In December 2020 a virtual meeting of 70 world leaders took place, with many countries including the European Union and UK strengthening their emissions reduction ambitions through new pledges as part of the 5 yearly Paris Climate Agreement ratchet clause. [1] Australia – with a 2030 target that is less than half of what would be consistent with the IPCC’s recommendations to limit temperature rise to 1.5 degrees above the historical average, and with no net-zero commitment – was not invited to present to the forum. [2]
What are the implications for businesses?
It is clear that the world is shifting, at least in terms of policy announcements, towards a downwards emissions trajectory. Emissions peaked in 2019, and though dampened by the Covid-19 pandemic during 2020, are expected to trend upwards in 2021 as economies reopen and more normal travel patterns resume. However, the year has been marked by significant changes of stance and tone in the politics of emissions reduction amongst Australian trading partners that collectively purchase nearly three quarters of our emissions, including the UK, Europe, China, South Korea and Japan. [3] The US Presidential election result will see the incoming Biden team snap back to pre-Trump policies, including re-joining the Paris agreement and announcing a formal net-zero by 2050 target. [4]
In Australia, while there was a slight change in language since the US election, as yet there has been no shift in Federal emissions reduction policy, despite all states and territories now having net-zero policies or legislation. [5] This is cementing Australia’s position as a laggard amongst developed nations, particularly given our extremely high per-capita emissions. [6] This puts most businesses at a distinct disadvantage.
Let’s get physical
From a physical risk perspective, Australia is experiencing national temperature increases significantly above the global average due to the thermodynamics of its large dry landmass, which is on its way to becoming significantly hotter and dryer. The Murray Darling basin, home to much of the country’s agricultural output, has seen river flows has seen an 11% winter rainfall decline over the last two decades and is on its way to a projected 20% decrease in river flows even in a comparatively good case scenario of 2 degrees average global warming. [7]
Throw in higher rates of evaporative soil moisture loss, heat stress on plants; fewer frost days in winter (which are essential for some crops’ growth cycles); and more weather extremes including extreme precipitation events that denude topsoil and take juvenile plants with them, and you have a recipe for lower overall agricultural productivity and much greater output variability. It’s all very well as a wealthy country to say “we’ll just import more in a bad year”, but there is a growing likelihood that, with increasing frequency, multiple growing regions will experience bad years simultaneously. [8]
It’s not just agriculture that is exposed. As unusually intense storms pummelled Australia’s East Coast this week, threatening infrastructure and leading to significant erosion of Byron Bay’s iconic main beach [9] we had a taste of the growing threat of extreme coastal weather, particularly the damage that storm surges propelled by high tides and magnified by even small levels of sea level rise (to date mostly caused by thermal expansion of the heating ocean, but increasingly from melting land ice in polar regions). [10] Climate models project that both tropical cyclones and East Coast Lows, while not necessarily more frequent, are generally likely to be more intense when they do occur. [11]
Indeed, recent analysis by insurance broker Aon found that so-called secondary perils including hail, flood, storms and bushfires (that generate small to mid-sized losses compared with primary perils such as earthquakes and cyclones) have generated over half the global insured losses between 2017 and 2019. All of these phenomena are expected to become more damaging due to climate change. [12]
Globally, economic losses from extreme weather events have increased significantly over the last four decades, partly due to the increasing value of assets built in exposed areas. [13] With multi-metre sea level rise over the long term (beyond 2100) now locked in even if the Paris climate goals are met, and the majority of coral reefs almost certainly devastated by mid-century, billions of dollars of coastal infrastructure (including major roads, ports and airports) and tourism assets is at risk. [14] As such, affordability of insurance is decreasing: following Townsville’s 2019 flooding, premiums rose as much as four-fold. [15]
From Transition to Transformation
Then there are the transitional risks, which could affect companies’ revenues, asset valuations, or costs of doing business. Take the recently floated Dalrymple Bay Coal Terminal, which Queenslanders have an ill timed stake in through the government-owned QIC’s 10% share. Down 25% in its first week, during which the ASX shed just 0.6%. [16] The ASX200 energy sector has significantly under performed the broader Materials Index (covering all resources) over much of the last five years. [17]
While fossil-fuel related electricity and resources assets are currently the most affected, with major managers responsible for trillions of dollars of investment decisions announcing Paris-aligned net-zero mandates for their portfolios, it won’t be long before the malaise spreads to other major users of fossil fuels, particularly in transportation and in turn energy intensive industries such as steel. Just last week a new initiative – Net Zero Asset Managers – was launched with 30 founding signatories, adding to the UN-convened Net-Zero Asset Owner Alliance, launched in September 2019, which now has 33 members. [18] Emissions intensive businesses will come under increasing pressure to adopt transformative business models. Australian businesses may be disadvantaged to the extent our energy system remains fossil fuel dependent.
Unless Australia embraces a net zero 2050 target (along with a coherent plan to get there) – and particularly while it remains the highest per-capita emitter and one of the largest global producers of fossil fuels – exporters are likely to start feeling the pinch. The European Union has proposed a tax on imports from countries whose emissions reduction targets are not Paris-aligned, and one of the top contenders for the head of the OECD is proposing a global roll out of such a scheme. [19]
Most Australian businesses would benefit from policy decisions that accelerate the transformation towards a clean energy system encompassing electricity, transport, industry and agriculture. Economist Ross Garnaut and other analysts predict that a renewable grid would push electricity prices down, in turn lowering operational and transportation costs as vehicle fleets are electrified (or converted to green hydrogen in the case of some heavy transport). [20] As NSW’s recent renewable energy zone auction demonstrated, there is considerable private sector appetite to fund this transition given the superior economics of solar, wind and storage. [21]
Contrary to public perception, Australia’s coal and gas industries are responsible for only about 1% of jobs. [22] Clean and circular services, manufacturing, agriculture, energy and non-fossil resources industries are key to our future economy. Talk to Adaptive Capability today to understand the risks and opportunities of climate change and turbo charge your business.
David McEwen is a Director at Adaptive Capability, providing strategic risk and project management advice to help businesses create and preserve value in the face of climate change. His book, Navigating the Adaptive Economy, was released in 2016. Visit www.adaptiveeconomybook.com.
[3] https://www.ft.com/content/185e5043-fd72-4fef-a05c-f2a5001c7f4b
[4] https://www.bbc.com/news/science-environment-54858638
[6] https://www.bbc.com/news/science-environment-55222890
[10] https://cleantechnica.com/2020/04/23/the-number-of-people-affected-by-floods-will-double-by-2030/
[12] https://www.insurancejournal.com/news/international/2020/09/23/583704.htm
[17] For example, graph in section 3 of this article: https://www.marketmatters.com.au/blog/post/market-matters-weekend-report-sunday-19th-july-2020/
[20] Garnaut, R., Superpower – Australia’s low-carbon opportunity, La Trobe University Press, 2019.
[21] https://reneweconomy.com.au/dubbos-new-renewables-zone-shows-the-path-away-from-fossil-fuels-79082/
With major regulators making increasingly direct and clear statements about directors’ liability relating to the management of climate change risks, the “unforeseen” excuse is no longer going to cut it. In recent months major Australian regulators the RBA, APRA and ASIC have made it clear that the implications of climate change must be effectively considered in corporate decision-making.
