A chance to profit as climate forces a governance rethink

The implication of warmer temperatures include sea level rises and extensive flooding. Picture: AFP

This month’s IPCC report ups the ante for Australian business, particularly our boards, to make climate governance a priority, quickly.

With more than 1800 climate change-focused legal cases filed across six continents to date, shareholder activism showing real bite, financiers factoring this into the cost of capital, policymakers globally moving to price the negative externalities of emissions, and regulators shifting quickly to require the quantification of climate risks and incentivise mitigation action, the landscape for boards is changing rapidly.

The risks associated with climate change are not some future scenario when most of us on boards are long dead and gone, but within the lifetimes of us, our children, and businesses we lead and the workers who work with us.

It is hard to escape the conclusions of the UN-sponsored report which has looked through more than 14,000 papers on climate science, and concluded that the planet has already warmed by 1.1 degree, is headed towards missing the Paris target not by 2050 but a full decade earlier, and that weather extremes will intensify and become more frequent.

That virtually all of this temperature rise is human-induced should not be surprising. After all, this reflects the progress of humanity, bringing with it the growth in the human race, wealth and prosperity – for all the good and the bad.

The history of humanity is that we have always caused and solved problems – it is what our species does and we always strive to do better.

But what is concerning is the acceleration – temperature rise over the past 50 years is the fastest in 2000 years and seems to be getting faster.

The implication of warmer temperature is not that the tropics extend down to Melbourne (which some might find an improvement) but that heat stress will affect labour productivity, increased intensity and frequency of natural disasters will damage our capital stock and uproot lives, and sea level rises and riverine flooding will devastate communities and erode our valuable agricultural lands. All these are important considerations for business, but even more will be the response to all this – policy, regulation, changes in consumer preferences, the viability of some goods and services and businesses alike.

Our own modelling shows that if we get the economics of this right, action on climate change will actually be good for the Australian economy – creating growth of around $680bn over the next 50 years and hundreds of thousands of jobs along the way while avoiding a $3.4 trillion hit to the economy from not acting.

Climate risks, and the massive opportunities that are also emerging, are fundamentally strategic and financial issues. No board should simply delegate this issue as an operational detail for the executive.

Australia’s economy wins big from acting on climate change. This is also true for the businesses that take the right steps to transform to capture the opportunity, that act fast and act early.

That is the responsibility of directors on boards. For many it’s a strategic question, for some a matter of tactics, but for all it’s a task of transformation. Freezing in the headlights of disruption will not be judged favourably.

Proxy voters and financiers worried about the risks and losses of potentially stranded assets, and shareholders seeking long-term value, are already demanding change.

Whether insurance is even available for some businesses, some sectors, and some parts of the country are live issues. In light of recent events, boards and executives should note two things: some large companies have been blindsided in AGMs by votes based on climate risks and objectives; and the rapidly emerging focus on responsibility for Scope 3 emissions – the emissions caused by suppliers and customers who use the company’s products.

Scope 3 emissions are the sleeper in this debate and why the agenda will be transformative.

In all likelihood, sustainability and climate change will drive more transformation than the digital transformations companies have seen to date.

Participants in every sector will be judged by the emissions outcomes not just of their own operations but of those across their full value chain – that was the substance of the Shell judgment. This will reshape a board’s view of shareholder value and its relationships with all stakeholders.

This is playing out across all parts of the economy, requiring boards to deal with this challenge more systematically – for their own organisations and as a collective in gaining better understanding and developing principles for the transformation that beckons.

The World Economic Forum’s Climate Governance Principles provide an excellent starting point to support boards to better lead their organisations through the risks and opportunities presented by climate change – most importantly by embedding climate considerations across the business.

The legal, personal, economic, and commercial futures of boards and their organisations, along with the personal reputations of directors, are truly at stake.

Will Symons is lead partner, climate and sustainability at Deloitte, Asia Pacific, and Pradeep Philip is the head of Deloitte Access Economics.