Business as Usual in an Unusual World: Understanding Climate Data and Risk

In the first half of this two-part essay, Genevieve Wright reflects on last month’s Climate Change, Business and Finance event, where a panel of industry experts explored what it would take for Australian business to take climate science seriously.

Image by Tom Rogerson, via Unsplash

As the world plunged into the unknown chaos of the COVID-19 pandemic, the tell-tale reactions of denial and delay reared their heads within all tiers of society. Leaders, governments and communities initially responded by not responding; the scale of this threat was too uncomfortable to accept. However, with the planet’s infections now exceeding 2 million, the world has entered a surreal state of lockdowns and the global economy has ground to a halt. And yet as drastic as this seems, the pandemic and its far-reaching social and economic impacts are dwarfed by the myriad consequences of the world’s worsening climate crisis.

This harsh truth was revealed last month at the Sydney Environment Institute’s event ‘Climate Change, Business and Finance: What Is the Latest Science and How Worried Should We Be?’. With a panel of speakers that bridged the divide between science and business, the main message of the evening focused on how best to prepare businesses for future climate catastrophes of unknown scale and scope. As esteemed climate scientist, Professor Michael E. Mann from Penn State University outlined, a “business as usual” trajectory leads to a 3 – 5 degrees Celsius warming, which is likely incompatible with organised human civilisation. Rather than the analogy of driving off a cliff, Professor Mann argued the climate crisis was more like humanity walking out into a minefield; the further we proceed, the more danger we encounter. Despite this grim forecast, he noted that the “perfect storm” of Australia’s catastrophic fire season, a third mass bleaching of the Great Barrier Reef and the mounting pressure for climate action from “Generation Greta”, represented a tipping point in humanity’s awareness of the climate emergency.

“We’re going through a tipping point. Here in Australia […] it’s sort of an experiment gone bad, and the rest of the world is watching that and realising that it’s coming to them too, and if we don’t act on this problem now, this is the future that is in store for all of us.”

– Michael E. Mann

So if society is waking up to the worsening climate crisis, what role can business play in accelerating meaningful climate action? According to Dr Tanya Fiedler, from the University of Sydney’s Discipline of Accounting, Australian businesses have a unique opportunity to be leaders in this change given the lack of government leadership. Progressive corporations, according to Fielder, can act rapidly and with great agility in identifying climate risks and opportunities. For instance, Dr Fielder highlighted how Blackrock, the world’s largest asset manager, had recently stated that sustainability would be the new standard for their investing and that fossil fuels like thermal coal had no real future. Yet, despite this freedom, the difficulty of effectively executing this behemoth responsibility was not lost on the panellists who acknowledged the tension between logical decision-making technology and the illogicality of the multi-faceted climate crisis that we now face. As moderator Zoe Whitton, leader of Citi’s Asian arm ESG Research team, remarked, “Climate change doesn’t change one thing, it changes everything. Essentially, we’re trying to connect systems that have not been connected before in order to figure out how to live in our new world. It’s a communication and technical challenge.” So how can Australia become that frontrunner in change?

Business understanding of climate data and risk

For meaningful climate action to occur, businesses first require a clear understanding of the severity and scope of climate-related risks and their financial impacts. Unfortunately, the disconnect between science and business on climate risk stems from the lack of simple, straightforward answers. As Professor Mann acknowledged, science presents a range of probabilistic climate risks which are interconnected and vary in severity, how businesses interpret and prioritise this data is crucial. As he noted, the climate possibilities that are low in probability but catastrophic in impact are the ones of greatest concern. “Any economist will tell you there’s a reason to act even faster because you worry about the so-called ‘heavy tail’ of the risk distribution, the possibility that there are events out there that could be hugely costly, is a reason to invest even more in mitigation and to move even more rapidly towards the decarbonisation of our economy.”

Professor Michael E. Mann explains the climate data. | Image by Christopher Wright, IG: @chriswrightau

Another contributing factor as to why businesses aren’t enforcing climate adaptation and mitigation measures is due to an absence of accounting disclosures within financial statements around climate risks. Dr Fiedler considers first-mover disadvantage a major factor here as this unchartered territory of climate risk assessment is often confusing for accountants and auditors to grapple with without sufficient training and assistance from external analysts. “Therefore, internal upskilling around translating climate data into business outputs is paramount,” says Dr Fiedler.

