ERM Energetics Exchange

Episode 7: Climate risk management and Australia's finance sector

• Energetics • Season 1 • Episode 7

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An experienced leader in the finance sector, particularly in sustainability and governance, Emma shares her views on climate risk management, the power of scenario based analysis for planning and capital allocations, and the importance of engaging with the investor community. Together with Energetics' Peter Holt, they discuss the impact of the COVID-19 crisis and Australia's path to economic recovery.

Featuring: Dr Peter Holt, General Manager, Strategy and Policy and Emma Pringle, sustainable finance professional

Note: The information and commentary in this podcast is of a general nature only and does not take into account the objectives, financial situation or needs of any particular individual or business. Listeners should not rely upon the content in this podcast without first seeking advice from a professional.

Introduction:

Welcome to the energetics exchange podcast conversations with energy and climate experts. Please note that the information and commentary in this podcast is of a general nature only, and does not take into account the objectives, financial situation, or needs of any particular individual or business business should not rely upon the content in this podcast without first seeking advice from a professional,

Dr Peter Holt:

hello, and welcome to energetic slightest podcast. I'm Dr Peter Holt, general manager for strategy and policy today with me, I have Emma Pringle. Emma is a ESG specialist with well known to many people throughout the industry. And he's also a coach here of one of the working groups from the Australian sustainable financial initiative, otherwise is SP so again, we've had a remarkable ranging from some of the worst Bush fires in Australia, particularly here on the Eastern coast, a CTE filled with smoke to a global pandemic that has caught all of us by surprise. How do you think the market has responded?

Emma Pringle:

Uh, look, I think the market is doing what it does best, which is trying to find value and take a long term view around where the risks might lie, where these present day risks are presenting to us and how we might best respond. I think, where this is challenging on other shops the markets had, instead of it's just so unprecedented. And if you look back at the market disruptions over the last few decades, things like the GFC, it's been a, a shorter time period and a more identifiable recovery on the way out where this one I think is really turning into so many uncharted territories.

Dr Peter Holt:

So now that we're coming into uncharted territories, what are the indicators around ASG provided for investors in this period? Have they been looking to these or are they ignored these indicators?

Emma Pringle:

No, I, I look at things that are indicators are more important than ever. And I think this is probably the time when people must realize that you're a longterm view, which is what he is doing is effectively doing. It's trying to look into the future in years, environmental and social risks as a proxy for further governance and future performance of the company is become critically important as all the traditional evaluation metrics are really a lot harder to pin down. So when I think about things like the way an investor might engage with the company, environmental and social factors are I really come to the forum in a way that they never have before as investors really try to deeply understand the drivers and the response of an organization.

Dr Peter Holt:

So the analogies that we've seen in the marketplace has been that Covance compressed a whole lot of trends, a very short period of time. And in some ways we've had real life stress testing of, of assets and businesses as well. Is that what you're seeing in the market?

Emma Pringle:

Most definitely. And I think, you know, we often talk about the change and the long time that change takes a happen until we come into crisis. And you do have that sudden escalation of these change paradigms, and I think in your community exactly right. That we are seeing this kind of microcosm of the factors come into play right now.

Dr Peter Holt:

So then in the investor financial investor world, do you see some investors being more prepared for this type of event that we're living through now, the covert event, as opposed to other investors?

Emma Pringle:

I think it's probably too early to call that if I'm honest, I think, you know, certainly so my mind is scrambling. Yeah. The obvious response is to say, yes, those are consider a range of factors in the evaluation and the way they invest and not just, you know, write an index or look at traditional financial metrics that are actually doing deep evaluation of an organization, looking at the way that it's playing into the future, looking at the way their companies meet its financial and nonfinancial risks. So investors are absolutely going to be the best prepared to weather this crisis, how the market responded, whether or not they've invested our right will play out over time. But certainly you would have to expect that more than ever a focus on non financial risks is as important as financial risks

Dr Peter Holt:

as an analogy. Um, climate change has been well recognized as a systemic risk to investors as well. And we've seen, um, the response, uh, from financial stability board through the task force on climate related financial disclosures, really wanting more information to understand the systemic risk in the financial sector as well. I was actually on a podcast last night, listening to Mark Carney saying, well, we thought corporates would be able to act and act quite quickly, but have been frustrated by the slower rate of change and adoption of their hints. Specifically the TCFD recommendations from his point of view, what do you think is happening in Australia in that context as well? Do you think it should be mandatory?

