Mandatory disclosures of climate risk: essential to accountability

in Renew Economy

There’s a huge difference between asking “what’s most likely to happen, and how could that affect us” versus “what’s the worst that could happen, and how likely is that.” While the latter is the traditional risk management framing, the first approach is how most Intergovernmental Panel on Climate Change (IPCC) reports are presented, at least at the summary level that is consumed by senior policy- and decision-makers.

No wonder then, that many people still see physical climate risks as gradual, with extremes worsening incrementally and linearly. And why most climate risk assessments seem to make the same assumptions.

There are two problems with this. The first is that we’re already seeing abrupt and discontinuous changes, such as the unexpected and persistent material upward shift in average ocean temperatures in mid-2023, which has now seen every day for over a year at unprecedented levels.

The second is that physical risks often have natural break points given differing vulnerabilities and exposures, where damage suddenly tips from being negligible or manageable, to significant or catastrophic. For example, residents of the Australian city of Lismore discovered this when they suffered unprecedented flooding in 2022. While many had experienced previous inundation of the lower level of their properties, this event drowned entire buildings. People who had stored their belongings on an upper level, expecting them to be safe, were left devastated.

In fact, as the Institute and Faculty of Actuaries put it in their recent paper Climate Scorpion, “the sting is in the tail risks”: the unlikely but high impact events occurring in the tails of a probability distribution. Climate change is shifting extreme weather distributions to the right and, at least in the case of temperature extremes, is flattening the bell curve, with longer and fatter tails. What were once highly unlikely events but within the distribution curve are now more likely; and what were once inconceivable are now possible.

Climate Projections Don’t Tell the Full Story
Most climate projections are still modeled at a fairly coarse range due to the massive computing power required – in the best cases squares that are perhaps 10km by 10km (many are around 100 km by 100km). They are good at establishing regional trends in certain weather conditions over multi-decadal periods (such as average temperature and seasonal precipitation trends) but are less useful for projecting localised phenomena such as flash flooding, large hail or extreme wind. Traditional design risk assessments based on historical “one-in-100-year” events are ill-suited to a rapidly changing climate.

Further, so-called “positive feedbacks,” which amplify heating, can reach tipping points that push systems such as Arctic ice albedo to be self-perpetuating, are not incorporated into many models. With mounting evidence that several of these feedback mechanisms may already have been activated, it is increasingly likely that climate projections are understated. The climate system appears to be more sensitive to changes in greenhouse gas (GHG) concentrations than had been projected.

Speaking of which, just because many scientific papers generally end their projections by the year 2100 doesn’t mean that climate impacts level off at that point. In particular, ice is expected to continue melting for centuries, with multi-metre sea level rise already locked in. Only the rate of rise and long-term maximum sea level reached are dependent on our collective actions to mitigate emissions. In many areas, the question is not “if”, but “when” we are likely to reach devastating levels for a particular low-lying coastal city or region.

The bottom line is that climatic changes are likely to be discontinuous; impacts will vary widely depending on local phenomena and vulnerabilities; and the rate of change is likely to accelerate, as James Hansen and other climate scientists have warned.

With mandatory climate disclosures, however, investors, experts, advocacy groups and the public could have opportunities to take companies to task over the inadequacy of their emissions reduction efforts and their articulation of climate risks.

Limited Risk Assessments
The next limitation is that many risk assessments only consider lower order climate risks. It’s typical to see physical climate risk assessments that consider direct local hazards and impacts such as flooding or coastal inundation, droughts, heatwaves, and severe storms affecting a particular facility. Some consider consequential impacts such as delays shipping goods if roads around a factory are cut off by flooding or storm damage.

But what we’re starting to see are cascading and compound/cumulative impacts, often where climate change acts as a threat multiplier. Towns devastated by the same or different climate disasters within months of each other, leading to structural changes in communities, or the availability of labour, insurance coverage, and capital. Unforeseen impacts to the accessibility or cost of inputs produced on the far side of the world that might render whole product lines uncompetitive or unviable.

Or how about the simultaneous failure of harvests in multiple breadbasket regions due to catastrophic shifts in growing conditions and/or collapse in pollinator populations, in turn leading to a massive spike in global food prices and widespread famine? While wealthy countries might be able to ride it out with government food aid or subsidies, it may ripple into population displacement and regional instability, at a scale we have never seen before.

If a business operates in or sells to affected regions, how would that translate to risk? Meanwhile, companies providing discretionary products and services may be hit hard as consumers’ focus switches to essentials.

Critical Misunderstandings
There are a couple of other factors related to physical climate risks that are poorly understood:

First is that the current rate of global heating is unprecedented. The earth has never heated this fast. There is no time for most natural systems to keep up with the changes, especially given the almost fanciful “overshoot” emissions mitigation pathways, which assume a hotter level of warming can be reached before as yet unproven and unscaled technologies are miraculously deployed to reduce atmospheric GHGs and turn down the heat.

Secondly, if people other than climate scientists give this any thought at all, they may blithely assume that peak warming coincides with peak global emissions, and that the temperature will start to decrease as per annum emissions reduce. Unfortunately, while we keep adding emissions, GHG concentrations in the atmosphere keep rising.

The last decade is the coolest we will experience, at least until we reach “net zero” emissions (in a way that is actually consistent with atmospheric chemistry and the laws of physics, rather than what it says on somebody’s spreadsheet). And that’s in the increasingly unlikely event we haven’t triggered multiple tipping points by then. If we have, the heating will continue, with nothing humanity can do to stop it, short of radical and highly risky geoengineering projects.

