Climate change risk governance

Risks & opportunities for SA SME’s

Environment Protection Authority

Sarah Barker, Partner, Head of Climate Risk Governance,

MinterEllison

21 April 2021

minterellison.com

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Minter Ellison

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The greatest risk to the global economy is not Covid-19

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Minter Ellison South Australia

Overview of today’s proceedings

A

B

C

Global context – the great acceleration

▪ What is ‘climate change’ – and why is it a

material financial risk (opportunity)

▪ Key tips for SME’s at the start of their risk

management journey

Australian context – managing

economic transition risks(and opportunities) ▪ Tennant Reed, Ai Group

SA context – managingphysical

risks (and opportunities) ▪ Dr Graham Green, SA DEW

Physical

risks in

SA

Sectoral impacts

transition risks in an Australian context

Why should business care?

Acceleration at a global level

1. Climate change as a financial risk (& opportunity)

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Minter Ellison

Three categories of financial risk associated with climate change

Legal & liability

Government, corporate, and

directors/officers

Physical

Acute and gradual onset

To the natural and built

environment

Economic transition

The response of governments, capital

markets & the real

economy

Policy/regulatory, technological & shifts in

stakeholder preferences

Minter Ellison

Physical risks

Physical

Acute and gradual onset

To the natural and built

environment

Economic transition

The response of governments, capital

markets & the real

economy

Policy/regulatory, technological & shifts in

stakeholder preferences

Legal & liability

Government, corporate, and

directors/officers

Minter Ellison

Like an ice age, in reverse; C01 levels are far higher than previous interglacial periods, and have risen remarkably fast

Atmospheric CO2 levels, parts per million

Source - Vostok ice core Law Dome ice core - Mauna Loa Observatory

400,000 years ago

Interglacial penods

300,000 years ago

200,000 years ago

100,000 years ago

400

350

300

250

200

now Sourc~ CDIAC OM

South Australia

The threshold question: what is climate change?

• What?

• Climate change – ‘greenhouse effect’ • How and why?

• Primarily emissions of carbondioxide, methane etc from human activities: combustionof fossil fuels (energy, transport, industry, manufacturing); agriculture (livestock); land use change and clearing – 40% from built environment

• When?

• Pre-industrial 280ppm vs 415ppm CO2e now – already average planetary temp approx. 1.1°C above pre-industrial average

• ‘Business as usual’ emissions: 4+°C above pre-industrial average by 2100

Significant increase in extreme heat

days

Sea level rise 20cm+ (3.4mm per

year) Warming proJe<:ted Increased variability

150 by2100

in rainfall Baseline 4.1-•.a•c

100 Increased drought, Current pollcles fire conditions 3.3-J.g•c

50

Pledges & INDC• 2,000 species 2.4-2.1·c

Betow2•c rendered extinct 1.s-1.1•c

2010 2030 2050 2070 2100 due to climate 81l,c;i,:Roclc..,__,._..IIMIIMI-.Secil10111 change in last half

century (8% of total Minter Ellison 25,000 species

extinctions)

.. .. 14% af globa

p<>pulation subject extreme heat

% plants >50°/4 range

6% msects >50110

range

90% deollne coral r

1 5m tonne dechne 1 fisheries catch

Sea levels 40an+

4 % global land ystems transform

2°c As early as

2036

37% global pop'n subject to extreme

heat

16% of plants lose >50% range

18% insects lose >50% range

99% decline reefs

3m tonne decline in fisheries catch

Sea levels 50cm+

13% global land ecosystems transform

4+°C 2100- locked in mid-century

Highest temperatures In 30 million years

Glacial melt compromises fresh

water sources

Drought over 40% inhabited land

Sea level rise 6 feet+

Extinction of >50% of all known terrestrial and marine species

Ill South Austnliil

Why do we care – and where are we headed?