Emma Pringle:

Oh, I would love to see TCFD reporting being mandated, but I do think that there was a long way to go before we get the disclosures to a point that are going to be really useful for investors and for all stakeholders. And you know, some of the issues that I see are though to be spoken about more broadly. So things like comparability and, um, you know, the quality of the inputs and outputs. And I think like anything else we need to remember that, that these are useful in terms of this they're really good signposts for an investor as to how a company is thinking about the risk. They can absolutely pose different scenarios as to what might happen in the future and therefore how their business might respond under those scenarios. But until, you know, I think we evolved with it a bit more, the true value of them won't be realized. Certainly the biggest thing for me, when I look at a company doing its TCFD reporting, even an indicator as to how the board and the executive is thinking about climate change and climate risk to them, they'd be Smith.

Dr Peter Holt:

So it gives you a good insight into risk, risk management and prepared fitness for businesses to cope with unusual times and certainty as well. And what you're telling me is that there's opportunity for these to be improved the disclosures, to be improved. We're seeing an emerging market. Now that brings me to some of the work that you're doing through the Australian sustainable finance initiative. How are ASPE for short? Can you tell us about this body? What is it doing what's its purpose?

Emma Pringle:

Absolutely. So the Australian sustainable finance issue, that's sweet is a group that came together early last year to look at what sustainable finance looks like Australia. And to, to develop a roadmap of recommendations for policy makers, for regulators, for the industry itself across banking investments, insurance, to gray, a longterm resilient economy for Australia. And the way that we're doing that is by, by bringing some of the best minds, I guess, across those industries into a, into a forum where we can identify what the challenges are and then how, what the leaves are that we can pull to best place Australia up to respond into the future. And I think as you said, it's particularly relevant, you know, in the current time that we're in, you know, we, we probably came into the process really focused a lot more on, on the E or the S and G that we look at and with climate being so topical in Australia and globally, but the COVID crisis has really forced us to make sure and Emory stress tests. I guess I'll only in planning and thinking tonight, show that the social and the health sides of the equation are taking as equal importance as climate and the environment that have got a lot of air time I in the last year or two.

Dr Peter Holt:

So how has that changed? Some of the thinking going through the initiative in the working groups?

Emma Pringle:

Well, it's changed it so much as maybe helped, you know, really make sure that we are strengthening our thinking across the board. I think it's probably a us go back and reflect very much in our purpose, which is around creating that really resilient and stable system that can withstand shocks into it, such as COVID or any other health related shock or a crisis, or any other disruption into our economic, our environment, into our social system so that we can have that long term, um, support, I suppose. And, you know, kind of, it really does make a think about, you know, vulnerable communities and are they getting the right support that they need through this? It's something that I think about what stimulus packages might be coming out the Kobe, you know, we, we hear the term, the road out a lot, but what does that right up look like? And how do we make sure that we are planning as a nation, the right project, the right investment, the right development that will put that long term fear into the system.

Dr Peter Holt:

So a lot of the issues you're describing are also climate related issues as well. So they're compounding now from both health and from climate. Does that factor into some of the thinking as well?

Emma Pringle:

It really does. You know, like we said, this shock of the health related crisis, it has a lot of parallels to the, any other kind of shock. And when we talk about sustainability, we are talking about environmental sustainability, social sustainability, economic sustainability. And when we say sustainability, it is really outcomes. It's how do we have the right outcomes for a long time and looking at as best we can over the longterm view. And it also, I think the resilience factors are incredibly important. So then making sure that we can be resilient now, but also develop the resilience into the system.

Dr Peter Holt:

And so then leading on to outcomes and solutions, what are some of the policy Lavers or interrupt, not necessarily even policy, but recommendations that you're seeing that coming out of ASPE?

Emma Pringle:

Well, maybe if I go back a step and talk to the objectives of the SV in the first instance, which actually was really developed around, I guess, four kind of key aims, uh, which were, um, are mobilizing capital, creating a sustainable stable, resilient, financial system, making better informed decisions and meeting community and consumer expectations. And so, as we've been working through, we've had four technical working groups that have been loosely aligned to each of those four Ames. And as we've worked through reefing, some really consistent and common themes coming out. So the first kind of half of our work, and we released a progress report in December last year, which spoke to them cause we identified six challenges. And those six challenges I think, would be really recognizable to most people, which is where, where we see things in our system that need leavers pooled to address them. And absolutely climate is a good kind of test to put against theirs, but now, so we've coded them solid from the other challenge that we're seeing around vulnerability, which I mentioned earlier, but I think is really at the core of what we're trying to do. Um, and so those challenges, those six challenges, um, talk to things like leadership and culture and institutional structures, um, certainly the community and consumer interest and outcomes, which is very dear to my heart, but then also, you know, taxonomies. So frameworks tools, standards within the industry in the first instance, and then, you know, how do we actually allocate capital where it needs to flow and what are the policy and regulations around that? So our recommendations, which will be coming out later this year, everything's been pushed back, uh, someone with COVID impacts, um, we'll be spanning across all those areas and really addressing those critical challenges.