This is because most types of GHG (including carbon dioxide, nitrous oxide and dozens of industrial chemicals) are long lived in the atmosphere – taking hundreds to thousands of years to break down, and continuing their warming trick that whole time.

In fact, the carbon dioxide released by burning a tonne of coal traps additional heat (from the sun) in the atmosphere equivalent to around 100,000 times the heat energy released combusting the coal itself! Only methane breaks down in what might be considered human timescales, though while it remains in the atmosphere its heating impact is devastating, causing nearly one third of the observed warming.

Where’s the War Gaming?
Given the incrementalism assumed in many climate risk assessments, one seldom sees the sort of war gaming of seemingly extreme scenarios, but it is precisely these sorts of long tail risks that could be the downfall of many companies and governments.

And while companies should be vigilant to the tipping points of climate system feedbacks, it might be social tipping points that lead to their undoing. For example, it is increasingly observed that gratuitous consumption in the Global North, exemplified by the billionaire class with their private jets, yachts and profligate lifestyles, are responsible for a vastly disproportionate level of emissions and broader environmental harm.

Just as the inequalities of the uber-wealthy precipitated the French Revolution, it might not take much more to prompt widespread consumer boycotts and/or political backlash against brands and companies that, in and of themselves seem to have little climate risk, but are tainted by their association with big polluters.

Big Emitters Are Incentivised to Increase Climate Harm
Which brings us from physical risks towards transition risks. Here we have a classic case of tragically misaligned incentives, because the transition risks that stand out for many corporations tend to stand in opposition to the actions we must take to give our civilisation a fighting chance of surviving this century (and possibly even the next few decades).

This is highlighted in the matrix below, showing that if governments were to start treating climate as the existential crisis that it is, transition risks would suddenly become catastrophic for whole industries, particularly those involved in extractive energy and emissions intensive products and services.

No wonder such companies and their industry groups are resisting change, resorting initially to outright denial of climate science, and more recently, since it has become obvious that the climate is changing, to ever more desperate efforts to delay the introduction of policies and measures that would effectively reduce climate pollution.

It is now routine for big polluters to own the political discourse, through generous (though, in the scheme of things, trivial) donations; a network of aligned “think tanks” and media influencing policy and public discourse; and a veritable revolving door of lobbyists, advisors and politicians shuffling between industry and parliaments.Decades of neoliberalism has put short term shareholder value maximisation at the centre of corporate actions.

The central financial concept of the time value of money (a dollar today is worth more than a dollar tomorrow), rationalises corporate actions that ignore the fact that there will be no business on a dead planet (as immortalised in a viral 2012 cartoon from The New Yorker). No wonder many mandatory climate-related disclosure frameworks, including Australia’s, are targeted solely at investor stakeholders.

What Can Be Done?
Runaway climate change driven by positive feedbacks would devastate the biosystems we depend on (which are already weakened by over exploitation) and take our civilisation down with it. Having just experienced our first 12 month period with average global temperatures 1.5 degrees above pre-industrial times, there is no time to waste. There are clear limits to adaptation, particularly when it comes to preservation of biodiversity, agricultural systems necessary to feed an expected 10 billion people by mid-century, and the longer term viability of low lying coastal communities and infrastructure.

Without signs of a rapid, radical rethink of our economic system, which would need to be adopted in some form by all the major economies, it feels like we are in a downward spiral. Sure, there have been encouraging shifts in sentiment and economics around the reduction of energy system emissions, but most governments are still moving at a glacial pace versus what is required, hamstrung by the donations and lobbying power of big polluters.

Globally, emissions continue to rise. The concentration of atmospheric greenhouse gases – the only climate indicator that really matters – continues to rise. Some of the world’s best climate scientists have moved from issuing ever more strident warnings, to non-violent direct action and uncharacteristic displays of anguish and grief, so devastated are they at the world’s failure to heed their multi-decadal warnings; so terrified are they, given their foresight about what is to come.

With mandatory climate disclosures, however, investors, experts, advocacy groups and the public could have opportunities to take companies to task over the inadequacy of their emissions reduction efforts and their articulation of climate risks. A better quality risk assessment is also in the interests of the company itself.

In the first instance, ensuring disclosure requirements are comprehensive, comparable, regimented and robust is critical. Risk assessments should be informed by a range of scenarios, developed by experts, that explicitly require discontinuous and long tail risks to be evaluated along with risks up and down the value chain. Guidance should be provided to ensure complex and cascading multi-order risks are investigated.

Governments can help by providing high resolution climate projections (such as the forthcoming NSW NARCliM 2.0 release), along with country, regional, sub-regional and sectoral risk assessments informed by a range of expert stakeholders, covering both physical and transition risks.

Unfortunately, the recent watering down of the US SEC’s proposed measures (which excludes value chain risks), the lack of a double materiality lens and other shortcomings in the ISSB’s IFRS S2 Climate-related Disclosures standard, and delays to the adoption of Australian requirements are signs that our collective safety continues to be sidelined by people who do not understand – or care – about the risks.

David McEwen is a Director at Adaptive Capability, providing climate risk and net-zero emissions (NZE) strategy, program and project management. He works with businesses, community leaders, policy makers, designers and engineers to deliver impactful change. His book, Navigating the Adaptive Economy, was released in 2016.

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