▪ Gradual onset – sea level rise, ice melt,

ocean acidification, regional temperature and rainfall variations

▪ Catastrophic – extreme weather events: increase in frequencyand intensity (eg

drought, flood, bushfires, storms, cyclones)

▪ Ecological impacts include - mass extinctions of flora and fauna, biodiversity

loss, fresh water loss

MinterEllison South Australia

Changes are already here…

MinterEllison South Australia

Changes are already here…

Two boches a~e taJ(.en i.fWay by the NYC Medic.al Examiners from a dnveway m D1tmas Park in New York :1tyon Tuesday, October 30. Curtis Mun5/Au PlcturuJZum.a

MinteMlH!SfFlliSon South Australia

Impacts are non-linear: e.g. Sandy

IMATELY 20 CENTIMETRES OF SEA-LEVEL RISE AT THE SOUTHERN TIP OF MANHA SUPERSTORM SANDY'S SURGE LOSSES BY 30% IN NEW YORK ALONE. Further incre egion may non-linearly increase the loss potential from similar st

South Australia

Climate change is a threat multiplier

Estimated annual a¥erage, losses to c.rus.tom-ers from physic-al ,isks:

Findings

fJ

0Js1omera 19::irg ~u:::reasng rep3ir and rflPbcemen'I costs fcr ~~ dimage ro thar p::roperties.

lhdSI the ·gh erris-sioos [RGP 8.5} scerurio, if 'lill \l•me io cartim~ ·o lmd i these ii!"BiiS,

e:stina.ted :,moo ,a:,,erage, bsses to cusbJrners across oor h!Jllle DJ paifciio are e:.:pacled to ioor£-am by 27%. b'j 2000 -

·:. is lflSa th 1% per Ennt11 . The l!lfgesl: COlllrh.rl:rr 10 :;a las!ias Cll'I'Eflt}t arisas ifrcm soi coolraciian, oot tJ-e rocdeing :sh(llj'.:;

~ ooas:-in da1io bsseso:t.Jldincrease bJ 71% bJ 2060, ¢ma,jy we to sea. le\.'el rises.

Estimated annual anrag;e, l.oss by peril hiie-:< 42018 • 100}

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21) 100 (l

00 61'.l 40 20 0

2018 00m ;!OO!i

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South Australia

Beyond coastal inundation – implications for real assets?

Minter Ellison

Economic transition risks

Physical

Acute and gradual onset

To the natural and built

environment

Economic transition

The response of governments, capital

markets & the real

economy

Policy/regulatory, technological & shifts in

stakeholder preferences

Legal & liability

Government, corporate, and

directors/officers

Minter Ellison South Australia

Accelerating international developments

Policy & regulation

The international

regulatory environment

is shifting at an order of

Technology

Energy (stationary, transport and materials)

Market stakeholder preferences

Investor expectations continue to elevate –

despite Covid

magnitude faster than

that in Australia Beyond corporate stress-testing, to

demand Paris-aligned strategic plans

Minter Ellison

Net-Zero Targets The 126 countries that have set full decarbonization goals contribute 51% of global emissions

■ Target Under Discussion ■ In Policy Document Achieved ■ Proposed Legislation ■ In Law

Source: Climate Action Tracker Bloomberg Green

South Australia

International regulatory environment

▪ A. Net zero by 2050 policies

▪ Required to meet Paris Agreement targets to limit global warming to ‘well-below’ 2°C above pre-industrial averages

▪ From 10 to 110+ in 2020

▪ Now including EU, UK, Japan, South Korea, California, NY(all 2050) and China (2060)

▪ B. Adjacent policies

▪ Prudential – capital regulatory requirements

▪ Trade – including carbon border tariffs

*** * EU TAXONOMY * FINAL REPORT ~ . *

* .. **

Agriculture and forestry

Manufacturing

Electriaty, gas, steam and air conditioning supply

Water, sewerage, waste and remediation

Transport

Information and Communication Technologies (ICT)

Buildings

South Australia

International regulatory environment

▪ C. EU Green Finance

Regime

▪ Green Finance Taxonomy

▪ Capital regulatory

requirements?

