Video transcript: Climate change: The coming storm and how to prepare (Part 2)
Title:
Climate change: The coming storm and how to prepare
Part 2: Mitigating climate change risks within your organisation
Lloyd Kavanagh and Stephanie de Groot
MinterEllisonRuddWatts
Lloyd Kavanagh, Partner, MinterEllisonRuddWatts
So how do you prepare? In the first part of this presentation, Stephanie and I demonstrated, we think, that there is a new set of climate risks which will have a material impact on the performance, position or prospects of many organisations, including those which you lead, or in which you audit.
They are:
- the physical risks;
- the transition risks; and
- the liability risks.
As we said in the first part of the presentation, climate change is a multi-faceted issue. Its origins are environmental but it has now also evolved into a business issue with clear physical, legal, and financial implications. Again, there’s a useful parallel with Covid-19. First and foremost the pandemic is a health issue. But now it’s clearly an economic issue too, with the IMF projecting an impact comparable to the great depression.
Whether driven by your understanding of the financial implications, by statutory duties, or by concerns about the risk of liability, you should be shifting from a 'is climate change a thing, and why would it be relevant to my organisation?' to an approach of 'what are the likely impacts of climate change going to be for my organisation, how should we manage them, and what do we need to do and what do we need to disclose?'.
But those are not easy questions. As the quote on the slide indicates: “Scrutiny of risks and opportunities is key, as well as management and disclosure.”
Stephanie de Groot, Senior Associate, MinterEllisonRuddWatts
There is no national framework for how Crown entities or local authorities should tackle climate change – yet.
There are several papers on MfE’s website that provide guidance for local government on preparing for climate change, but many are out of date. One such paper is a guidance manual for local government in New Zealand. It’s an old publication from 2008, but the preparedness steps it outlines are sound.
- First, know the science. Understand the issues and the urgency to act.
- Second, understand the projections for New Zealand. These differ regionally.
- Third, identify the potential effects on your organisations’ assets, functions, and services.
- Next, assess the likely magnitude of such effects and understand what are the priorities.
- And finally, incorporate climate risk assessment into regulatory, assessment, and planning processes.
If the select committee’s recommendations on the Resource Management Bill are enacted, a topic that we addressed in part 1 of our presentation, we will likely see formal national direction introduced for local government on how they should make decisions about climate change mitigation, in exercising powers their under that Act.
Similar issues as to the governance impact are now being addressed in the private sector, and Lloyd will now talk to you about those.
Lloyd
You may from the first part of this presentation recall that many of the personal liability questions turned on whether those running the organisation, or responsible for its disclosure, had taken “all reasonable and proper steps” or some similar formulation. Put another way, the question is what approach should a prudent director, board member, or senior manager take to protect their organisation and themselves?
In terms of governance, a very useful frame of reference, I think, for either the private or public sector is the World Economic Forums’ publication How to Set Up Effective Climate Governance on Corporate Boards – Guiding principles and questions. That was issued in January 2019, and while it’s aimed at corporate boards, the principles are I think equally applicable for anyone advising or sitting in a managerial or directorial position in any organisation, including a Crown entity or local authority. And you will notice some resonance or alignment with the old guidance manual that Stephanie’s just referred to.
The World Economic Forum has set out eight principles, which you can see on the slide, each with guiding questions to help identify and fill the gaps. So I’m going to run through those, starting with Principle 1 – Climate accountability on boards. The key here is that the board acknowledges its accountability for the long-term stewardship of the entity and that that includes resilience to climate change, as it does with any other issue presenting financial risks. And therefore that a failure to do so may breach their duties. So you start with that clear acknowledgement.
Next, there needs to be a command of the subject. It’s important to ensure that the board’s composition is sufficiently diverse to understand how climate change may affect the activities of the entity – the business. All directors need to make sure they have at least some understanding, but boards should look at whether they add an expert or two.
Next, the board and governance structure. It’s important to determine how most effectively to integrate and embed climate considerations into the decision-making structures, into the board and the committees and their interactions with management. Is it clear, you should ask, when and where these decisions are going to take place?
Next, principle 4 – there needs to be a material risk and opportunity assessment. This usually involves asking management to assess the materiality of climate-related risk and opportunities in the short, medium, and long term – and that the board takes time to understand and is comfortable with that assessment.
Then principle 5 – the strategic and organisational integration. This is a key challenge – ensuring that the climate change considerations that are being identified are actually integrated into the organisation’s strategic processes and embedded into the management of those risks and opportunities. Now this is an area of current weakness which we see. There’s often a good theoretical discussion at the strategy day, but in day-to-day operations little changes.
Principle 6 – incentives. It’s an old sore that what gets measured and recorded is what gets prioritised, so it’s important to align executive incentives to promote the long-term prosperity of the entity, including having climate-related risks, targets, and indicators incorporated.
Next, reporting and disclosure. Remember I said I think disclosure is where the activists are going to come. It’s very important to ensure that material climate-related risks, opportunities, and the strategic decisions relating to them are consistently and transparently disclosed to all stakeholders, including investors and regulators. Those include financial filings and offer documents. Make sure you’re taking “all reasonable and proper steps” to ensure that the disclosure is complete.
Finally, principle 8 – exchange ideas. Maintain regular dialogue with peers, policy-makers, investors, and other stakeholders to share insights and methods, and stay informed about the latest climate-relevant risks, opportunities, and regulatory requirements. This is a dynamic topic – no one has all the answers.
So in summary, the key to managing the risks we have highlighted, is to be open-minded and proactive. It does not matter whether you, quote, “believe in climate change” or not. What matters is you accept that there is a new set of financial and business risks that may well have a material impact on the performance, position, or prospects of the organisations that you lead, or you audit, and you need to respond, as you would for any other risks. So with that, thank you.
Stephanie
Thank you.
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Transcript © MinterEllisonRuddWatts, 2020