Date
November 2023
Author
Date
November 2023
Author

As published on FS Sustainability

Even if the world is able to act sufficiently to contain climate change to 1.5 degrees of warming by 2050, there will still be degree of physical impact that is literally baked in, and a degree of volatility in the transition that can be hard to predict, introducing challenges for investors, business, government and communities at large.

As mandatory climate reporting nears on the horizon for Australian entities, there is a convergence on how to disclose financial risks and the scenarios that entities should use to ascertain some of their key risks and opportunities. But knowing which scenarios to choose can be a challenge – for example, the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) has published new climate scenarios including predictions that a net zero transition could be "too-little-too-late", disorderly and delayed.

Q&A with Olivia Kember, Principal Consultant, Energetics

Q: Let’s start with the basics – what do we mean by a disorderly transition?

A: It’s a phrase that has been used a lot in the climate nerd community, but it really only came to be more relevant to investors when the NGFS released its climate scenarios.

The starting point in Australia was the electricity markets, where we could see how the transition to clean energy has been happening in a very messy way. There has been misalignment among policy, regulatory, investment and consumer signals with a range of negative consequences. These include putting at risk reliability and affordability of electricity, undermining decarbonisation and making it very hard for investors to figure out when, where and what to invest in, in terms of infrastructure and generation assets.

But what we’ve also realised is disorderly transition can emerge across the whole economy. Decarbonisation can – and will to some extent – face these types of misalignments across every sector.

Q: What tools can investors use to navigate a disorderly transition?

A: Scenario analysis is one strategic planning tool investors can use. There’s been an upswing in scenario analysis for disclosure purposes, driven by the TCFD and now the Australian Sustainability Reporting Standards. Looking beyond disclosure to figure out how to use scenario analysis to test and refine your strategy can be very powerful. We are seeing new approaches emerging that offer ways of thinking through the risks of climate-driven volatility and more sophisticated methods to estimate climate impacts; investors can use these to work out how to gain an edge in reducing downside risk or (perhaps more importantly) capturing opportunities that will come from some of the disorderliness we will face.

Q: What’s the balance between investing in adaptation versus mitigation?

A: One of the sources of disorder is going to come from physical climate change itself. It’s playing out now and in the short term it’s baked in, regardless of whichever trajectory we’re on in the long term.

In Australia we have been walloped by extreme bushfires and floods in the last few years so we’re starting to see the signs. The withdrawal of insurance cover from some areas and high premiums in others are pretty disorderly responses to higher physical risk. We are seeing this specific issue now adding another barrier to investment in some new renewable energy projects. And from the investor perspective, if you’re developing a new solar farm, you don’t want it to be built in a place that’s susceptible to flooding, you need it to be resilient to all the climate hazards it’s going to face.

You can’t put these things in separate buckets, and the flow of risk between climate change itself and decarbonisation goes in both directions, so to be resilient you need to consider the full spectrum.

Q: How do you integrate a just transition into all of this?

A: This is where companies shouldn’t be afraid to create their own scenarios – use your scenario exercise to think through the value of enabling a just transition. Communities that get treated badly through one aspect of transition are not going to be supportive of more transition. This is a long game that needs to play out, and as a business you need to figure out how best to bring everyone along with you. This will be the way you can achieve the sustained decarbonisation impact you want.

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