How climate risk assessment can help decarbonisation agenda

ENGIE Impact
By Amy Steel, Climate Risk Expert and WA Leader, ENGIE Impact
Friday, 20 October, 2023

How climate risk assessment can help decarbonisation agenda

In recent years there has been a global push for increased transparency on the financial implications of climate change. Countries like New Zealand and the United Kingdom have mandated disclosures, followed soon after by the US, Switzerland and Singapore.

Australia looks set to be next.

Jim Chalmers recently called for Australia to align its business practices with international stakeholders, investors and competitors. And in December, the Treasury released a consultation paper detailing plans for a mandatory climate risk framework for certain Australian organisations.

Australian businesses are already on the front foot, ranking in the top four countries for Task Force on Climate-related Financial Disclosures (TCFD) support. Financial regulators have issued guidance requiring companies to report on their exposure to climate-related financial risks. Meanwhile, the Australian Banking Association, representing investors and business workers overseeing $47.2 trillion in assets, supports applying the International Sustainability Standards Board's (ISSB) TCFD-based scheme to Australian borrowers.

The momentum is shifting towards mandatory reporting and, consequently, many companies are already providing crucial information on their efforts to mitigate the impacts of a rapidly changing climate. Companies reliant on fossil fuels face increasing financial and regulatory pressures in the coming years as well, making accurate reporting an imperative.

But it’s not all about reporting solely to maintain compliance. There are several notable upsides to climate risk reporting, and it comes down to increasing their attractiveness to investors, improving their bottom line, mitigating risk as well as adapting decarbonisation plans of companies in the long run.

Integrating physical climate risk must be considered as companies decarbonise

Decarbonisation remains a critical challenge of this decade, with various compounding and interacting factors influencing companies’ decarbonisation plans. Work needs to be done to limit this risk and benefit from the advantages presented as companies take steps to decarbonise assets and businesses.

This July was recorded to be the hottest in 120,000 years in Australia. High temperatures are a known hazard for solar farms and can result in a decrease in energy production at extreme ambient temperatures. As extreme weather events grow in both frequency and magnitude under the changing climate, decarbonisation plans need to be adapted to build resilience to these more potent extremes. Companies should evaluate the system design components which are concurrently vulnerable to extreme heat events. For example, depending on the level of solar energy input the normalised power output for a solar farm decline with increasing temperature up to about 50°C. Companies need to identify the key thresholds which could be tipped. Simultaneously, they need to undertake scenario modelling to understand the future frequency, duration and magnitude of extreme heat and explore the other factors which may be contributing to the issue (ie, wind speed/irradiance) to assist in building a climate-resilient system.

In essence, climate risk assessment will encourage Australian industries to reassess their operations, identify areas for improvement and take proactive measures to address climate-related risks. This transparency will not only help protect their financial interests but will allow companies to take proactive actions to achieve their commitment to decarbonisation.

Industrial evolution the key to climate transparency

Companies have recognised the importance of addressing climate risks and have started to incorporate decarbonisation strategies and climate risk management into their operations. For example, BHP has committed to a goal of net zero operational emissions by 2050 and is investing in low-emissions technologies to reduce its carbon footprint. Meanwhile, Rio Tinto has divested from coal operations and is actively investing in renewable energy projects.

However, it is not just the mining giants that must take action; smaller companies across all industries must also adapt to the changing landscape by addressing climate-related risks and opportunities. Companies can address climate risks by incorporating climate-resilient design principles into their projects, investing in sustainable materials and engaging in thorough risk assessments to identify and mitigate potential vulnerabilities.

Pros of certainty and assessment outweigh cons of additional compliance

Mandatory climate risk reporting laws present both benefits and challenges, including compliance costs, regulatory burden and concerns regarding the accuracy of reported information.

However, for Australian organisations, climate risk disclosures provide an opportunity to reassess their operations and identify areas for improvement. By addressing these risks and taking proactive measures, industries can not only protect their financial interests but also contribute to the global sustainability effort. Failure to address these risks could lead to significant financial losses, reputational damage and reduced investor interest.

As Australia moves towards a values-based capitalism, the nation must recognise the importance of integrating decarbonisation and climate risk adaptation. Embracing transparency and mandatory climate risk disclosures will empower industries to seize the opportunities presented by a sustainable and resilient economy while safeguarding their future in a rapidly changing world.

Amy Steel, Climate Risk Expert and WA Leader, ENGIE Impact.

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