Climate Resilience has been the buzzword in the market for some time, but what does it mean and why should you care?
Climate Resilience is ‘the capacity of companies and funds to survive and thrive in the face of social and environmental shocks and stressors’ [GRESB]. By shocks, we mean short term acute events like fires and floods. Stressors are the longer-term chronic vulnerabilities such as increasing heat days and precipitation levels.
Why should we care?
The need to disclose climate resilience is not going to go away. Momentum is building globally for companies to identify, manage and disclose their climate risks and opportunities.
You only need to open a paper, watch the news or even look on the streets to see that climate action is gaining momentum. The public and society as a whole are becoming more literate and conscientious about the issue and this, in turn, is influencing the investment community.
As the effects of climate change on economic activity become more significant, there is increasing demand from investors, trustees and other fiduciaries for consistent, comparable, actionable information in company reports. Investors increasingly expect Boards and Executives to actively assess and respond to climate risks.
In May 2017, a shareholder resolution at Exxon Mobil called on management to produce a report detailing the implications of a 2 degree scenario and received 62% support. This, along with similar results at other oil and gas companies’ AGMs, signals that the majority of investors in the world’s biggest fossil fuel producers see value in having this information. This is likely to extend to the real estate sector as the climate change agenda continues to gather momentum.
35% of REIT properties globally are geographically exposed to climate hazards, including inland flooding (17%), typhoons or hurricanes (12%), and coastal flooding and sea-level rise (6%). Investment managers and investors for directly held assets currently use insurance as their primary means of protection against extreme weather and climate events. However, insurance will cover damages from catastrophic events; it will not cover higher capital expenditure and operational costs and loss in value from a reduction in the asset’s liquidity.
A pattern is emerging of activist shareholders filing resolutions against corporations, particularly major energy companies, demanding increased transparency surround climate change risks and company policy [Norton Rose]. For example, in Australia in 2018, 23 year old Mark McVeigh filed legal action against Retail Employees Superannuation Pty Ltd (REST), seeking information regarding what the trustees know about the impact climate change will have on its investments and what they are doing in response to this knowledge.
A fiduciary duty is a requirement that informs investment and management practice in a similar manner to aspects such as costs and investment returns. A failure to take account of ESG issues could be seen as a breach of their fiduciary duties. Fiduciaries, therefore, need to show they have identified and assessed the risks to companies and to their portfolios.
Increasing disclosure on climate resilience
The driving force behind more effective disclosure in climate resilience is the TCFD – the Taskforce on Climate-related Financial Disclosure. TCFD is a global voluntary disclosure framework launched in mid-June 2017 to allow organizations to identify the climate risks and opportunities they expect to face, and ultimately to disclose the financial impact of these in their annual reports. As of May 2019, 648 organizations have shown formal support for the TCFD, including 118 asset management organizations.
Stockland an Australian Securities Exchange (ASX) 50 organization and Australia’s largest diversified property group, has been an early adopter of disclosure in alignment with the TCFD framework. Stockland has been identifying risks and opportunities relating to the impact of climate change for over a decade. The business response to these is guided by a Climate Change Adaptation Plan which is regularly reviewed, and a detailed Climate Adaptation Strategy, as well as business unit sustainability strategies. Whilst Stockland did not disclose the actual or potential financial impact of their identified climate risk and opportunities (which is of specific interest to investors), in February 2018, the organization lodged “Stockland’s Climate-related Financial Disclosures” on the ASX as part of their half-year reporting suite. This made Stockland the first Australian property company to disclose its climate risks and opportunities to the ASX in accordance with the Task Force recommendations.
In 2018 GRESB launched the Resilience Module within which the Climate Resilience Indicators are aligned to the four pillars of the TCFD framework, namely Governance, Risk Management, Strategy and Performance Metrics and Targets. The Resilience Module was unscored in 2019 but is expected to be integrated into the wider GRESB framework in 2020.
It is now widely considered industry best practice that organizations should consider climate change in the context of their strategic and operational risk management. As a first step, organizations should conduct a gap analysis against the TCFD reporting framework with a view to identifying and addressing the gaps across the Governance, Risk Management, Strategy and Performance Metrics and Targets pillars.
Associate Director, EVORA
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 2 degrees of separation: Transition risk for oil & gas in a low carbon world – Carbon Tracker; UN PRI page 11]