MACKENZIE. Climate horizons.

Companies are still lagging on modelling and disclosing impacts of climate change – more business, government and regulatory action is required. 

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, concludes a report released by the Centre for Policy Development (CPD) today.

Climate Horizons, written by Sam Hurley and Kate Mackenzie, and featuring inputs from ClimateWorks Australia, comes one 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 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 Sam Hurley, CPD Policy Director and co-author. “They expose themselves and their shareholders to substantial risk.”

“The TCFD 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.”

“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. Scenarios that rely on business-as-usual assumptions – and corporate strategies based around them – are becoming less and less credible.”

“It’s great some of Australia’s biggest companies and our financial regulators are now genuinely engaging with the implications of meeting the 1.5C objective in the Paris Agreement,” said Kate Mackenzie, a CPD fellow, co-author and Policy Director at Climate-KIC Australia. “However, 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.”

Anna Skarbek, CEO of ClimateWorks Australia, which contributed to Climate Horizons, agrees 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.”

Climate Horizons 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’s 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.”

Climate Horizons will be discussed tonight in Sydney at a CPD forum on financing a sustainable economy. The forum will feature a keynote address by ASIC Commissioner John Price.

Sam Hurley is CPD Policy Director;  Kate Mackenzie is CPD Fellow and Policy Director at Climate-KIC Australia.

Full report available here: https://cpd.org.au/2018/06/climate-horizons/

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