Dr Peter Holt:

So you're going to give us any insights about what they might include some of the key insights.

Emma Pringle:

Look, I can't, I can't talk to them at this point in time cause we are deep, deep in the process of putting them all on the table and really are in a really big phase of having this deal though. I feel like I'm always telling her where she grew up that way[inaudible] but where we're on the processes, all the recommendations across each of the technical working groups have come into a single, um, coordinating working group and have been just about this week, put out to Asti co for review ratification. Um, some of them are quite bold and out there, which is what we really need. And some of them are the more pragmatic, um, incremental steps or laying the foundation of the short term. So we can make that, that gratitude change longer term. Certainly our group had some, had some great, you know, curly left of center ideas that we thought would be, uh, you know, one random, really to put a bit of a firecracker under the system. But we're also balanced that with, I guess, the need for change that's can be palatable across the system because we want this to be a report that the industry will pick up that regulators will pick up and read and go, yep. That makes sense. We can see that change. We don't want it to be something that is so out there that gets relegated to the pile of random on the flight tiers, that, that, that group was brought up. Right. So it's gotta be implementable and achievable.

Dr Peter Holt:

So you've got some big goals, some got some big ideas that you'll share later in the year after it's been road tested as well. So that brings me across to some of the dialogue that you've had through this process as well. How have the regulators engaged with the initiative?

Emma Pringle:

Yeah, really well. So we, for example, Jeff summer haze from appro, uh, has been an observer on our steering committee. We've had input from the other regulators as well, and they've been incredibly supportive with, I guess, acting a bit of a sounding board and a bit of a steering, um, you know, ship through through the process. One of the key differences from the Australian roadmap process. And I should just say, you know, this roadmap, um, is an idea that has been globally in play for some time now, too. Um, we've seen run, that's come out of countries in Europe and in Asia and, uh, elsewhere New Zealand are working on one at the mundane as well. Some of the earlier ones, um, have been government led or government instigated in Australia. One of the really key differences, there's probably two or three key differences about the Australian. One, one of dang that is industry led and government backed. So we have had support from government. We've had, um, quite involved support from regulators, but we really want this to be something that the industry leads and where we see most of the changed sitting it's with the industry. Couple of the other changes that come to mind, uh, most of the other roadmaps have been very focused on the green economy and looking at a climate response right from day one, Australia was as much about the social as it was about the environmental outcomes. And, you know, that happens with the Cobra crisis in the middle of it. It seems like it was a very wise thing to do by those at first set this up to be, you know, equally spread across it, the, in the F and then the third thing that I think has become really evident to me when I've spent a lot of time reading that some of the other jurisdictions roadmaps is Australia more than anywhere else. Who've had a real focus on the community and the consumer. So rather than it just being something that we're talking about within the industry, so how do we allocate capital? What systems do we change? What policies were put in place around, you know, the way that pension funds might be invested, for example, where had a real focus on and what do they system changes mean for the end consumer or for the communities in which we operate? How do we create that strength, but also talk to and engage the communities along the way.

Dr Peter Holt:

So as soon co-leader of the working group on communities and consumers, what are some of the insights that you're seeing at that level then to distinguish between a it's the Hage leg one from Europe was the roadmap from memory.

Emma Pringle:

Yeah, so the H Lake I think is a great example of one that focused very much on the system and less on the consumer in the process. And look how group has been just so fantastic. We've had the most amazingly engaged working group. We've had some really great experiences working, not just in the system, but working with those communities and consumers that we're talking about. One of the big challenges I think with the whole assay process is that we are still people sitting within the industry and talking to each other, trying to solve problems for the real world. And in our typical working group, we had people who are working with some of the groups that we are trying to solve problems for. We've had stakeholder round tables where we brought people in and said, you know, what, what, what's the problem? What's the question that, where we're trying to, to answer here. So we've had a really great input from that things. But the other thing that we've really focused on is not just sustainability within the system. So not just what does a good ESD product look like, or what should a super fund consider if they're putting up a, you know, a sustainable product, but really it's, it's not just sustainability within the system, but the sustainability of the system. So how do we help those most vulnerable, all those who were traditionally locked out of the financial system, access the right solutions for them, whatever might look like.

Dr Peter Holt:

It sounds like some fascinating work. Now I know you've just recently been working within corporate as well as now, back with working with investors, just change tack slightly differently. How do you see the different views of ESG from within corporate, from an investor perspective as well, change your view?

