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CEO Insights: De-risking is key to a zero carbon future

By Andrew Petersen

CEO | BCSD Australia

In his recent keynote address, the Deputy Governor of the Reserve Bank of Australia (transcript of speech here) shared his insights on how climate change will affect Australia's financial stability, investment and growth, and his message was clear: One of the most significant, and perhaps most misunderstood, risks that organisations (business, finance and governments alike) face today relates to the physical and transitional impact of climate change, or climate risk.

Investors worldwide are putting pressure on companies (through initiatives such as Climate Action 100+) to protect their businesses from a shift to lower-carbon fuels, driven by new laws as well as consumer choices. We see this pressure at its greatest in Europe, where Norway’s Finance Ministry recently instructed its $1 trillion sovereign wealth fund to divest some oil and gas companies to shield it from a “permanent decline” in crude prices. ​

To value climate risk, financial markets need better, more comparable and complete information about climate change. The Task Force on Climate-related Financial Disclosures (TCFD) is addressing this issue through their Recommendations, designed to help companies disclose climate-related financial risks and opportunities. Many initiatives are driving greater and more meaningful disclosure across the world:

  • The Australian Accounting Standards Board (AASB) and the Auditing and Assurance Standards Board (AUASB) are stepping up the profile of their jointly authored guidance around emerging risks - including climate risk - issued in December 2018, which is not mandatory but would represent best practice in applying the mandatory definition of materiality.

  • The Carbon Disclosure Project (CDP) which recently upgraded its global environmental disclosure platform to incorporate the TCFD’s recommendations, found in its most recent analysis that the 7,000 companies across the globe disclosing this year have aligned their disclosures with those recommendations (72% of the listed companies that disclosed through CDP were able to answer between 21 and 25 of the 25 new TCFD questions).

  • The Climate Disclosure Standards Board and the Sustainability Accounting Standards Board (SASB) released its checklist of 11 steps to integrate the recommendations into standard business processes.

  • And to support the implementation of the recommendations the World Business Council for Sustainable Development (WBCSD) and the TCFD have been convening 'preparer forums' for priority sectors: electric utilities, chemicals, materials (cement), transport and agri-food. The oil and gas sector was the first. The WBCSD's TCFD Oil & Gas Preparer, released July 2018, identifies examples of good practice, develops disclosure roadmaps and seeks investor perspectives on TCFD disclosures, including how market participants use the information.

​And announcements by the oil and gas majors in the last few weeks are emerging evidence of the evolution on climate risk, even as hydrocarbons remain their dominant investments.

Bloomberg is reporting that Royal Dutch Shell wants to become the world's biggest power company within 15 years and that it plans to reduce carbon emissions from its oil and gas operations and product sales by two to three percent during the 2016-2021 period, the first time the company has issued carbon footprint targets.

Other energy majors including BP, Total and Equinor ASA have also all made specific statements and investments around low-carbon fuels. In late February, Total’s upstream oil and gas boss told major industry conference that oil may only make up 30 percent of the company’s portfolio by 2040, with cleaner natural gas making up 50 percent and renewables and power accounting for the rest.

What is significant about this news is that it's another sign that corporate leadership now views climate change as a bigger threat to their businesses than even the historically low returns that are associated with those in electricity generation.

Oil and natural gas are likely to continue providing the bulk of global energy needs, particularly in the transport sector. However, the share of fossil fuels in the global energy mix is forecast to diminish over time. The speed of adjustment will be determined by public policy and the private sector. But let's be clear: this transition has well and truly begun. Not taking action is unsustainable. Taking action that is unsustainable is uneconomic.

All BCSD Australia members receive ongoing analysis of these and other topical sustainability issues through our weekly e-newsletter THE INSIDER.


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