Companies cooling on global warming

FALLING concern about global warming has prompted a drop in the proportion of companies assessing their vulnerability to climate change, while government policies to manage the risks remain fragmented and unco-ordinated, a study released by the Climate Institute has found.

By InvestSMART · 29 Oct 2012

By InvestSMART ·
29 Oct 2012

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The report found a widespread belief that because taking steps to limit the risks to long-lived assets such as the energy industry and railways is "expensive, extensive, time-consuming and difficult", "no action is often seen as the easiest path".

Such inaction, though, may carry costs of its own. A separate report out last week by Baker & McKenzie and the Asset Owners Disclosure Project, argued that trustees in charge of Australia's $1.4 trillion in superannuation who failed to consider climate change risk may be in breach of their fiduciary duties.

"A rapidly changing climate drives not just warmer but wilder weather," the Climate Institute report said. "For our infrastructure economic, social and natural this means that the past is no longer a good guide to the future."

Munich Re, the world's biggest re-insurer, told BusinessDay that Australia's weather-related losses rose more than fourfold in the 1980-2011 period, a pace only exceeded among the continents by North America.

Australia makes up less than 2 per cent of the global reinsurance market but over the past five years the country has accounted for more than 6 per cent of global losses, the risk report said.

Two surveys by the CSIRO of more than 400 public and private sector organisations found the proportion taking into account risks had fallen from almost 60 per cent in 2008 to less than 47 per cent two years later. Just over a third had taken steps, or planned to, in response to the assessments, the report found.

The unco-ordinated response of governments is perhaps best illustrated by the varying state-based land-use planning policies related to expected sea-level rises and storm surges along the nation's coastline.

South Australia tips one-metre rises. Tasmania doesn't provide a projection while New South Wales recently dropped its projections.

Port operators, though, are factoring in increases anyway. The proposal for a fourth coal terminal at the Port of Newcastle, for instance, assumes a rise of 90 centimetres.

Surf Lifesaving Australia is one not-for-profit organisation not waiting for a national consensus before taking action, and is examining the risk to its members and properties. Some two-thirds of its 309 separately incorporated clubs scattered around the coastline are located in "zones of potential instability", the report said.

In its report, Superannuation Trustees and Climate Change, Baker & McKenzie and AODP found "a general reluctance by asset managers and fund managers to disclose the climate-associated risks of their investment portfolios".

The report argued that super trustees could face future litigation if they fail to take appropriate steps to protect the values of their long-lived assets. "Trustees have a clear duty to consider climate change risks and relevant laws and policies in making investment decisions where such matters prove to be material," the report said. "To fail to do so would be negligent and a breach of their duties."

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Frequently Asked Questions about this Article…

Why are fewer companies assessing climate change risk, and what does that mean for investors?

Surveys cited in the article show concern about global warming has fallen, with the proportion of organisations assessing climate vulnerability dropping from almost 60% in 2008 to under 47% two years later. The report says many view action as “expensive, extensive, time-consuming and difficult,” so doing nothing can seem easiest. For investors, that decline in formal assessment can increase exposure to unpriced risks in long‑lived assets (for example energy, railways and infrastructure) if companies don’t plan for a changing climate.

Could superannuation trustees be in breach of their fiduciary duty for ignoring climate change risk?

A report by Baker & McKenzie and the Asset Owners Disclosure Project argues trustees managing Australia’s A$1.4 trillion in superannuation could be in breach of fiduciary duties if they fail to consider climate change where it is materially relevant. The report warns trustees have a clear duty to consider climate risks and associated laws and policies when making investment decisions and that failing to do so could be negligent.

How have weather-related losses in Australia changed, and why should investors care?

Munich Re told BusinessDay that Australia’s weather‑related losses rose more than fourfold in the 1980–2011 period. Although Australia represents less than 2% of the global reinsurance market, the country accounted for more than 6% of global losses over the past five years. For investors, rising and more volatile weather losses can affect insurers, infrastructure owners and other companies with physical exposure to extreme weather.

Is government policy on climate risks and sea-level rise coordinated across Australia?

No — the article highlights a fragmented, uncoordinated government response. State‑based land‑use planning policies differ: South Australia plans for one‑metre sea‑level rises, Tasmania provides no projection, and New South Wales recently dropped its projections. This lack of consistent policy can complicate risk assessment for investors and companies operating across states.

Are any businesses or organisations already planning for sea-level rise and coastal risk?

Yes. The article notes some port operators factor sea-level changes into planning — for example, a proposal for a fourth coal terminal at the Port of Newcastle assumes a 90‑centimetre rise. Surf Lifesaving Australia is also proactively examining risks to its members and properties, noting around two‑thirds of its 309 clubs sit in zones of potential instability.

What did reports find about disclosure of climate-associated risks by asset managers and fund managers?

The Baker & McKenzie and AODP report found a general reluctance among asset managers and fund managers to disclose climate‑associated risks in their investment portfolios. That limited disclosure can make it harder for everyday investors to understand how funds and managers are addressing material climate risks.

How does a changing climate affect the investment case for long‑lived assets?

The Climate Institute warned a rapidly changing climate brings not only warmer but wilder weather, meaning historical performance may no longer be a reliable guide for future outcomes. Long‑lived assets like energy infrastructure, railways and ports may face physical and regulatory risks that could affect asset values if those risks aren’t properly assessed and managed.

What practical questions should everyday investors ask about climate risk and their investments?

Based on the article’s findings, investors can ask whether their superannuation trustees, fund managers or companies are assessing and disclosing climate‑related risks, what assumptions are being used for sea‑level or extreme‑weather scenarios, and whether long‑lived assets in the portfolio have been stress‑tested for climate impacts. The article highlights that lack of assessment or disclosure could carry financial and legal implications for those responsible for managing investments.