Emma Pringle:

Oh, it was such a fantastic experience for me to, to sit inside a company that usually I'd be looking at from the outside. I think there were some things that were there absolutely parallels in the sense that there are some real drivers of change within any organization. There are those that really appreciate the value that a focus on, um, you know, management of nonfinancial risks can have to a financial outcome. I think what I was really pleasantly surprised about actually was how much good thinking does go on inside a corporate about the risks to a business or the risks to a community that they're operating in that don't necessarily get well articulated outside the organization. So one of the things that investor that we get quite frustrated about when we look at a company is we say, and I think this is where TCFD comes. Um, you know, really into its own is that we think, well, we know that that company must be thinking about what its climate risks are. We know that they must be taking a view on different, um, energy mixes into the future and what that might mean to their own organization, but as an investor, unless that company is telling us that through things like TCFD aligned disclosure, it's very hard to get a sense of how the company is thinking about it. So in my experience with the company that I was raised to be working with, absolutely, it has some great thinking going on internally around what the future might look like. So I guess it gave me a lot of confidence that the conversations are there and that really the need for better disclosure is absolutely the right lever to pull here so that we can connect the investment community better with the thinking inside these organizations.

Dr Peter Holt:

And we've got a whole deal of change occurring at the moment. Does that require more information, less information, more discussion, more disclosure, more are we asking for more and more and more? What are we asking for

Emma Pringle:

one of those disclosure is not going to disclosure. Absolutely. Uh, no more disclosure. It's absolutely not the answer, I think. Um, and again, I think this is where is really helpful for an organization to, to have a very clear view on what investors are looking for. And certainly not this organization I was working with, but other companies that I spoke with in the past and so welcomed engagement from investors, because they've said, thank goodness, you'll be writing the sustainability report to me. We come across all this information. We try to put it into a single place that you can read it, but other investors we're to need two or three things that you really trying to get out of it. So, you know, in my experience, most I, our teams or almost sustainability teams within an organization have really welcomed clear direction, signals, clear engagement from the industry investment community around what are the key risks that you want to hear about from us and what are the key management structures that we have in place to manage those risks? So, no, definitely not more disclosure. It's better disclosure.

Dr Peter Holt:

Definitely not more, but the challenge is an investor only wants to save three things. What are those three things? And is that the same for each investor?

Emma Pringle:

Oh, look, it is not the same for two bedrooms, not the same for each company. So it, you know, and that's where this question materiality really comes into it. So I think the upfront work that needs to be done is identifying what interiorly she's are in each sector, in each company, and then having the clay standards with the way that those are communicated. And I think if you look back over time, there are some really good examples of where we seen a maturing of a process around the way that Risa disclose or that, um, you know, different sustainability reporting has really come up the curve. I think we will see an absolute continued improvement of climate risk disclosure through standards like TCFD, um, in modern slavery. Obviously people are now really interesting, one in flavoring with the legislation coming into effect in Australia this year. But I think it will take some time before we start saying reporting on that, that will allow external stakeholders to have a very clear view of what it means to a company.

Dr Peter Holt:

So then on that note, what advice, or what insights would you give to large Australian businesses, uh, across social environmental and governance issues as they consider their future planning and their future capital allocations?

Emma Pringle:

I think they really interesting to see as we come out of, COVID how those couple of allocations are made with an eye to changes in the, the future economy that we're going to have as a necessary result of COVID. I think we've had a lot of discussion around, um, where government stimulus packages might go and what the right ways to deploy that capital in ways that are going to create a sustainable infrastructure or your resilience across different social structures. And I think that, you know, there's a real ambiguity in the system that we probably haven't seen for awhile, certainly internally in a company, the most obvious place to start if it is a company that's exposed to fossil fuels is to do some climate related scenario analysis. So that it's a very well understood roadmap into the future of where the risk lies, what that might mean to capital over short and long term, and therefore how to have a business best respond to it. So in fossil fuel company, whilst it's not be harder to transition, it's much easier, I think, to identify the risks because there there's so much thinking in the system now to do that, you brought a, I'd say, absolutely keep engaging, keep talking to investors, keep understanding where the risks might lie across the total spectrum and know

Dr Peter Holt:

how better to respond to it. Well, thank you very much, Emma, for some of your fascinating insights, you've certainly, we've certainly spent a whole range of things from social issues to social equity, to health dominance and to environmental issues and how they converge and how they diverged. We thank you for your perspectives. Uh, I typically come to these kinds of conversations cause they clear climate lens on, but clearly, um, a lot of these issues that we're facing now through the COVID epidemic is much broader as well. Join us next time for more insights from energetics podcasts,

Introduction:

energetics exchange, podcast conversations with energy and climate experts.