Can’t see the risk from climate change for trees
Our interconnected world is hiding the materiality of climate change risk
Last week was Australia’s national conference on climate change adaptation. With academics and practitioners in the room, the discussion largely fell on latest thinking on how to promote action responding to climate change. While these discussions followed many tangents led by the interests of academics and consultants pushing their latest research or tool, one key point still to be addressed:
Are the physical impacts of climate change material for organisations now?
Business and executives are not convinced. Launched at the national conference, I led the delivery of Disclosures on climate risk: A review of ASX top 200 companies. The salient finding was that despite leading firms assessing climate risk, only one or two of the 200 firms we reviewed disclosed climate risk as material to their business.
This is contrasts with the opinion of global organisations such as the World Bank and the World Economic Forum, where increasing incidence of extreme weather events and failure of climate change mitigation and adaptation efforts are considered in the ten global risks of highest concern.
While climate change is seen as a global threat, why does this not translate at the company level?
There are many reasons why the importance of climate risk may not be translating to the corporate world.
Planning time horizons
Organisations such as the World Bank and World Economic Forum have innately longer planning time horizons compared to companies. Influenced by the industry and asset types, most companies planning time frames are usually one to five years. Insurance companies plan on a one year time frame, where as petroleum or gas companies might have longer 30 year planning time horizons for certain decisions and investments. This will shape how they might see material risks to their business operations. Shorter planning time horizons, means climate risk will be ranked lower.
Higher priority risks
In light of shorter planning time frames, companies are likely to have more pressing issues. For example, while electricity generation companies are exposed to climate change, a more immediate risk is that climate change mitigation and management of changing electricity demand. For other industries, changing commodity prices occupy minds, or the potential for human rights issues to arise in their supply chains.
Not considering systemic & cumulative risk
Importantly, when it comes to climate change physical risk, assessments of risk are often narrow in scope and therefore likely to under emphasize systemic and cumulative risks that climate change poses. Fishery risk assessments demonstrate this point well. Often within fisheries, risk assessments focus on one species, but increasingly the need to understand the broader environmental and ecosystem context is necessary to understanding the potential survival of a fishery. This may also be the case for company risk assessments. It is difficult to consider and quantify the cumulative and systemic risks that a company might be exposed to, but these risks are the ones that have the biggest potential to cause material impacts.
The interconnectedness of our economy is unprecedented. We can fly around the world in 48 hours, we can chat and interact with people across the globe within seconds through social media. We are reliant on electricity companies to continue to supply electricity to telecommunications infrastructure for us to interact with the world. Our banking systems are globally meshed (as demonstrated through diagram in article header). Companies and society’s reliance on each other, make us more exposed to flooding in Thailand, pandemic in Africa, and storm disruptions to Heathrow.
Does this mean that our companies are more exposed to climate change than they currently consider? Maybe. Without insight into risk assessment methodologies and applications it is impossible to be conclusive. However, as global organisations continue to high light the extreme impacts that climate change could have on the world, the gap between them and our corporates must narrow to ensure that action to mitigate such risks is reduced.
