In recent years public opinion in Australia towards climate change has changed significantly, backed by a number of “one-off" climate events that are simply not “one-off". The heightened effects of these events mean that Australian businesses have started to see knock on effects and are looking to change the way they operate. Regulation is not far behind.

Internationally, customer demand for sustainable products, environmentally-friendly goods and co-benefits that avoid emissions (the “pull"), and market regulation and investors (the “push"), are transforming the global market.

While this is true in Australia to an extent, a critical “push" component is missing: embedded political will and related local business taxonomy.

In the coming years, Australian business will see a growing number of “pushes" to prepare for climate change, as the urgency to understand and mitigate against climate risks – illustrated by the example of the insurance sector – becomes increasingly apparent.

A growing “push" for Australian businesses to prepare

Following ASIC's report on climate risk disclosure by Australia's listed companies at the end of 2018, we saw the ASX release their own Corporate Governance Principles and Recommendations in late February. These guidelines include recommendations for listed companies to ensure that sustainability AND climate change are adequately dealt with in risk strategies. In addition, the ASX encourages companies to improve their own disclosure of the risks they face from climate, in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

When compared globally, the Australian superannuation industry is relatively advanced (sitting just behind their European counterparts) when it comes to shifting investments away from coal and towards renewables, looking for opportunities in low-carbon technology, and implementing the recommendations of the TCFD.

Renewables are beginning to outperform fossil fuel-generated power in Australia and internationally

Renewables are beginning to outperform fossil fuel-generated power in Australia and internationally (McKinsey Energy Insights' Global Energy Perspective, Jan 2019)

For some years, Australian super funds have been decarbonising as well as engaging with the boards and CEOs of businesses they own or have shares in – with the express intent of encouraging greater understanding of climate risk and adequate reporting. This practice enables better long-term returns, and thus a more secure and risk-free return for you and I, as super fund investors.

Just last month, the Reserve Bank of Australia's deputy governor, Guy Debelle, issued a stark warning to business that climate change is not only real, but that its impacts are becoming more frequent. As a result, Australian businesses are much more likely to be affected, which will begin to put significant stress on the country's economic output and financial stability.

"We need to think in terms of trend rather than cycles in the weather. Droughts have generally been regarded as cyclical events that recur every so often. In contrast, climate change is a trend change," Dr Debelle said, citing the impact of Cyclone Yasi in 2011 which impacted banana prices so much that inflation was boosted by 0.7 percentage points.

But as Australian regulators continue to call for businesses themselves to understand the potential impacts of various climate scenarios, the country still lags politically, without a clear framework and taxonomy for businesses. This missing component would allow for the kind of aligned reporting to enable peers to make direct comparisons, and give investors better visibility when choosing where to place funds.

The shortcut here is to borrow from and adapt what has already been done in the European Union through the creation of the High-Level Expert Group for Sustainable Finance.

Out of the original recommendations put forward to the EU, many have already been adopted and implemented both politically and by the investment community – including a clear taxonomy, through which businesses and investors now have a shared language through which to communicate on climate risk.

The urgency to act

The urgent need to act on climate risks is clearly visible in the Australian insurance community.

While presently accountable for approximately 2% of global insurance, Australia was responsible for over 8% of claims seen by reinsurers globally last year. Given this, there is a clear and significant risk that Australian insurance premiums for specific regions and events may become unaffordable.

With the May election looming, will the next government listen to investors, the energy markets (where the price of renewables will soon significantly outperform coal-fired power stations), and the thousands of school children marching the streets in fear for their futures?

As we see politicians themselves waking up to the need for urgent action, it is high time that the government begins to listen and, in doing so, protects the Australian economy with swift policy action to help businesses hedge against climate risks and make the most of the natural opportunities to come from taking climate action.

Understanding and mitigating climate risks is not only a matter of protecting investments – it's also a way to enhance them. Get in touch with John today to find out how South Pole can help your business prepare for the effects of climate change, or learn more here.