▪ Sustainable Finance Disclosure

Regulation

Minter Ellison

November 2020

Effects of climate-related matters on financial statements

Th1sdocument1s1ntendedtosupportlhetonsistentapphcat1onofrequ1rementsmlFllS"Stimdards

Clhna1echangel1aioplelnwhlchlnYl!S10rsand OlhtrlFRS 1tauholde:rs art lnertasinJly inttrtlU!d beeawe ofi11 poiential effect on oompanle1' bwlnes1 models. ash lkiws. financial position and lln.andal pert.rm.an«. Most lndu.ttriu haw betn. or art lluly io be. affected by climate chanie and dfor11 to manage 11:11 imp~. Howe~u,omecompanles. indmln!1and activiliuwillbeati,CU!dmottthanothtn.

lFRS Standards do not Rli!ro:plld1ly ioclimate-rtlated m.atten. However.c:ompanlesmustconslder dimate-rtlatedmatteislnqplylnglFRSStandards whtn 1he effect of those matte:rs 11 mate:rial in 1he COll10:1 of the llnancial state menu taken u a whole. lnbrmatlon is m.aleri.tl' If omitting. misstating orobsc:uringltcouldrta.tOMblybeexptctedto lnfluenl'.I! decblonstha1primary11$ersofllnandal slalemenll jhel'taflH, lnw1lon) nuke on lhl! basis of thoseflnandalstalements.whlchpmvklefln;md;il Information about a specille company. fur example, lnform.arionahou1tw,,,.,manai,mentha111consldel'td dimate-rtlated matten in preparinJ a company'1 llnandal statements may be material with respect to thl!mostsigni!lc.antjudgenltntsandestimatesthal mana,tment hall made.

Tbe table btluW 11!:ts OUI txair.ples lllustrallng when lFR.SStandards ~ reqlll't companies l')C01Ulder thl!effectsofc:Hmatefflatedm.auerslnapplying 1hl!prindple1inanumberofStandards. Thellst l1IIOll-ah!Wl~therecouldbeotherliutanl'.l!1 whl!l't dimaaefflaaed matltrl art l'tievant when applylnglFRSSundards.llrexamplethmeon 1hl!measumnentofdellnedbenelltobligatloiu Rtlaledinformatlonc:an befoundlnanidl!;k_ by Niel: Andenon. mtmbtroftht lrutmatlonal h:muntlngStandards Board. Tbl:I education.al m.ate:rialcomplenlentllhatartlde,addingforexample

speciftc:paragraphl'tli!rtn<'.ellr:ilFR.Srl!!plil'tments 10a11istthoseapplylngIFRSSundard!I.Forpurpost1 ofDlumatlon,thedettriptioMlnlherabledo not alw.ays explain the rtlev.;i_nt rtquiremenl:I complffi:ly. It 1:1 thl!refort Important: 10 rtfer 10 lhl! nqu1Nmen11 In 1hl! Standards when preparlna: llnandal staltmenlL This docwnent does not addrt!l1 managtmtnt commentary.

lnadditloatothespec:i11.crequlrement1outllnedin thetablebtl.:iw.JNitl'r!!!fflfCl'mllcfFalolllialSlafflnlM COlltalns1ome'1Ytran:hinJtequll'tment1that couldbtreltvantwhencon.1iderlna:cllmattfflmd maiten.. Forexample.paraa:nphn2ofl"51requlres disdosureofinformat:ionnot1peciflcallyrequlred bylFRSStandardsandnolprtll!:n!tdtlll!:whereln 1heftnandalstaiement1hutlha1l:ll'tieYant10an understandingofanyoflhl!llnanc:ialslalements Tblsparagraph.toi,,therwllhparav,aph31oflAS l requires a company toconslderwhd:hl!ranymaterial Information ii mi:uing from 11$ llnandalstattments­le acompany ls ttqulred to conslderwhether to

