Measuring the cost of climate change
This year, ISF was engaged by Climate-KIC Australia to lead the research component of their Climate Measurement Standards Initiative (CMSI), a resource that will help insurers, asset owners and banks to set a price on future climate-related replacement costs of residential and commercial buildings and infrastructure in Australia. We spoke to Dr Scott Kelly, who spearheaded ISF's research and sat as a member of the CMSI secretariat.
What was ISF's role in the CMSI project?
ISF conducted background research on international best practice in climate scenario development, undertaking multiple surveys across dozens of financial representatives, co-facilitating workshops and contributing to discussions across three committees including climate science committee, finance committee and the applications committee.
In your scenario analyses, you look at a range of sectors and how climate change and weather volatility might affect them. Is this a relatively new approach?
The motivation for this research has come off the back of the Taskforce for Climate Related Financial Disclosure (TCFD), which is now the de-facto standard for reporting against climate risks within business. It was first released in 2017 and provides a high-level framework for undertaking climate scenario analysis. Although the TCFD has already transformed the way that organisations think about climate risks, it falls short on providing the necessary detail required for organisations to report accurately and at sufficient resolution on the types of physical and transition risks that may impact their business model in the future.
As the TCFD is global, it also does not provide specific detail on material risks that are important for Australia. What is novel from an international perspective is the fact that the process we have undertaken with CMSI is that the process is industry led. In other jurisdictions across the world, governments are playing a much larger role in facilitating the establishment of reporting guidelines for climate risks. The initiative also involved leading climate scientists, reporting standards professionals, service providers and academics from across Australia.
Another innovation of this project was the fact that it brought financial practitioners from across the sector together including insurance, banking and investment for the first time. This first phase of the CMSI has a focus on physical risk, with the intention to increase the scope to other areas including transition risk in the future.
Up until very recently organisations across the world had no idea about the physical and transition risks that their organisations would have to deal with now and in the future. By going through the process of undertaking climate scenario analysis for the organisation, it allows the organisation to see how different climate futures may unfold...
Why is a study like this important?
The impact of climate risk reporting is hugely significant for transitioning to a low-carbon future. As a student of sustainable development, one of the first things you get taught is that measuring and understanding sustainability is the first step on the journey.
Up until very recently organisations across the world had no idea about the physical and transition risks that their organisations would have to deal with now and in the future. By going through the process of undertaking climate scenario analysis for the organisation, it allows the organisation to see how different climate futures may unfold across low-carbon or high-carbon transition pathways and how these scenarios may have an impact on the future success of the organisation. It then prompts the organisation to start thinking about how they can develop organisational resilience to these possible future pathways. That might involve adapting infrastructure to the risks of climate change, divesting from fossil fuel assets or working with counter parties to decrease their exposure to climate risk.
Investors are increasingly requesting that companies undertake climate scenario analysis so that they have a better understanding of the potential for climate risks the organisation might be exposed to. The accounting standards associations both in Australia and internationally are also increasingly requiring that organisations report on the materiality of climate risks within financial reports. Climate scenario analysis is therefore fundamental to understanding the evolution of these risk and how they may manifest over time. As organisations start to get a better handle on these risks, and as investors and consumers start to seek low carbon opportunities, the start of a significant market transformation process will occur. Those organisations that have developed strategies for the low-carbon transition or the physical risks of climate change will be better off than those that haven’t, and those that continue to ignore these risks will ultimately be left holding on to stranded assets that are worthless and no one wants to buy.
The CMSI produced two reports during this project: financial disclosure guidelines and climate science guidelines.
The financial disclosure guidelines seek to develop a common interpretation of the TCFD recommendations and aim to improve the comparability of climate-related disclosures for Australia.
The climate science guidelines are based on a review of current scientific literature and independent expert assessment on the expected change in behaviour of physical risks under the climate scenarios recommended in financial disclosure guidelines. The specifications aim to ensure that disclosures are based on the best available science, and to improve the comparability of disclosure.
Download the full reports here.