ERM Energetics Exchange

Episode 15: How are the experiences of 2020 shaping our approach to climate risk?

• Energetics • Season 1 • Episode 15

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In a year in which we’ve heard the word ‘unprecedented’ used many times, risk management is front and centre for organisations; particularly how they identify and prepare for large scale, high impact, business disruptions. The reality of our changing climate – and what we are doing about it – was highlighted with the devastating bushfires in Australia and the US. But while climate risk issues have been vigorously discussed in the past, they have not perhaps always been robustly addressed. There have been many initiatives aimed at increasing the awareness of climate risk, the assessment of the impacts of climate risk, and improving market disclosures in relation to exposure to climate risk, including the TCFD. So what, if anything, has changed - or is changing - in how we manage (and disclose) climate risk and build resilience?

Featuring: Nigel Brook, Partner, Clyde&Co and Dr Mary Stewart, CEO, Energetics

Out host: Susan Staples, Associate, Energetics

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.

Speaker 1:

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.

Speaker 2:

Well, hello everyone. And welcome to the energetics podcast series a I'm Susan staples. I'm an associate with energetics and a climate risk and governance specialist. I'd like to start today with an acknowledgement of country. So I'm going to acknowledge the traditional owners on the land, on which we meet today. For me, that's the Wurundjeri people of the Kulin nation, and I pay respect to their elders past, present and emerging. So today I'll be leading a discussion on international developments in the management of climate risk, TCFD legal issues, building resilience. And we'll hear about the state of climate risk disclosure and how recent events in Australia and overseas are impacting the way that organizations and their stakeholders are responding to climate risks. Joining me today is Nigel Brooke based in London, Nigel leads the re-insurance team and the global campaign on resilience and climate risk for quite in code and code a global law firm supporting the insurance, the transport energy and infrastructure sectors, and Nigel has extensive experience in advising large multinational organizations and insurers to optimize and extend insurance and risk management capabilities to protect those most vulnerable to disasters. So welcome Nigel. And thank you for joining us. I'm also delighted to welcome my colleague and energetic CEO, dr. Mary Stewart, who in addition to being our CEO is also a business server to the UNF triple CS technology executive committee, and a regular attendee at the annual meetings of the UNF triple CS conference of the parties, more commonly known as cops. So hello and welcome Mary Susan. And I'm grateful to join you today from the land of the Gadigal people. Thank you, Mary. So we've heard the word unprecedented used a lot this year. Um, 2020 appears to be that one in 100 where we've hypothesized about many times, but those events that we thought could happen at some point are actually happening and they're happening really at a scale and a pace that was really perhaps unanticipated or difficult to anticipate. And it seems to have raised a lot of issues for organizations in how they manage risk, particularly how they identify and prepare for these large scale sort of high impact business disruptions. And an example, being the raging Bush fires in Australia and the us where this was on our TV screens in our news feeds for weeks. And it really seemed to bring home that topic, climate change, not so much talking about it, but talking about what are we doing about it. And that seems to be applicable, not to just individuals, but to organizations as well. We've also seen a lot of countries as recently as today in South Korea who have announced net zero targets, which are setting countries on a de-carbonization path. That's going to have impacts for some of our organizations that we work with as policies change to reflect some of that ambition. So while the risk policies have been vigorously discussed in the past, they haven't always been that well addressed. And we've seen lots of initiatives aimed at trying to improve the awareness of climate risks or impacts of climate risk and the assessments that we're doing about that. And also how we disclose to the market, what we're doing about that. So TCFD would be a great example of where that's a new and emerging requirement. So the question really we're trying to explore today is what, if anything has changed or will change, uh, in relation to how we manage and disclose climate risk and, and build resilience going forward. And I had all this Israel turned to you as, as the head of the climate risk practice globally for cloud and code. How do you see the state of climate risk assessment and disclosure, and where are the leading lights in response and deterrence to the TCFD and, and importantly, where do improvements still need to be made.