pt"(Mdeaddltlonaldlsclosureswhencompllanl'.I! wilh thtlptti!lc:rtqulrt:mentslnlFltSStandards ii lnsufflo:lerutoenableinwstontoundemandtht hnpactofpa"lc:ulartransactions.otherewnt1and COllditioiuonthl!company'1llnandalposltionand 11.nandal perfonnana. c.ompan1e1 will thl!rtf0tt: need tocoiulderwhe1herr:ipn:wldeaddltlonaldisdosures when compliana with lhl! sp,ec:ilk requiuments In fFRS Standards II in.suHldenl toenablt lnYl!:llors to understandthl!lm.pae1ofc:Hm.a1efflmdm.auen onthecompany'sflnandalpositionandllnandal performance. Tllest'1Ytran:hlna:requlremen11 In 1"5 t may be especially relevant br companies whost 11.nandal posillonor llnandal ptrbrmana Is partkularlyaffectedbyc:llmatefflatedma1ten..

~-lndtl,olJISPMD'.lttKrmaJtlNb Ns-1 ◄1 hi D"...i"'-• .. -tb,dkt<fdim-aoo! !1 ol. lll<llli:itllJHidcMI-Baidou!a futlin-i--....o.mmalilq-..;ali'J'Jod-"'· IIIIIDIFR5

South Australia

Accounting and financial statements

D. AccountingGuidance Financial reporting step-change – IFRS has signalled position similar to

AASB/AuASB

Consider: what does climate risk mean for

asset useful lives, fair values, impairments,

provisions for onerous contracts, bad and

doubtful debts etc?

Technology

▪ Price parity in major markets as early as… 2022?

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Folksam ?enslonJanmarlc

alecta Iii A.CalPERS Nordea

Q:;> !itorebrand e Swtu Re

CLIMAT~ LEAGUE ►►

2030 ►

Investor Expectations for Paris-aligned Accounts

A Fundamental Reslilaping of Finan,cc

Sustainability as BlackRock's New Standard for Investing

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REGULATORY GUIDE 228

Prospectuses: Effective disclosure for retail investors

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19,341 MR Financial reporting, focuses for 31 December 2019

OAPRA

South Australia

Market stakeholder preferences – investor expectations

COMPOUND COSTS: HOW CLIMATE CHANGE IS DAMAGING AUSTRALIA'S ECONOMY

Climate change on track to make world 'uninsurable': IAG FINANCIAL REVIEW

If we donrt rapidly reduce ,greenhouse ,gas emissi .. by 2030 about 1 in every 19 prope · es could have effectively una r ab le inSllrance premiums.

Bushfires may crimp living standards long term as insurance costs hit $2b

Climate c ange a · di ex eme weather aye p ojectedl t red ce prope ty values by . · 571 ibililio by 2030. $6 1 bi lion by 2.0 5 0 and $ b11l ion by 2 0 Q_

Insurance?

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Minter Ellison

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~ Government of ~ South Australia

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Building a better Australia

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' Annual Report

• Allianz@

South Australia

What does this mean for SME’s? Increasing pressure across the supply chain – finance, suppliers and customers with net zero targets (including government)

Supply chain pressure - big Access to competitive

business & government in SA finance & insurance

2. So how do we turn risk into opportunity?

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MinterEllison South Australia

3 key takeaways - strategy

This is a material

& accelerating

financial risk (&

opportunity)

Past experience is not

representative of future

risk

Stress testing & scenario

analysis on a forward looking

basis

Think like big business

maximise value

through a strategic

approach

Opportunities in agility and

proactivity understanding

pressures on larger business

with whom you contract

Contact

Sarah Barker

Partner, Head of Climate Risk

Governance

T +61 3 8608 2928

M +61 402 220 556

EMAIL sarah.barker@minterellison.com