The impacts of climate change are already being felt in Australia and the economic transition to a low carbon economy is already underway.  Yet, the longer-term impacts and trajectory of the shift is inherently uncertain given the variables involved, posing challenges for organisations and for boards from a risk management and strategic planning perspective.  So how should boards be engaging with this challenge?  This was the theme of an expert panel discussion at the inaugural Climate Governance Forum.  Our key takeaways are below.  

In a panel discussion moderated by MinterEllison Partner and Head of Climate Risk Governance Sarah Barker entitled Scenario Planning: A Challenge for Boards held at the inaugural Climate Governance Forum on 1 August 2022, an expert panel -  David Karoly MAICD (Honorary Professor, School of Geography, Earth and Atmospheric Sciences, University of Melbourne); Diane Smith-Gander AO FAICD (Chair, Zip Co) and Kathleen Conlon FAICD (Chair, Lynas Rare Earths) – discussed the inherent challenges for organisations and for boards in particular, in considering climate risk on a forward looking basis and how they can and should engage with this task. 

The starting point for the discussion was that despite the difficulty, planning for the transition is a necessary step for organisations to take and for boards to engage in - a 'business as usual approach' is no longer an option.   

Australia is the 'canary in the coalmine' on climate 

Professor Karoly opened the discussion with a brief overview of the science behind the different climate scenarios used to quantify the physical risks of climate change in Australia and globally, drawing on the findings of the 2021 and 2022 Intergovernmental Panel on Climate Change (IPCC) reports.

The key takeaway for directors is that the climate has already changed – the world has warmed already by 1.1 degree and is set to continue warming - and we are already experiencing the physical impacts of this in Australia.  It is indisputable, for example, that the extreme weather events of recent years (eg the Black Summer bushfires and February/March floods) will become more frequent and more intense going forward – whichever climate scenario is applied.  

Beyond this, there is less certainty around the rapidity with which the climate will continue to change and the relative severity of the impacts this will have for the environment, for wildlife, and for the communities and businesses that rely on them.  

In essence, the science reinforces the fact that directors need to consider climate risks on a forward-looking basis, given that the climate has and will continue to change and in light of the fact that historical experience is no longer a reliable guide.  

The question is, how directors can and should engage with this task. 

Discharging your duty of care and diligence: How does scenario analysis fit in?

Directors have a duty under s180 of the Corporations Act 2001 (Cth) to engage with the impacts of climate change-related risks on their operations and strategy in order to satisfy their duty of due care and diligence.  As flagged, a key challenge for directors in this context is the 'radical uncertainty' around both the rapidity with which the physical impacts of climate risk will be felt given the variables involved and likewise the lack of certainty around the pace or trajectory of the economic transition.  

The panel reflected on the role that scenario analysis can play as a risk management tool in this context to support forward-looking, climate-informed strategic planning and decision making over the longer term.  

One key message to emerge from the discussion is that scenario analysis should not be seen as a tool that is available or appropriate only to larger and more complex listed entities.  Though larger companies are increasingly expected to have their own tailored 1.5 degree scenarios, the panel encouraged smaller boards to avail themselves of the resources available to enhance their approach to climate risk management more broadly, and to scenario analysis in particular.    

Reflecting on the challenge for smaller boards in approaching this task,  Ms Smith-Gander emphasised that in her view,  engaging on climate risk does not entail a change to the core role of directors.  Directors, Ms Smith Gander said, need to understand the risks as they apply to their own company, set a risk appetite and then invest accordingly.  The process or mechanisms, should be 'agnostic' as to the type of risk being considered.  Scenario analysis, is in her view, a valuable risk management tool, even for smaller boards, in this context.  

The transition will not be linear

Another challenge for boards and for companies, is the fact that climate-related risks (and opportunities) may crystallise more quickly than planned, and in unexpected ways, necessitating a rapid pivot in approach.  

The sudden and rapid increase in demand for materials critical to the renewable industry was given in illustration of this.  

How should directors ascribe weight to different and competing interests?  

The discussion also touched on the question of how directors should approach the task of ascribing relative weight to different and competing interests in the context of making climate-risk informed investment decisions.    

The panel considered that directors need to think beyond immediate financial returns, especially when making decisions for the longer term.  

It was suggested that shadow carbon pricing  - applying a hypothetical surcharge to the price of projects that create carbon emissions - could be a useful tool in evaluating projects this context.

Importantly, it was also pointed out, that directors have a duty to act in the best interests of the company, when making decisions of this kind, not just shareholders.  In light of this, Ms Smith Gander observed that the company can only provide returns if it actually exists – if failure to invest in a project would put the longer term sustainability of the company at risk, then this should be factored in.

Candid disclosure is the least risky approach

The panel was asked whether it would be 'greenwashing' for a company to deliberately use entirely different scenarios in order to present the rosiest possible view to stakeholders of the extent of their exposure to climate risks, their approach to managing those risks and their transition strategy.  

The panel was unanimous in their view that this approach would be inadvisable, not least because it entails enlisting scenario analysis to support a one-sided picture of the company's exposures and transition plans - the antithesis of what scenario analysis is intended to do.  

As to whether it would constitute greenwashing, Ms Barker said that it is a question of whether the company disclosed that that they had used different scenarios – if they failed to do so and allowed the market to think they had engaged in a robust exercise when this was not the case, then it would constitute greenwashing (though it was nevertheless inadvisable).      

How companies can thrive in the transition to a low carbon economy 

Having focused primarily on the importance of managing the risks associated with the green transition, the panel was asked for their insights into what opportunities there are for companies and for boards.

Professor Karoly suggested that the rapid transition to renewable energy generation affords an opportunity for Australia to emerge as a renewable energy superpower if the necessary investment is made.  Along similar lines, Ms Conlon pointed to the likely acceleration of investment in the renewable and technology sectors as both companies and investors look to accelerate the transition to renewables as a key opportunity.  

From an individual director perspective, Ms Smith Gander advised boards to identify and celebrate the small wins they can implement on a day to day basis.  

[Source: This article is based on notes from the Inaugural Climate Governance Forum panel discussion: Scenario Planning: A Challenge for Boards on the 1 August 2022.  The panel included: Professor David Karoly MAICD (Honorary Professor, School of Geography, Earth and Atmospheric Sciences, University of Melbourne); Diane Smith-Gander AO FAICD (Chair, Zip Co); Kathleen Conlon FAICD (Chair, Lynas Rare Earths).  The discussion was moderated by Sarah Barker MAICD (Partner & Head of Climate Risk Governance, Minter Ellison)]