Speaker 3:

And then, uh, as you say, 2020 has been acceptable, but in fact, I think the last two years of Phoenix sea change, but the biggest shift I've seen is in the investor community where there's a coming together of some of the biggest names under various, that has been the most prominent with climate action, 100 plus, but these are major institutional investors, not, not just the old suspect, but from some of the pillows of less prominent to the past, including BlackRock who are now joining forces, put pressure on the companies, they invest in particularly the highest dimensions to disclose and to cut themselves in line with a two degree world. And that's quite a spectacular shift is a tectonic shift. And they do seem to be converging on last to the lots of other stakeholders around the TCFD standard. Those are a variety of other standards that were already in play, but TCFD is rapidly becoming the, the colds and, uh, the, this investor pressure in particular, but other stakeholders as well is forcing the pay expressible to adult TCFD for those who haven't done. So, yeah, and then to start reporting more granular detail, and it's not just the reporting, it's actually the inaction of course, but you don't address. You don't explain what steps you're taking to address the climate risks that you've identified. Then that's all too much, less than half of the exercise. It strikes me that what the investors particular are concerned about is the actual powered risk that this isn't just doing it for the sake of it. They are genuinely concerned about the climate risk embedded in their investment portfolios, and they want to see action. I think also realization that this needs a loop shift that it's just no good. Just getting one sector, getting in line with two degree or 1.5 degree world. You've got to get it right across all of the, the major sectors and get them all going in the right direction. Otherwise you're not really mitigating the kind of risk in the investment portfolios. So let's be really striking tons of bleeding lines. I'm proud to say, I'm sure as a leading the way that my best people, I could be relaxer. Who'd been talking about this for a long time to really seem to be embracing to CFP, and then going back, um, that bit further of science-based reporting some banks, particularly in France, BNP Paribas. And it does seem a lot of the leading, um, lights on this are Europe based. I think there's from what I'm seeing Australia as well is, is, uh, is ahead of the curve. Um, us necessarily, there aren't many examples I could pick up there pushing a TCFD.

Speaker 2:

And it just seemed to me that there's maybe, I think it was 60 companies that have reported against the Tracy of gene, the ASX 200. So it's a substantial proportion, but there's still a way to go. Um, and do you see any improvements that might need to be made in relation to TCFD at this stage?

Speaker 3:

Well, I know that just looked at the consultation and I can see the biggest area, which is something that the TCFD itself recognized is metrics. So they identified the categories that we can switch, we need to report, but then they deliberately didn't put in benchmarks. They wanted those to merge. And I only seen that. That is, uh, obviously crucially important and the investor community in particular will be pressing harder. Ultimately you've got to met her, like things like that. Assess companies, comment, risk pool.

Speaker 2:

Yes. And do you say that as being part of the scenarios they're using as well as the metrics they're reporting on?

Speaker 3:

Yes. Yeah. So now I think I'm really going to come to the fall and, uh, this is where the, uh, companies can really make, could use all the range of providers who have this capability, the metrics on physical risk and transition risk and liability risks. Now that they're kind of orphaned, but they're just going to ask her to stop larger. I think I would say that the risk of being sued here and, um, capabilities. So there's a lot more companies coming into the outlet, but the established players, I think

Speaker 2:

I'm able to provide really speaking to companies who have engaged for the first time they have found it really illuminating if there's like a narrative. Yes. Even if it's not a hundred percent realistic, it really just educates them on how. Yeah, absolutely. So, so Mary, can you comment on Nigel's response and you know, how you'd characterize the level of ambition in Australian businesses from your experience?

Speaker 4:

I've got to agree with Nigel that a lot of the drive is coming out of the investor sector and the work that we previously did, we did recently for the investor group on climate change, which looked at what investors are looking for in their disclosures highlighted exactly what Nigel said, which is that the investors are looking not only for disclosure, but understanding how your strategy is addressing those impacts. So definitely, um, TCFD is, is finding its feet in a lot of the financial and the investor sectors and leading lights are the insurers in Australia, quite good performance out of the property sector as well, but much past that a lot of the drive is coming from shareholder pressure and getting them to engage in or get their shareholders, getting companies to engage in what they need to do. Just looking at the improvements and particularly what well, firstly, around scenarios, we do find that companies probably don't use this scenario playing well enough. They should use those scenarios also to help them identify the opportunities and they need to dig deep into that information. Do you have concerns about the limited number of scenarios? Some companies are willing to engage in as well, but I think the real space for improvement is the very clear understanding that there is a difference between the mitigation risks. So the risk that you face because of investment or because you yourself are a carbon intensive industry, but also the adaptation risk and the existential aspects of adaptation risks are actually changing our business model to be sustainable and have longevity in a very, very changed natural environment. So just getting their idea across in companies is quite complex. And I think that's where we're going to see some of the TCFD work improve going forward.

