June 25, 2018 – 427 REPORT. Regulatory pressure and financial damage are necessitating an increase in physical climate risk disclosure in Australia. In exercising their own due diligence and assessing the exposure to physical climate risks in their portfolios, investors arm themselves with valuable information on corporate risk exposure which they can leverage to engage with companies around resilience. This report explores the connection between climate hazards and financial risks and shares examples of corporate adaptation and investor engagement to build resilience.
The global tide of interest in the Task Force on Climate-related Financial Disclosures (TCFD) has hit the shores of Australian financial markets, steered by regulators concerned about the systemic risk climate change poses to the economy. In 2017 Australian Prudential Regulation Authority’s Geoff Summerhayes was the first Australian regulator to formally endorse the TCFD. “Some climate risks are distinctly ‘financial’ in nature. Many of these risks are foreseeable, material and actionable now,” he said. This sentiment was echoed by John Price of the Australian Securities and Investments Commission in 2018 and reflects growing regulatory concern over climate risk disclosure internationally, as shown by Article 173 of France’s Law on Energy Transition and Green Growth and the 2018 European Commission Action Plan.
This Four Twenty Seven Report, Responding to Economic Climate Risk in Australia, explores the drivers of financial risk in Australia and discusses approaches to addressing this risk. The nation’s dominant industries are particularly threatened by the prevalent climate hazards. For investors, understanding a company’s risk to climate change is an essential first step to mitigating portfolio risk, but must be followed by corporate engagement to build resilience. Institutional investors are increasingly leveraging shareholder resolutions and direct engagement to prompt companies to disclose their climate risks and adapt.
- Australia’s “Angry Summer” of extreme weather in 2013 cost the economy $8 billion and was followed by another summer of extremes in 2016-2017.
- Construction, mining and manufacturing constitute almost 20 percent of Australia’s economy and are highly vulnerable to heat stress and water stress, which threaten large swaths of the nation.
- Boral Limited and Rio Tinto are both Materials companies exposed to water and heat stress in their operations, but they have different risk scores stemming from differing vulnerabilities in their markets and supply chains.
- Engagement on climate is relatively new for Australian shareholders, but is gaining momentum, with institutional asset managers voting on several climate risk disclosure resolutions in 2018.
- Investors can address physical climate risk by reviewing their asset allocations, disclosing their own risks, investing in new opportunities and engaging with corporations.