There's icebergs ahead for Abbott-era executives

As the carbon tax is controversially repealed, Australian business must turn its mind to operational and reputational risk.

Climate change remains a management issue. Carbon emissions must be managed and reduced to meet our national emissions target and fulfil our international obligations. With the release of the Summary Fifth Assessment Report by the UN’s Intergovernmental Panel on Climate Change, the scientific evidence for climate change is overwhelming and the pressure for meaningful action grows.

Today’s article specifically considers climate change risk profiles in terms of operational and reputational risks which increase uncertainty and often lie in what Donald Rumsfeld famously called the “unknown unknowns”. But are climate change risks really 'unknowns'? Or do businesses have a blind spot? Are we looking in the right direction?

Spectrum of risks associated with climate change

Risks can be classified into four categories: legal/compliance, markets, operations and reputation. Managing climate change risks in a stable policy environment for the first two of these categories is a relatively straightforward exercise for business. Existing internal controls manage compliance risks and hedging strategies are used by major greenhouse emitters to manage market risks.

Where policy is controversial, the key climate change risks move to operations and reputation risks stemming from uncertainty and the potential for community pressure to impact on a business’ licence to operate.
 
What could community activism on climate change mean to your business?

Before embarking on a specific discussion of risks arising from activism, it’s worth considering how risk is assessed.

The size of your risk is a function of the magnitude of the potential loss multiplied by the probability of that loss occurring. Risks are not specifically driven by stakeholder groups, but stakeholder groups can certainly influence the magnitude of your business’ exposure to those risks.

Environmental groups have opposed the repeal of the carbon tax and question the new government’s alternative plan. Further opposition will be raised if there is a gap in timing between the repeal of the Clean Energy legislative package (all 17 pieces) and the design and implementation of the new government’s Direct Action policy. Establishing Direct Action, an Emissions Reduction Fund, and any potential baseline and credit scheme on a national level is a complicated task with many industry and company-level issues that need to be resolved before legislation is submitted to parliament. For reference, the Clean Energy Future’s Jobs and Competitiveness Program was well over four years in the making before the issues with thresholds, industry baselines and supplementary assistance had been resolved.

Activism is also being fuelled by the contribution Australia’s government does or does not make to global climate change negotiations. We need to stop seeing ourselves as a small island on the other side of the planet with limited impact. In the most recent international climate change talks, COP19, the position of our government was observed by global climate change negotiators in Warsaw, and reported in global media outlets, as not being interested in negotiating tougher emissions reduction targets, or even being present.

What does this mean for business?

Business should expect that the global climate change movement will campaign in Australia to drive companies to react to climate change concerns. Focus will particularly apply to large emitting businesses seen to be failing to decarbonise.

Management cannot afford to ignore those aspects of their business which a community cares deeply about.  Increased connectivity, especially through social media, enables an issue to escalate within hours across a community and outrage can blindside an organisation. Consider such examples as the public outrage over live cattle exports and changes to regulations which have a few more public rounds still to go; or the coal seam methane industry in NSW which faced opposition from both conservative radio hosts and the environmental movement. In hindsight, were these issues that could have been addressed earlier? Would this have mitigated business risk and reduced non-production time for the companies involved?

Climate change disclosures and increased questioning of business.

The international and domestic investment communities increasingly require corporations to disclose their climate change management strategies. For funds managers and analysts across the world, climate change is seen to have long term implications for capital expenditure decisions, market positioning and business reputation. In Australia, all major emitters have been reporting their emissions publicly for many years and company performance can be easily viewed and rated. Programs such as Reputex indices and CDP identify the leaders and the poor performers in different sectors.

One recent example of interest in the way business manages risks associated with climate change, was seen in the ASX’s Corporate Governance Council’s draft third edition of its Corporate Governance Principles and Recommendations. The ASX paper reflects broader global concerns in the investment community around disclosure of risk. Recommendation 7.4 states: “A listed entity should disclose whether and if so how, it has regard to economic, environmental and social sustainability risks.”

This aligns with the focus on material risks which is now an expectation of the Global Reporting Initiative G4 reporting protocol.

Building a resilient business

CFOs and other executives charged with the responsibility of managing climate change risk need to consider whether existing risk management and sustainability frameworks are sufficiently robust to detect issues fuelled by community activism in a global market. Ultimately the objective is to create a culture that supports a resilient business able to address emerging risks – an objective the financial and investment community clearly considers increasingly important. And, of course, more perceptive businesses with a clear climate change/sustainability response will benefit through enhanced risk mitigation and competitive advantage.

Brian Innes is general manager of business development at Energetics. Originally published by Energetics Insights. Reproduced with permission.