Speaker 2:

And I, and I think Mary, as we come again into the bushfire season here in Australia, you know, as I've mentioned last year was described as unprecedented. And then we was already following a devastating drought here in Australia. And it seems to jolted, I guess, Australian businesses into an awareness of some of the risks of physical risks of climate change. How have energetics clients responded over 2020? And do you think this understanding of physical risks is growing?

Speaker 4:

I think the understanding definitely growing and also the understanding at board level. And I think a lot of our clients have responded because boards have worked that climate risk is now a known risk and this has been enhanced by the pandemic, which is that even unknown risks need to be planned for and managed. But the bushfire season was predicted back in 2005, 2006, there was documented evidence that we would have a bad bushfire season, some bite time between 2018 and 2020 ended happened. So at the moment and no longer can board directors say that climate change is an unknown risk. It is a known risk. It is a significant risk and airport level. It is starting to be taken seriously. And that's how our clients have responded. They've started to look at what, what is the value of dress, um, looking at what their productivity measures are and what the impact on those productivity measures can be from different environmental variables. And I think a key piece of work that I can point to here is the work we did for the Commonwealth bank of Australia, which looked at the impact of a changing environment on their agricultural loan book on a farm by farm basis, up to 2060. And you can unpick what, how product production on farm will change as a result of changing rainfall and changing temperature. And there were some profound findings from that, but what's really important is the risk is so huge that the opportunities equally big, and that was an actual refining for us out of the work was that as soon as you start and picking these risks in detail, you start and unveiling potential opportunity as well is the understanding of physical risks growing. I'm not sure there's an understanding that physical risk is there that understanding is growing, but actually, and packing those climate models and understanding what a changed environment means for you on an asset by asset basis. I don't think that understanding is growing fast enough. We have access to the best science in the Southern hemisphere in Australia through, through the CSRO. And I don't think enough companies actually may take advantage of the access that they have to those data.

Speaker 2:

And it's interesting, you were talking about the director engagement and the board engagement in this issue is obviously increasing and it's, you know, from, from my experience, um, there's a lot of drivers that are encouraging that as well, that are not just in relation to the events themselves, but in relation to some of the legal obligations or the governance standards that directors are now being, um, a lot more stringently held to account against, which is encouraging to see as well, nodule, I suppose, from, from your perspective being overseas and looking in on Australia's experience and that of the recently in California, what are some of the reactions that you've seen? And you've heard from the, as I said from the outside, in,

Speaker 3:

Particularly from an insurance perspective establishment as possible, I think the wildfires in Australia, um, the figure I read calls about 20% of the, uh, Parsons on, uh, that's about 10, 20 times as much as publishing. And then of course, uh, the West coast has said not just California up and down the West coast, they've had really about 2018, but 2020 has just broken. So it's just a off the scale, a super dry vegetation, high winds that intense heat to combination and seeing some of the shots from San Francisco and saw blade runner tuck 49. And this, um, this has had to, um, resonating with insurers, looking at whether these risks will remain insurable and also engaging, uh, on the risk management side, what steps could policy holders and the wider community take to mitigate so that it remains wearable. The regulator has actually leaned in on insurance instead of effectively, if you want to chatter on touring ready kind of risk and insurance, this concept of primary risk and secondary risks from it from a catastrophe perspective. So they, the primary risks would be the obvious one. So Cane's secondary risks of now moving launcher. So wildfires that drag these secondary breasts not being taken seriously, there's some of the wall who's from California in 2018 cumulatively that they hold the level of, um, a significance there should be changing their thinking about the risk profile of the world. That's also bringing home to anyone who a skeptic that climate change is happening yet. It's going to get worse. So this affecting insurers Saturday's about physical.

