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The umpires decide on climate change

If the Extinction Rebellion protests around the world haven’t raised the awareness of climate change passion, maybe a major disruption to your coffee habit is closer to home.

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According to the Washington-based Climate Institute, by 2050 climate change could decrease the area in the tropics suitable for growing coffee by as much as 50 per cent.

"Firms that align their business models to the transition to a [low carbon economy] will be rewarded handsomely. Those that fail to adapt will cease to exist.” – Mark Carney

A tea drinker not a coffee drinker? Maybe you’re a bank or insurance company then? Or someone who wishes to be banked or insured? Climate change matters. Inexorably, major change is happening.

Bank of England (BoE) governor and former chairman of the Financial Stability Board Mark Carney, long a firm but rational voice in the cacophony, was blunt last week at a Tokyo conference hosted by the Taskforce on Climate-Related Disclosures: companies which failed to align their business models with “climate reality” would cease to exist. Those which did would be rewarded “handsomely”.

“Changes in climate policies, new technologies and growing physical risks will prompt reassessments of the values of virtually every financial asset,” he said. “Firms that align their business models to the transition to a [low carbon economy] will be rewarded handsomely. Those that fail to adapt will cease to exist. The longer that meaningful adjustment is delayed, the greater the disruption will be.”

Financial risk

Or take the view of Hong Kong’s central bank, the Hong Kong Monetary Authority (HKMA): climate change is real, the 2015 Paris Agreement must be acted upon and “there is also a growing consensus amongst central banks and financial regulators to take a more proactive stance against these risks”.

For example, according to Arthur Yuen, HKMA deputy chief executive, “the Central Banks and Supervisors Network for Greening the Financial System, commonly known as the NGFS, in which over 40 central banks and supervisors have already reached a consensus: and I quote, "climate-related risks are a source of financial risk and therefore fall squarely within the mandates of central banks and supervisors to ensure that the financial system is resilient to these risks".

This is straight forward risk assessment. Global warming means catastrophic weather events will be, on average, of a higher magnitude and more frequent. Not only will catastrophic events be worse but large scale environmental change - shifts in rainfall patterns, melting permafrost, drier conditions in once arable zones - will inexorably change human living conditions.

Here now

When that happens there will be direct impacts on the real economy. Perhaps homes and businesses in some locations will become uninsurable. Some assets - consider a farm in a region where drought is a regular occurrence or tourism in a skiing precinct without regular snow - will lose massive value.

A growing number in Australia’s agricultural sector are making exactly this point.

Crookwell farmer and Deputy Chair of Farmers for Climate Action, Charlie Prell, said in a call to action this week “with drought continuing to plague much of New South Wales and Queensland along with pockets of other states, it’s clear that climate change is here now”.

“A fully funded and implemented national strategy would support farmers to minimise risks and realise the opportunities of a transition towards a low carbon economy. The strategy must be underpinned by strong research and development, a transition to clean energy and the capture and storage of carbon.”

Providers of investment capital - be they banks, venture capital funds or markets - will pay attention to these threats even if a company or government tries to ignore them because risk reflects return.

In Sydney also this week, The Investor Group on Climate Change (IGCC) held its 2019 Climate Change Investment and Finance Summit to discuss the policy, investment and risk management impacts of climate change.

According to IGCC chief executive Emma Herd “investors and financial regulators have identified climate change is a systemic risk to the economy, the financial system and the long-term returns for superannuation holders”.

All of the above

With or without government support or coercion, companies are responding to climate change because regulators or investors or their staff or communities - or all of the above - are demanding it.

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Source: Bank of England

At the IGCC summit, there was recognition of investor commitments to net zero emissions portfolios, science-based targets for infrastructure emissions and a first of its kind sovereign green bond for an emerging economy.

If major investors are rewarding climate-responsive action, regulators and a growing band of increasingly sophisticated activist investors are prepared to wield the stick.

In Australia, the looming annual meetings of the major banks will again no doubt see questions around funding of carbon-intensive industries. For example, Market Forces, a non-profit environmental activist, has filed resolutions ahead of the AGMs calling for strategies to slash lending and exposure to fossil fuels consistent with the goals of the Paris accord.

The banks have committed to act. Here at ANZ, for example, CEO Shayne Elliott notes the bank is “in active discussions with our largest corporate customers in carbon-intensive industries as they look at further ways to cut emissions and support the transition to a low carbon economy”.

“We’ve made a public commitment to support our top 100 emitting customers to identify their climate change risks, create transition plans and report publicly on their progress,” he says. “Of course many of these customers already have well developed plans and are taking action, but our involvement and ability to nudge and reward the right behaviours can have a material impact.”

One of the most notably pro-active companies is BHP, the world’s largest miner.

In recent weeks BHP has repeatedly drawn attention to what it describes as the “existential threat” of climate change.

Although climate change is more profound than a social issue, BHP has said investment of human and financial capital in managing social issues is simply good business. On sustainability, Fiona Wild, BHP’s vice president climate change and sustainability - that is, the company has a dedicated senior executive - told investors “we recognise our role to work with others, including policymakers, NGOs and peers, to encourage global action”.

As well as working with its customers to lower emissions, BHP has also committed to a $A400 million “climate fund” to encourage investment in new technologies - and it sees the potential for that fund to be profitable in its own right.

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Mark Carney: “And Task Force on Climate-related Financial Disclosure is increasingly a responsibility, as suggested by research from the Commonwealth Climate and Law Initiative that concludes that non-disclosure is a bigger liability risk than disclosure.”

Evidence based

Of course this is an emerging area and “green washing” or just over enthusiastic marketing remain counter-productive. That’s why the IGCC is looking for evidence and science-based responses.

And the BoE’s Carney notes the next two years of climate-centric reporting needs to “balance the urgency of the task and the imperative of getting it right” as a prelude to any mandatory standards. The standards, he said, should be comparable, efficient and help the decision-making of both capital-suppliers and users.

What these responses, by businesses, by investors, by regulators, have in common is they are based on analysis and evidence, science, risk assessment and economics.

Andrew Cornell is managing editor of bluenotes

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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