‘Climate risks are risks to business and should be a priority for boards of directors’.
/By David Singleton AM
When it comes to climate change and resilience to extreme weather events, Australians don’t need to look very far to understand our challenges – as the poem goes, we have ample droughts and flooding plains … and heatwaves and blackouts. But the challenges do not come from mother nature alone, they lie in leadership, particularly in Australia’s approach to business sustainability. Lessons should be learned from UK businesses in terms of understanding the imperatives and structuring business strategy around climate change.
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When it comes to climate change and resilience to extreme weather events, we don’t need to look very far to know what out challenges are. Australia has certainly had its fair share of droughts, floods, heatwaves and blackouts. These events occur every year, and all indications are they will continue, strengthening in intensity and frequency.
The challenges aren’t, however, solely due to mother nature. They also lie in Australia’s approach to business sustainability. How well do our businesses and their board members really understand the imperatives? How are they structuring their business strategies around climate change? Are they doing it at all?
As I looked around the globe for good and bad examples to highlight in this article, I couldn’t help but turn to the crisis in Cape Town. If city living Australians want to know what a worst case scenario could look like just a few years down the track, this is a fairly frightening - and close to home - example.
Cape Town is one of the most affluent cities in southern Africa and is currently operating under strict water rationing protocols as it faces the near reality of running out of water. In the near future, the water supply to properties will be turned off and residents will have to leave their house and fill a container with water from a stand pipe. For 80% of the population in south Africa, this is how they already live - they don’t have running water, or water storage - but it’s become big news as it hits the affluent cities.
At a relatively recent event in Melbourne led by Dame Polly Courtice, she said “Dealing with climate/carbon issues is non-negotiable” and pointed to the Cape Town crisis. In her view, it’s a situation that represents the next step as to where our civilisation will likely head. I’m afraid that I must agree.
As Director of the University of Cambridge Institute for Sustainability Leadership (CISL) - which helps to build strategic leadership capacity in business and government to tackle critical global challenges – one of the important points Dame Polly made was the need to ‘understand your purpose as an organisation, or an enterprise or an individual’. If you are clear about your purpose, then a lot of the hard decisions required of board directors shouldn’t be hard.
There were many forces at play in the Cape Town situation – such as under preparation via a lack of diversification in water sources (over 95% of the city’s water comes from surface water dams) – and it is governments who are often blamed. However, we also must consider the role of business and their Directors, who undoubtedly have played a role and have had an impact upon the eventual outcome.
Had climate change been on the radar for company boards in Cape Town, would they be facing the current situation?
It is a timely reminder for businesses, that when it comes to climate change, we are talking about a system connecting a series of events and associated risks, which will inevitably have far reaching implications across the economy and the environment.
We’ve seen the legal opinion released by the Future Business Council, which requires company directors to take climate change into account when making decisions about company strategy, performance and risk disclosure.
Climate risks are risks to businesses and therefore ought to be on the radar for Boards of Directors. Boards of Directors ought to be paying attention to climate change and if they are not, they are in dereliction of their responsibilities.
Businesses can make immediate, mid-term and long-range changes, start to look at decision making through the climate change lens and I see several links between this approach and the Cape Town situation.
In making strategic decisions about water supply a board ought to be sensitive to the changes that will emanate from our changing climate.
When we think about investment decisions – for example investing organisation pension funds, we can see a movement to divest from some investments and to focus on more sustainable assets. Instead of looking at investment decisions in terms of asking “where are we going to get the best bang for the buck?”, we start to look at them and ask: “how do we ensure that our community is sustainable in the future?” which should result in a different set of investments.
While the crisis in Cape Town represents a dim view of the future, a more positive picture can be found in the UK, where many businesses seem to be ahead of those in Australia in terms of understanding the imperatives and structuring their business strategy around climate change.
A terrific speech was given by Chair of the Environment Agency, Emma Howard Boyd to the Westminster Energy, Environment & Transport Forum earlier this year. Her speech canvassed challenging issues without being alarmist. Boyd is an environmentalist, but she is also an investor, which in my view gives her ideas credibility.
One underlying theme of her speech was about making hard financial decisions with regard to how to address risk, how to mitigate against risk … looking at these decisions as business-based assessments and also environmental based assessments.
Boyd talked about England’s 25-year environment plan and she described how the environment agency has been effectively working towards solutions for this for some time. She spoke to the fact that although some of the more dramatic impacts are quite frightening, there are things that have been done, and that are being done, and that taking a measured approach can provide real solutions to these issues.
The 25-year plan says “We will take all possible action to mitigate climate change, while adapting to reduce its impact. We will do this by… making sure that all policies, programmes and investment decisions take into account the possible extent of climate change this century.”
In Australia, there have been attempts to do this sort of thing ...It’s not that this doesn’t happen … it’s just not approached with the same rigour or level of importance as in the UK.
In 2013/14 we saw the Federal Government (Department of Environment and Sustainability sponsor a panel (on which I served and which Sam Mostyn chaired), addressing this broad topic; we developed a blue print for the sorts of actions that could be taken.
In 2015, we saw the release of the National Climate Adaptation strategy which approached the adaptation agenda from a scientific perspective, publishing a range of material based on the work of academics across this particular sector.
Although this (and more recent) work is a positive step in the right direction, as Boyd pointed out in her speech: “Experience shows us that the challenges we face cannot be solved by academic documents alone. Collaboration between people – countries, governments, businesses, communities and NGOs - is essential.”
When we consider this issue in the context of the role of business, and boards of directors, in Australia, the message is clear. There is a need to take a more analytical and considered approach to this issue. Board of directors need to make hard choices, they must invest in sustainable approaches, yet at the same time they, and broader society must learn to live with the ramifications of climate change – just as the Residents in Venice do.
They also must start to understand, that climate risks are risks to business and should be a priority for boards of directors. The risks are real and will gather momentum. We must take them seriously.