Speaker 2:

And do you think that that's playing out in terms of the short term or the longer term trends of how that's presenting itself?

Speaker 3:

Well, that's an interesting point, but the, the short term parts you might even think complacently would be, well, we ran 12 months policy, so we can just take Academy. If the competition changing, we can shift our pricing and our risk appetite accordingly. I think again, there's been a sea change in attitude, certainly in Europe, this realization that if you don't shrink your business model, then, um, will go downhill your, um, if you anticipate that, uh,[inaudible] appreciate the time, what are you actually going to do with that too? It's going to be writing in five or 10 years time. Yeah. And that's also true of transition risks that they have. For example, the NP portfolio for an insurer will look printed 10 years time transition.

Speaker 2:

And it's, it's probably a really good segue into the next question that I had around you. A recent article, which was titled a coherent climate strategy is as vital as ever for insurers. And, and in that you concluded that the, um, you concluded the article with a statement that the, both the pandemic and climate risk are here to stay and that the insurance industry has a vital role to play in supporting businesses to navigate that new normal. So can you share some of your insights in your enter the role of the insurance sector as we emerge from these, you know, well, 20, 20, but who knows what 20, 21 and 2022, or we'll present to them.

Speaker 3:

Yeah. That's, I'm picking up a point. Mary made it, yeah. The risks which have seemed to hit from left field. But in fact, well I anticipated in certain quarter and I messaged it didn't seem to get through. So similarly with the pandemic, there's any number of reports. And in fact, there's one that came out last year, which was based in my scenario two credit bars. Um, but these, these seem to be restricted to certain sectors and not to spread so out to the wider world. Congress, of course, that the scientists will be able to tell you in quite granular detail, how the cloud is likely to change area by area and also transition risk. And that will take over that actually has been trying to get that message across, but DEMEC has come upon us much more rapidly than power change from nothing to world changing in a matter of months. But it's, I think it's also a brutal lesson about the transition that the cost of the economy that have been hit hardest because of champagne or the oldest one is a couple of tests. It excellent indexed. I think the last time I checked the energy sector represented 2.3% of the smallest industrial sector that, and excellent imitate them in the stakes. Why a renewables company, intensive market biracial. So you said a massive accelerator. I think even after the pandemic has passed, um, as countries pump money into their economies to try to revive them in line to that many countries will. So that could be money into the agree to call me and enter your tech, call me and download, accelerate the energy transition. So I think there are lots of lessons to be learned from this. It's almost like, Hey, how's Scott for the future. If you like, this is what would have happened anyway. Even if the pandemic hadn't hit us, but it's just accelerated that trend. And, uh, this, um, the, or the gas sector may recover in the short to medium term, the world's, uh, asked about growers, but the suggestion is that they all going to be in long-term decline.

Speaker 4:

Well, I'd like to ask Nigel a question, which is, um, my frustration with the lack of policy in which Australia is operating at the moment is that at the moment it appears that we are getting towards a catastrophic transition of the economy. There is a point in time in the not too distant future where we will have to have wholesale changing of business models, and it will be uncontrolled you're in the UK, which has a legally binding commitment to NetZero. Do you think that the potential still exists for a catastrophic con transition in instances where it is no longer able to job possible to ensure activities?

Speaker 3:

Yes, I do. Um, I was struck by the UN PRI report and its concept with the inevitable policy responses came up two years ago and that thesis was that there would be a step change in the next decade and probably by the middle of this decade and for a whole variety of reasons, not least the ratchet mechanism in the Paris agreement. And the later it took place in mr. Carey, the more chaotic transition. I think the, there are the meetings, there are all the disorderly transition you've got. So for example, different countries with different ambitions, there's a relief that, uh, China and not to kind of upset also now South Korea at the more countries that to set time dishes like that, and then, um, put pressure on other countries like India and so on[inaudible] because if they all aren't in a coordinated and, um, carefully calculated way, then that's the best prospect and all we transition. But with a breakdown in international cooperation, we've seen over the last few years, I'm not holding my breath, uh, this different policy ambitions plus the, um, past changing price or renewables, uh, which again, I think it's not widely known just how fast they are and how much Cooper they're getting and how fast, which by itself is going to have a destabilizing effects on some of the older parts.

