Financial markets take heed - Ignore climate change at your peril

02 Dec 2010Archived News Climate Change Matters

The debate on climate change in Australia has largely been superficial and adversarial. Rather than informing the public about the issues and costs of managing a risk with high probabilities, we have simply seen arguments between believers and sceptics over whether or not climate change exists.

The Australian Government has failed to provide leadership. Their inability to explain the issue to the public, provide clear policy direction, and deliver a price on carbon has stalled decisive action, when many leading Australian businesses stood ready to substantially reduce their emissions.

It's a strange world when the CEO of BHP Billiton shows more leadership than the Government on climate change. In the last few weeks, statements by Kloppers and Nasser at the company's AGM pushed for a price on carbon and action on climate change. At the same time, the world's largest global investors requested action against global warming or risk economic disruptions far more severe than the recent financial crisis.

The statement (Global Investor Statement on Climate Change: Reducing Risks, Seizing Opportunities and Closing the Climate Investment Gap - November 2010) was signed by 259 international investors, with collective assets totalling US$ 15 trillion—more than one-quarter of global capitalisation. Signatories included Allianz Global Investors and HSBC Global Asset Management, many of the largest European pension funds and 12 US public pension funds.

It is the largest-ever group of investors to call for government action on climate change.

Despite this, many companies have yet to come to grips with the inevitability of a transition to a low carbon world, and so have neither considered all the attendant risks nor understood the opportunities that this new world will create.

Business seems caught in a troubling juncture of trying to maintain business as usual, whilst realising that climate change is already impacting business. The reality is the carbon train has already left the station, and yet most of the market players did not hear it approaching.

In the last week alone, three bank announcements point to change:

1. CBA slashes value of its share in Hazelwood

Commonwealth Bank chairman David Turner said it had written down its 2% holding in the Hazelwood brown coal-fired power plant in the Latrobe Valley to just $1 million, from the $25 million it paid in 1996. The write-down comes as the Brumby government negotiates with the plant's majority owner, International Power, on a compensation package close to a quarter of its generation by 2014, to lower greenhouse gas emissions.

2. Westpac's sustainability report

Westpac announced in this year’s annual sustainability report that they "will avoid involvement in transactions which support the establishment or long-term continuation of inefficient and high carbon-emitting assets into the future".

3. ANZ's confidentiality clause

Chief executive of The Verve Energy revealed that funding for their $150 million coal power station project was conditional on a confidentiality clause, therefore the bank’s name could not be revealed for fear of reputational damage. According to the Australian Financial Review, the chief executive was "really shocked when the issue of reputational risk was raised by the bank". It took 48 hours for the name of the bank, ANZ, to be published.

What can we learn from these stories about how our financial institutions perceive the likely impact of climate change on high carbon emitting assets?

They clearly indicate that banks are beginning to understand that investment in high emission assets is a risky long-term bet. Financial institutions realise that association with such investments may risk an adverse consumer response.

In a discussion with a top executive of a major superannuation fund last year, he noted that the market would not reward their business for moving away from the pack and changing their asset mix on the basis of possible impacts of future carbon policies.

Several questions were asked of this executive: Will this ‘follow the market’ strategy, which the industry now sees as conservative, turn on them? Will it prove to be risky if there was a sudden change in market sentiment regarding climate change?

He acknowledged the possibility of both and made this insight - "you know, perhaps we should not have a sustainability fund – those criteria should really be used to assess all the assets we invest in".

Despite the continuing political debate on climate change, the financial world seems to recognise that carbon risk is real and material. It impacts access to capital today. It raises obvious questions about the valuation of high carbon emission assets, particularly brown coal-fired power stations. These concerns will surely over time impact the value of other high carbon emission industrial activities, steaming coal mines and other assets.

A transition to a lower carbon emission global economy is inexorably on the way. This transition will impact on consumer expectations as they see escalating prices charged for carbon pollution.

For many businesses to survive the next global financial crisis, the opportunities and threats of this new global economy must be incorporated into core business strategy and risk assessment.

Organisations yet to adopt responsible investment practices must move now or risk an uncertain future.

Written by Jonathan Jutsen (Founder and Executive Director, Energetics) and Nick Ridehalgh (Director, Kiewa Consulting). 

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