Everlution Newsletter

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The Business Risk of Climate Change – Take Heed!

The threshold for dangerous global warming will likely be crossed between 2027 and 2042 — a much narrower window than the Intergovernmental Panel on Climate Change’s estimate of between now and 2052. In a study published in Climate Dynamics, researchers from McGill University introduce a new and more precise way to project the Earth’s temperature. Based on historical data, it considerably reduces uncertainties compared to previous approaches.

The researchers introduced the new Scaling Climate Response Function (SCRF) model to project the Earth’s temperature to 2100. Grounded on historical data, it reduces prediction uncertainties by about half, compared to the approach currently used by the IPCC. In analyzing the results, the researchers found that the threshold for dangerous warming (+1.5C) will likely be crossed between 2027 and 2042.

What does this mean for business risk?

Firstly, transition risks should be considered as these types of risks can result in a cascade of financial and economic impacts and these could include:

  • Write-offs
  • New competitive pressures
  • Changes in consumer demand for example for more sustainable products
  • Costs of adaptation

Then there are direct physical risks. The UN 2018’s outlook concluded that in the last 20 years there has been a dramatic 150% rise in direct economic costs associated with climate change. Extreme weather accounted for 77% of these losses amounting to $2.2 trillion.

Physical risks can be categorised as being either:

  • Gradual onset (such as longer-term shifts in climate patterns/sea level rise/ chronic heatwaves); or
  • Catastrophic (such as extreme weather events)

Both gradual onset and catastrophic physical risks have a cascade of financial and economic impacts and these could include:

  • Losses from physical damage to assets
  • Supply chain disruption
  • Disruption to production capacity
  • Increased operating costs.

These events will intensify as the climate continues to warm. When we exceed 1.5C° and head towards 2°C, physical risks will start to become extreme to the global operating market, consumers and supply chains.

Liability and litigation risks

Importantly, attribution science has developed to such a point that the frequency and severity of certain extreme weather events can be attributed to climate change. This has important implications for the concept of causation under the law. And the court’s primary role is to redress loss and damage. Recently, an official US government report warned of the serious health and economic impacts of climate change, saying the economy could lose hundreds of billions of dollars – or, in the worst-case scenario, more than 10% of its GDP – by the end of the century.

So what are the litigation risks arising from climate change? There are three broad trends in climate litigation which have emerged:

  1. Climate change as a rights-based issue
  2. Climate change as a financial issue
  3. Increasing oversight and enforcement of existing laws.

First, in relation to (1), where governments fail to act to protect the rights of citizens, courts step in. That is a fundamental premise of the rule of law. And that is precisely what is happening. In a recent case in the Netherlands, the Court found that its current generation of citizens will be confronted with loss of life and disruption of family life and ordered the government to cut emissions by at least 25% by 2020 (they are currently at 13%). The court said it was irrelevant that the Netherlands’ global contribution to climate change was only 0.5% of emissions. They should still act to protect their citizens.

In relation to the second trend, the evolution of climate change from an environmental or ethical issue to squarely a financial concern has huge implications for legal liability. It opens the door to litigation risk arising from breaches of standard consumer, corporate and financial risk management laws.

In particular, these claims will arise under three broad categories:

  1. Claims for failing to mitigate impacts of climate change under public and private nuisance, negligence, failure to warn, trespass and unjust enrichment laws.
  2. Claims for failing to adapt to the impacts of climate change as company directors and trustees have duties to act in the best interests of their company or members and must adapt their business strategies to take into account risks
  3. Claims for failure to disclose climate-related risks to shareholders (in Australia, we have already had a retail shareholder who has taken the Commonwealth Bank to courtfor failing to disclose climate related risks in its annual report and the New York Attorney General has recently launched a lawsuit against Exxon for allegedly deceiving its shareholders in relation to its proxy price on carbon).

Finally, the third broad trend in climate litigation – we are also seeing increasing oversight and enforcement of existing environmental laws. Dieselgate is a classic example of this. Non-compliance with emissions standards is no longer an acceptable way of doing business. Regulators will not be turning a blind eye anymore. And CEOs who leave their environmental compliance reading in the bottom of their file for weekend reading will end up in court (as happened with the CEO of Volkswagen).

Now, these three trends are working independently to create disruption in business-as-usual risk, but in some cases, they work together and then can be a very powerful driver of change.

A type of change is the adapt and evolve approach and involves an acknowledgement and acceptance of the trend towards decarbonisation. It accepts that change is needed if businesses are to survive. It requires companies to plan for net-zero by 2050 for developed countries, 2060 for developing countries.

It is not an easy option, as it requires time, money and willingness to invest in innovation and a long-term commercial strategy that works within the expected new framework of laws. But there are plenty of opportunities to be grasped in the low or zero carbon economy for those willing to take them (please see Ecoprofit’s website re the financial benefits of this approach).

It would seem that businesses that wish not only to survive but to thrive for future decades will need to:

  • Take climate change seriously.
  • Assess business vulnerability.
  • Take action to protect the business from failure.
  • Act now, independently of politicians (government policy is critical but there is plenty that can be done while we wait for them to get their act together).

It is the best legal interests of your company, your employees and your shareholders to act ahead of time. Every sector, profession and person has a role to play in stopping runaway climate change. A zero-carbon economy is both technically feasible and affordable.

Share watch – Helix Resources (ASX:HLX)

Helix’s main game is the early-stage Rochford Copper Trend which covers 12km of strike near Manuka Resources’ (ASX:MKR) high grade +420,000oz Mount Boppy gold mine. Initial results from early stage geophysical and geochemical ‘scout’ programs on the Rochford Trend have been very encouraging, Helix exec chairman Peter Lester said last month.

“We are also buoyed by the regionally significant greenfield discoveries of both Aurelia (Federation) and Aeris (Anomaly K/Constellation) recently in the district,” he says. “The 12km long Rochford Trend is book-ended by gold and base-metal deposits and has seen little or no modern exploration prior to Helix identifying its prospectivity in late 2019.”

Helix’s share price graph for the last year.

Financial Indicators

The VIX fear gauge as at Friday ESDT is down 1.21 points since 31 December 2020 to 21.56.

The Dow Jones Industrial Average as at Friday ESDT is up 688.41 or 2.26% since 31 December, the STOXX 600 is up 10.92 points or 2.7% to 411.27 and the Shanghai Composite index is up 155.66 points or 4.5% to 3,570.11.

Gold on 1,849.70. US 10-year Treasury Bonds on 1.12 and oil on 52.73. Cryptos Bitcoin is up 9,842 points or 34.02% to 38,775 since 31 December 2020.

ASX 200 75.50 points or 1.13% to 6,757.90 since 31 December. The Aussie dollar on 77.66US cents.

Eco Market Spot Prices

LGC $39.65

STC $38.05

ESC $28.25

VEEC $42.25

ACCU $16.50

Sources: RenewEconomy, demandmanager,  Reuters, SMH, Market Watch, Clientearth