Assisting in streamlining this conversation between science and business are data analysts like panellist Dr Nick Wood, an associate at Energetics, who acts as a mediator sifting through climate data and predictions and repackaging them as tangible problems for CFO’s. According to Dr Wood, when it comes to publishing disclosures of climate-related risks, businesses must recognise that these are probabilistic outcomes, rather than certainties.

From the other end of the panel spectrum, Executive Director of Treysta Wealth Management Mark Nagle highlighted that despite receiving packaged interpreted data from intermediaries like Dr Wood, he’s identified that investment managers aren’t sure as to how to convert these findings into portfolio management decisions despite recognising their value. This is due to a larger range of collateral risks that portfolio managers deal with. “The lack of a standard is a big issue for investment managers,” he says. “The overriding blockage at the moment is how to convert the data into meaningful decision-making at the portfolio level.”

So what regulations are in place for businesses to measure their climate actions against?

Taskforce on climate-related financial disclosures

After the 2008 global financial crisis, the Financial Stability Board was convened with the responsibility to identify potential risks in the future that could destabilise the global economy, including climate change. In 2017, the Taskforce on Climate-related Financial Disclosures (TCFD) released a set of recommendations around what sort of climate risks companies should consider, how they should incorporate them within internal decision-making processes, and what they should include in their disclosures.

Despite intentions to create a database across different sectors in respect to how climate-related risks are assessed, priced and managed, the TCFD has been a controversial topic as it relies solely on voluntary corporate disclosures. The lack of standardisation makes it nearly impossible for analysts to price a problem if there’s nothing to compare it against. Furthermore, these guidelines do not mandate where businesses should publish these climate-related disclosures thus leading to a mismatched conglomeration of appearances in sustainability reports, carbon disclosure reports, stand-alone climate change reports, or annual reports.

Panellists: Cate Harris, Mark Nagle, Nick Wood, Tanya Fiedler, Michael Mann and Zoe Whitton. | Image by Christopher Wright, IG: @chriswrightau

However, many in business have found the TCFD process crucial in integrating sustainability rhetoric into everyday business conversations. Lendlease’s Group Head of Sustainability, Cate Harris notes that the TCFD has been a sort of Trojan horse, bringing different areas of the business together and opening up the sustainability conversation as “an issue that impacts all of our people […] and operations”. However, Ms Harris did acknowledge that maintaining a consistency of reporting across sectors would be highly beneficial but near impossible due to the breadth and depth of climate science and the scope of climate change impacts.

Recognising this urgency to improve on the flaws in the TCFD process, Nick Wood outlined how a science, applications and finance committee has been established to deal with some of these issues. This has included the creation of a Climate Measurement Standards Initiative (CMSI) which involves Australia’s largest insurers, to agree on a common view of the future, so that financial risk exposure models and investments can be tested to the same standard. In order to achieve this, Professor Mann explained that climate scientists provide a spread of possible scenarios but cannot provide one standard future scenario. To combat this disconnect, Dr Wood pointed out that the CMSI is currently working on refining the data into an agreed probability distribution about what the future would look like.

Continued in part two.

Climate Change, Business and Finance: What Is the Latest Science and How Worried Should We Be? was held on March 2, 2020. The event brought together an esteemed panel of industry leaders to review the latest climate change science and the potential impacts on capital markets, corporations and industry.

Speakers included Dr Tanya Fiedler, Lecturer in the Discipline of Accounting at the University of Sydney, Cate Harris, Group Head of Sustainability at Lendlease Foundation, Mark Nagle, Executive Director of Treysta Wealth Management, Dr Nick Wood an associate at Energetics, Zoe Whitton (Chair) leads the Asian arm of Citi’s ESG Research team, and Professor Michael E. Mann, Distinguished Professor of Atmospheric Science at Penn State, and a Lead Author of the Intergovernmental Panel on Climate Change (IPCC) Third Scientific Assessment Report in 2001.

Genevieve Wright is part of the professional staff team at the Sydney Environment Institute. Genevieve recently graduated from a Bachelor of Communications majoring in both Media Arts and Production and Journalism at the University of Technology Sydney. With a keen interest in the psychological responses to the climate crisis, she hopes to imbue her creative film background into community programs that centre on transforming school curriculum and empowering communities to lead the way to a renewable future.