Speaker 4:

I must admit I'm cheered by the actions of the investor community, because in increasingly we seeing the investor community take that long-term view about what is financeable or what is fundable. Um, and hopefully we're gonna to not have the assets, which are not insurable in the short term. The finance sector has thought about where they're going to invest in the long run well enough. Um, but at the moment, betting our economic stability on the actions of the finance sector is isn't necessarily the best point of departure for the Australian economy. I like to ask Nigel another question. I mean, just thinking about the capacity of, of directors to engage with climate risk and the challenges that we find in, in coaching or helping our executive level clients to speak to boards and to enable the boards to engage with time at risk, there is a capacity gap there. And I was just wondering, I know that you're involved in a program in the UK. I was just wondering if you had any anecdotes from there that you could tell us or how it's.

Speaker 3:

Yeah, certainly. So we're actively engaged with a brilliant initiative called chapter zero, starting in the UK, but they aren't going international. And in the UK, then by the end of this year to train 1001 executive directors on campus, then that would mean that every listed company in the UK could appoint to these nets to all, and it would then all call climate risk. So there's a way of subverting, common knowledge and metrics, and well, Apple, we put on an event February, we're doing another one shortly. They're going to other countries as well. Exactly the same. Cul-de-sac, uh, I think this is crucial important just to have that, um, someone who's always reminding the rest of the board about the COVID angle, depending on the day when the whole board of course, conduct awareness of this as well. But there's another aspect of this. Uh, you can have a fairly aware of kind of risk strategies. Um, what do you really need to do then filter this down to the operational level. Now, the people who are making the day-to-day decisions, um, they themselves taking a captain Congress day today, cause I'm swear the real treasure looking from an insurance perspective, um, all the underwriters thinking part about time risk, are they posting your questions to their customers about the risks that they're sending out risks signals to the wider world would be really, really comfortable and calm through that directly. But then somebody with the, um, the managers who signed off on blooms in the back way below board up, are they taking account of climate risk? You can see that unless you bring those people with the journey that they're just going to stick with the same old. And, uh, if they've had a book of businesses historically being profitable, um, they may text them persuading that they should start asking these questions. I may be even lose business.

Speaker 2:

And it's really interesting some of the points that you raised in audio, because I certainly seeing from purely from a risk perspective, often that there's, there's quite a lot of understanding of the physical risk of calm change or there's some really good management and risk at an operational level, but the connection to the board and the strategic risk management framework of an organization is not clear, or it's not understood. And that's primarily because of risk ownership. So no one's willing to kind of own those issues and manage them. And, and, and also an issue of culture, which tends to be driven from the board about talking to your, um, your point about chapter zero, about the board being really able to articulate why climate risk is an important issue. And it has a strategic element to it. Um, I think is really critical. And, and, and, and to be able to close that gap, I think you'd see a lot more businesses really being able to embrace the opportunities rather than just kind of responding to the risk. I just find it really fascinating that, that these kind of awareness of directors and they've been pushed to do it in certain ways, whether they've locked it or not. Um, it's really positive to be able to see that and to see them move towards that. Um, I really get encouraged when I kind of see new regulations coming out that require that accountability level. The other point that I was going to make is in relation to the board, being able to articulate to investors, why climate risk management is important because I've often heard, um, executives say, well, um, you know, investors, aren't interested in, in this, they've told us to stop worrying about climate risk because it's, we should be focusing on the strategy and we should be focusing on the next three years and what that's going to look like. And I sort of sit back and reflect on that and think, well, there, the response from someone who really understood climate risk and the impacts that would have, would be to say, that's exactly what we're doing by managing climate risk, we are thinking about the long-term viability of the organization. And so I wonder too, whether in the education of directors and executives, there needs to be, um, I guess, being for them to be able to articulate that to the investors about why it's important and why it has that strategic element. And it's not just a, what are they calling it, virtue signaling, where you're just greenwashing and, uh, and you know, making nice claims that you don't really stand by, or so I think, I think there's a bit in there for the directors, as you said, that requires some, um, just engagement to be able to bring it all together through organization.

