Gen Change: From climate risk to a once in a generation opportunity

COVID-19 has put the size of the climate challenge into perspective. In fact, by bringing economies to a standstill, by forcing the closure of individual businesses, borders, personal garages and factories, emissions around the globe were reduced by about 7 per cent in 2020. Before we pat ourselves on the back, it’s key to remember that for humanity to really reduce our climate impact and limit global warming to 1.5 degrees, we need to suppress carbon emissions by an equal 7 per cent every year for the next decade.

Given that permanently shutting global economies isn’t an option, governments across the world are seeking new ways to transform, with every leader adopting a unique approach to ensure their populace not only survives, but thrives in a safe world.

The science is pretty clear - the Earth’s temperature has undoubtedly warmed by 1 degree compared to pre-industrial levels, with even the most optimistic forecasts saying this impact is now irreversible.

And while it may appear insignificant, experts warn that even tiny lifts in temperature translate into huge changes for the world’s climate with many species already at the mercy of this changing world.

What does this mean for the planet?

The CSIRO has warned that Australia will not be excluded from the detrimental impacts of climate change given that every aspect of human life is in some small way related to the environment. According to the research hub, most of the erratic changes to our planet over the recent decades will continue with Australia now predicted to suffer from:

•  More frequent extremely hot days
•  Rising sea levels
•  More acidic oceans
•  Declining snow depths
•  More intense extreme rainfall events

The WWF notes that this will have a profound impact on Australia’s ecosystems causing one in six species to become extinct while completely altering farming and food production, depleting water resources, eroding coastal areas, increasing health concerns and causing damage to our homes. Sounds fun?

While current damage cannot be undone, failure to act now will clearly see larger impacts on life as we know it.

Leaders set out a path to net-zero

Australia hasn’t been too convincing in setting its path to net zero. And while countries around the world have made firm commitments, Australia has termed 2050 as a “preferable” target.

Meanwhile, US President Joe Biden has announced a more ambitious target to cut his country’s emissions at least in half by 2030, after UK Prime Minister Boris Johnson pledged a 78 per cent cut by 2034.

“The UK will be home to pioneering businesses, new technologies and green innovation as we make progress to net zero emissions, laying the foundations for decades of economic growth in a way that creates thousands of jobs,” Mr Johnson said recently.

Australia, on the other hand, has no hard targets. Its aim is to cut emissions recorded in 2005 by 26 to 28 per cent by 2030. As part of this plan, the Prime Minister announced an extra $540 million in investments on clean energy projects in May this year.

Roughly half the money will be spent building hydrogen hubs in industry-exposed regional areas, such as the Pilbara in Western Australia and Whyalla in South Australia.

The rest of the money will go towards carbon capture and storage facilities, although the science is still out on their effectiveness.

Scott Morrison, however, insists the twin technologies will be crucial if Australia plans to achieve net zero emissions by 2050.

“We want to make clean energy more affordable and reliable while looking for ways our investments can get more people into work,” he said. “We cannot pretend the world is not changing.

“If we do, we run the risk of stranding jobs in this country, especially in regional areas.”

Technology not taxes

In Australia, the government has prioritised technology with innovation over the introduction of carbon taxes to guide the country towards net-zero emissions.

In a speech the PM gave at the Business Council of Australia, Mr Morrison said Australia will reach net zero as quickly as possible through the use of technological solutions that will create jobs as well as help the environment.

“I’m increasing in confidence with the plan that we’re developing to achieve that. We are not going to meet our climate change targets through punishing taxes. I am not going to tax our industries off the planet. We are going to meet our ambitions with the smartest minds, the best technology and the animal spirits of our business community,” he said.

And although the “animal spirit of our business community” may have financial gain at its core, Mr Morrison is confident the private sector is making strides towards cleaner practices.

“We need to change our energy mix over the next 30 years on that road to net-zero emissions. Last week I was in Western Australia and saw firsthand the groundbreaking work that Andrew Forrest and Fortescue are doing as part of our energy transition as a way of sustaining jobs in the resources sector,” Mr Morrison said.

But the PM’s word is not enough for some, with calls increasing for the inclusion of environmental impacts in financial reports with the goal to up their responsibility regarding all aspects of the environment.

In fact, following consultations in 2020, the International Financial Reporting Standards Foundation has moved towards developing international sustainability reporting standards, signalling a new era in corporate reporting where the same rigour is demanded for sustainability reporting as for financial information.

“With the pivotal support of the FSB and IOSCO, the IFRS Foundation is uniquely positioned to unify sustainability reporting. Our hope is that this will ultimately deliver a fully interconnected reporting system, addressing the key matters that drive long-term business value whether they relate to environmental, social, governance, intangibles or other non-financial information,” said Reinhard Dotzlaw, KPMG global IFRS leader, in May this year.

Recent research published by KPMG revealed that 78 per cent of the ASX100 clearly acknowledge climate change as a financial risk to business, up from 52 per cent in 2017. In fact, Australian companies place second across the globe in acknowledging climate change as a risk, and are ahead of the G20. However, despite this good news, only 32 per cent of the ASX100 include TCFD or climate risk disclosures in their annual financial or integrated report or published a standalone climate report. Moreover, a lesser 20 per cent of ASX100 companies use scenario analysis to model the impacts of climate change on their business, while 17 per cent state they are reporting in line with science-based targets.

Moving forward, KPMG noted that even if entities determine that based on their operations, climate-related risks do not currently have a material quantitative impact on the recognition and measurement of assets and liabilities in financial statements.

There is an increasing focus and expectation from regulators and investors on more information being provided in the financial statements on this topic. As a result, it is important, particularly for entities operating in sectors that are more significantly impacted by climate, to consider the disclosures made in the notes to their financial statements and whether climate-related risk discussions should be featured.

Your money in a greener world

And while corporations are required to do better, what many don’t realise is that they have a role in exerting the right kind of pressure to enact change. Namely, your retirement nest egg is a powerful tool in this process.

Just in May this year, a new legal opinion dictated that Australian superannuation funds are legally required to “understand and manage” the material financial risks of climate change.

Formed by barristers Noel Hutley SC and James Mack, the advice builds on a previous opinion in 2017, which prompted Rest Super member Mark McVeigh to successfully sue the $55 billion fund over its approach to climate action.

Some of the critical findings outlined in the legal opinion are:

• Super funds must take a thorough approach to understanding the financial risks posed by climate change, including obtaining regular expert advice;
• Where these risks are too great for a particular investment, funds must consider divestment – that is, shifting funds to less risky investments;
• Multiple studies have confirmed that failing to limit global warming in line with the Paris climate goals would have serious negative financial impacts across the economy broadly, and therefore super funds’ entire portfolios; and
• Target [investment] exposures, such as portfolio wide net zero emissions reduction targets, will need to be determined having regard to any financial risk posed by climate change.

But, despite these legal actions, not everyone’s superannuation is being invested in a greener world.

This is where you come in.

Recent data from Future Super revealed that just 7.7 per cent of the money currently invested in Australia’s superannuation system could transform Australia’s power grid to 100 per cent renewable energy by 2035.

“People have the right to choose where their money is going,” says Future Super’s CEO Simon Sheikh.

“To choose, they need to be able to see what their superfund is doing — both what it’s investing in and how it’s using its voting power as a shareholder. More super funds are starting to report on the carbon in their portfolios.

“However, the most important part for a consumer to see is how a super fund is investing their money and how they’re acting as a shareholder,” Mr Sheikh said.

As such, consumers are encouraged to take a closer look at where their money is invested.