Melaleuca Media
Positioning for a changing climate

Greenhouse policy has moved from the naysayers to companies positioning themselves to minimise risk and out perform their competitors. Acumen’s Susan Brown finds a major investment company won’t put up with any more hot air.

The world has changed – climate change is a big international financial risk for companies even if it isn’t showing up much on the Australian policy radar says Dr Ian Woods, Senior Research Analyst with AMP Capital.

Mining companies are particularly likely to be affected due to their energy use, involvement in exports and need for large scale investors and insurers to underwrite risk.

And it is the risk which is starting to stir those much needed investors and insurers to doing their own research to determine which companies are highly exposed and which are less of a risk for the financial markets. The financial industry are now regularly examining operational, value chain, regulatory and competitor exposure risks when making decisions according to Woods.

Last year on behalf of AMP (then Hendersons now) Capital Woods conducted a survey of the 100 top Australian companies (by market capitalisation) asking detailed questions on preparedness for climate change issues.

“There is a growing awareness in institutional investors that climate change can present a medium to long term risk. We wanted to know whether Australian companies had an understanding of the risk climate change presented” Woods told Acumen. “There were loud voices at either end - pro and anti climate change policy and we were not sure what the true picture was.”

The reaction to the survey idea was strong interest from industry groups “A lot of people thought it was good because investment industry are raising it. It was one of the first times we could see a clear picture of where industry is at.”

Survey findings were 50% of boards had not considered climate change risk. “We were surprised it was that low” Woods told Acumen. Only 50% of companies had someone with specific responsibility for managing the issues, 30% of respondents had still not developed an inventory and half of the respondents had not benchmarked their greenhouse performance against competitors. Just 43% had a climate change risk management strategy in place, only 56% had considered how it would affect relations with customers and suppliers and just 43% had benchmarked greenhouse exposure against competitors.

He found mining companies were the most prepared (90% of their boards had considered the risk, 70% had developed a specific climate change risk management strategy), but still had a long way to go. “The mining sector is probably more aware of all sectors in how they are exposed. They are in the spotlight, they are energy intensive” and they were early to sign up to voluntary programs like emissions inventories with the Australian Greenhouse Office says Woods.

But don’t get complacent about this. Woods says the programs provide an understanding of the inventory and emissions issues but do not adequately position a company to manage the risks which is where companies should be heading.

Crucially only 20% of mining companies had considered the potential legal liabilities or other legal issues in their greenhouse risk management plan. Long term supply and contractural agreements, grandfathered permits under emissions trading, disclosure of potential greenhouse gas liabilities to the market were all areas requiring legal management says Woods.

And it isn’t just about what you do in your own backyard. “Companies are looking at suppliers and customers (80% of mining companies had looked at value chain exposure), they know the impacts on them will not be from just their own emissions.”

The Australian survey last year was round one with round two coming in the form of a global assessment. “The Carbon Disclosure project in the UK is being done on behalf of 40-45 large investors who manage between them US$9 trillion asking the top 500 companies specific questions on how they are managing climate change risk. This is ten times the value of all companies on the Australian stock market so it is fairly significant.”

While the US and Australian governments won’t agree to the Kyoto climate change treaty to kick start international emissions trading, other projects are set to start and Woods advises Australian industry groups sit forward and think about their global interests. “The impact on the coal mining industry could be in their markets for example where the EU international emissions trading begins 1 January 2004. What impact will trading have?”

He says the early closure of coal fired power plants in Europe will affect a number of contracts there. If you are a coal exporter to the EU, costs of coal fired power stations will increase relative to gas which isn’t as energy intensive. This will have medium to long term financial effects.”

And impacts aren’t confined to Europe, Woods points out a carbon tax will shortly commence in Japan.

“In industry, competitiveness and advantage depends on projects having relatively cheap forms of energy. Our coal industry’s competitive advantage may change depending on their response” to the global changes says Woods.

“The financial community such as AMP Capital are starting to realise climate change is an emerging risk issue for institutional investors because if it affects the companies they invest in it affects the returns.”

But there are opportunities too says Woods. While companies who are exposed present risks for institutional investors, those who are prepared can take part in emissions trading schemes, or deal with new carbon tax regulations in other countries.

The development of a fully international trading scheme is probably inevitable according to Woods who values it at around US $2 trillion per year by 2012. As well there are other opportunities for the finance sector in financing clean energy technologies which could be worth US$1.9 trillion by 2020.

It isn’t just about markets. Woods points out worldwide economic losses due to natural disasters appear to be doubling every 10 years with current trends meaning annual losses will reach almost $150 billion per year in the next decade. Expect to see the impacts on insurance premiums as the world grapples with increasing temperatures, more floods, droughts and other climate induced changes.

Overall Woods wants Australian companies to take a “productive and lower risk course in managing climate change over the medium to long term.” Companies must position themselves to take advantage of the opportunities that might arise.

Overseas policy changes will affect suppliers, exporters, customers and the changes reinforce the need to address the risks irrespective of the current Australian Government’s policy on climate change according to Woods.

And the companies least prepared? “Healthcare, property trust and transport sectors are some of the sectors who have not developed policies and management plans at this stage.”

Woods knows the issue is tricky for business “Climate change readiness is not straightforward – it also depends on weather changes which isn’t a market issue.” For example if a mine or a business relies on access to a steady source of water and there are significant changes in rainfall patterns as expected companies have to investigate how that will affect them. This is a scenario at least one major company in Queensland is facing at the moment according to Woods.

His advice for Queensland business – be prepared “We really need to tackle this sooner rather than later, especially the ones operating in international markets really need to look at what happens overseas rather than what is happening in the Australian papers.”

It boils down to due diligence says Woods “There has been enough discussion on climate change now that directors would find it difficult to demonstrate they had been duly diligent if they didn’t examine climate change issues facing their company.”