Speaker 3:

Yeah. Then that's a real pivot again, I think, um, going back a few years, you would have had companies who didn't care and invested in the cat, uh, best. Cause I think I really, that there's been a sea change that is not a hundred percent right across the pool, but it it's, um, more and more of them coming on board. I think also a really important part of this broader building out beyond climate change and looking at, uh, that's this realization, um, really good data that ESG companies were good yesterday, right before that, in the mainstream sector. So again, uh, this old thinking that, um, yeah, so in an ideal boat, he has a cool suit words say if they have the polar bears, et cetera, uh, uh, I've always got to thinking about my bottom line, that awkward, I think is now a fact correcting. Um, uh, so you've got striking, um, for example, um, as an artist that it's scary for a kind of pool that's customers. And so there's, there is a massive shift underway. And, um, also then if there are any investors speaking to directors who are not yet with the program, there's a lot more dress can say just from a pure hot headed back to, um, not just in terms of glossy pictures in the annual report,

Speaker 2:

I think in terms of, um, final reflections, nodule, do you have any further advice for Australian business

Speaker 3:

And when I'm studying, um, it's an ideal few quite 12 months, but it's, it looks like first graders approximate as a kind of microcosm of good, but been kind of ramped up. So you've got climate change, physical climate change, uh, absolutely obsolete and ignorable. So if you know, you're going to get much harder and faster than the most of the rest of the world. So, um, you'll also then one of the world's largest coal exporters and, uh, um, but also with a big reserves for renewables, but there's an economy that could shift into. And, um, and then with, um, the politics that goes with this with was shocked by it. So it's got a lot of the issues. The rest of the world has been kind of ramped up, strikes me that the insurance and banking regulators are doing a great job and really spurring things along, uh, and really taking it well. I think one of the leading, um, uh, bringing that to groups in the world in this regard, and it seems also you've got a lot of, um, the financial services community to come along for this didn't actually bracing Commonwealth bank in particular really shifted that position. And it seems an increasing amount of the, the, um, business community as well is encouraging more ambition and wants, uh, most change. So those guys where I take encouragement that, that you've got those forces combining and that's, uh, they would prevail, um, the, the longer they take, of course, the bull bumpy, the transition will be

Speaker 2:

Mary. I'm going to offer you the same space,

Speaker 4:

But I, I agree with Nigel that, that you can clearly see action. The regulators are doing a Sterling job and definitely sending the right signals to the finance sector, to the insurance sector. And I think that it's, it's great to see that people are watching Australia from outside and, and seeing this action in spite of policy. And from my perspective, it gives me great hope because we are seeing the change. We're seeing many moving we're seeing without regulation being in place. People moving away from emissions, intensive industries, people pushing into renewables from our PPA tracker. You'll see that the show was the biggest year ever for renewables. PPA is we seeing this ground level action and ambition around both decarbonization and managing the risk associated with climate change. So if this is how it, what can happen with our policy in one country, it can happen with our policy in, in many other countries that don't have commitments to net zero and don't have concrete regulations in place. So we're on the way, but it also means we do have regulation in place. We can get there that much faster. So I've got hope in the F for the future, because you can see this concert of action and hope that we'll have policy that will drive it faster quite soon.

Speaker 2:

Fabulous. Look, thank you both for joining us today. Um, I'm sure there's plenty of other two or three, at least other podcasts on this topic that we could, we could spend hours talking about, but Nigel look, we've greatly appreciated the time that you've taken to join us today. And, um, Mary, I'm sure you echo that, uh, gratitude. It's been a fascinating discussion. Um, and thank you very much for joining. So, and for our listeners, if you've got any questions or comments in relation to today's discussion, just contact us through our website or your energetics account manager, energetics podcast

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