At the end of September 2015, Mark Carney (Governor of the Bank of England) made a speech at a Lloyd’s of London dinner. During this landmark speech, he elevated an issue to a new level. The issue is a consequence of the Paris Accord. In signing the Paris Accord, the world’s governments have agreed to limit global warming to 2oC. This decision may result in fossil fuel companies being unable to extract and sell all of their proven reserves of fuel.
In the recent past, there have been examples where changes in government policy have had a dramatic impact on the value of equity prices. The fortunes of the top five largest US listed coal companies are a salutary reminder of how quickly markets act. In the space of five years, the share prices of these companies were dramatically reduced - with some of the companies filing for Chapter 11.
Mr Carney was concerned that the investments of UK insurance companies would be placed at risk if the share prices of the fossil fuel companies suffered a downward correction. This is because insurance companies are heavily invested in fossil fuel company shares. Addressing this risk has now entered the mainstream of regulators, risk managers and asset managers.
As a result of this concern, an eminent task force, chaired by Mr Michael Bloomberg, was established earlier this year to address this issue. The Task force on Climate-related Financial Disclosures (TCFD) will develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders.
In order to address the various aspects of this issue, Climate Alliance was very fortunate to secure the services of Dr Paul Fisher, until recently an Executive Director at the Bank of England. During a whirlwind tour in October, Dr Fisher addressed many organisations in Melbourne and Sydney. See here for details of the press coverage. His talks addressed the policy, transitional and physical risks facing organisations as a result of the agreements reached at the Paris Accord.
Climate Alliance hosted its conferences in Melbourne and Sydney. Dr Fisher was the Keynote at each event, with Mr Rob Gell the MC in Melbourne. Sarah Barker, of Minter Ellison addressed this issue from the perspective of directors’ fiduciary duties. She addressed their duties as required in the Corporations Act and suggested that their fiduciary duty is the sum of their actions taken in good faith and best interests of the corporation plus their competence – demonstrated by due care and diligence. In summary, Ms Barker said directors had little choice but to consider climate change risk in the same manner as any other business risk.
In Sydney, Pauline Vamos (until recently CEO of Association of Superannuation Funds of Australia) addressed the Conference audience and spoke about this issue from the perspective of an investor. Mr Maged Girgis, Partner at Minter Ellison addressed directors’ fiduciary duties.
CAL encountered considerable interest from a broad section of the business community. The two primary areas of interest were investment risk and directors' fiduciary duties.
Investors have ample information to enable them to thoroughly assess the risks associated with climate change and the resulting policy changes that may ensue.
Directors of entities that invest funds on behalf of their shareholders or customer have a duty to take this risk seriously and are no longer able to claim that climate change is not real; or that they were unaware of the risk.
As Dr Fisher was quoted in The Saturday Paper: “This is a financial risk if you’ve got a long-term asset portfolio. Forget the ideology, do the risk analysis, otherwise you’re not meeting your responsibilities. We need to sweep the politics to one side and say this is just a commercial business risk, like any other, that we need to take into account. It’s coming, and ignoring it or pretending it isn’t there is not going to help.”