Published 12 August 2019
For those interested in the mainstreaming of climate change as a business risk, the recent release of the Commonwealth Bank’s 2019 Annual Report – which coincided with the bank’s announcement of its full-year profit results – demonstrated leadership on a number of counts.
First, the bank is the first of the big banks to commit to exit support for thermal coal and coal fired power generation by 2030. Second, the bank also committed to finance new oil, gas or metallurgical coal projects only, where these can be shown to be in line with the Paris Agreement, and third, the bank undertook further analysis of their exposure to physical climate change risks, through the stress-testing of their agribusiness/lending portfolio against climate change scenarios.
The first action is a no-brainer. Thermal coal is a sunset industry, and CBA has clearly decided the credit risk associated with continued lending to the industry can no longer be justified. The second action is not quite as straightforward, mainly because alignment with the Paris Agreement can mean many things. That is, a business might align its strategy to ‘Paris goals’ (which is generally assumed to mean holding temperature rise to “well below 2C”, and reducing carbon emissions to net zero by the second half of the century), but as with anything, the devil is in the detail.
The two key questions are when, and how. In asking when, businesses can plan to take the conservative option of cutting emissions rapidly over the next 5-10 years, or proceed, business-as-usual, leaving others to deal with the shock of a sharp downward trajectory in 2040.
In asking how, businesses can either radically transform their business strategy, their structures and processes to reduce emissions, or they can, again, continue business-as-usual and buy others’ emissions reduction activities. Because reducing emissions to ‘net’ zero is not the same as reducing emissions to zero. It is in the third action that I see the bank as demonstrating real leadership for a number of reasons. First, because they are doing what our government should be doing: bringing to attention the threat climate change poses to the agricultural systems that underpin and drive the Australian economy. Second, stress-testing the resilience of their agribusiness lending portfolio against climate change scenarios to assess their exposure to the physical risks of climate change, is not easy and it is new. This is cutting-edge work that integrates data derived from climate projections, historical agricultural data, profitability and productivity impacts and the banks existing credit risk models.
Finally, and this in my view is the really bold move, they have done this without any accounting or measurement standard in sight. That is, I can look at this work as someone who spends a great deal of time researching and trying to understand how probable climate impacts can be translated into financial values. And so, I have some inkling as to how this work compares to the work of others. The bank have also been as transparent as they can be in communicating their methodology to a lay audience. However, and this is the big but, I am not a climate scientist.
So what can I say about whether this information is really truly representative of the bank’s exposure to climate risk from its agribusiness lending portfolio? Similarly, how can I compare this to another analysis that might be undertaken at some future point by another bank for its agribusiness lending portfolio? And how do I know if this methodology is sound, or if the climate scenarios stress-tested against were those most fit-for-purpose etc.? And if I am not sure of these things, then how can a financial auditor be sure, or a financial analyst? How do auditors, accountants and analysts begin to work with this information without some very real upskilling, and without the standards that bound and frame the measurements undertaken and analysed?
This is leadership in a vacuum. Leadership in a vacuum that is made of an absence of the policy and governance infrastructures needed, as we move into a space our financial markets are ill-equipped for.
This article first appeared in Australian Banking and Finance.
Tanya Fiedler is a lecturer in the Discipline of Accounting. Tanya’s current research interests lie in the field of carbon accounting, strategy, valuation and market making.Tanya completed her PhD at the University of New South Wales (UNSW), Australia in 2016. Tanya’s thesis examined the making of Australia’s first nation-wide carbon market, by means of a longitudinal analysis of archival documents spanning 15 years. Tanya’s research also examined the calculative practices and technologies by which greenhouse gas emissions were quantified by engineers for that market, so that they could be valued by accounting. Prior to her academic career, Tanya worked as a consultant for Energetics, a specialist carbon and energy consultancy.
Tanya will be speaking on panel on climate risks in the insurance and banking sector, co-hosted by SEI at an upcoming Randstad Leaders Lecture in October. The panel will also include QBE Insurance Group head of ESG Risk, Sharanjit Paddam; Citi head of Australian ESG Research Zoe Whitton and climate Policy Research director Nick Wood.