"Building In Climate\’s Path"


Published on

Outcome from the Climate Change Summit in Sydney in July 2009 at Zurich Insurnace

Published in: Technology, News & Politics
  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

"Building In Climate\’s Path"

  1. 1. Ethical Investor - Building in climate's path Username Remember me Login Forgot login? | Register Home Subscribe Free newsletter Ethical Investor events Advertise About Us Policies Contact us Company Research Building in climate's path Search Written by Alexandra Cain search... Tuesday, 01 September 2009 Search As the frequency of disastrous weather-related events rises, awareness is beginning to emerge about how climate change risk could affect returns on assets. Floods washing away bridges and roads, bushfires melting electricity Resources substations and telephone cables, rising sea levels drowning airports. These are not images from the latest Steven Spielberg flick but the stark realities of climate change facing infrastructure owners and investors across Australia. Sustainability Awards Analysis The basic pieces of infrastructure needed for society to function – the telecommunications networks we use every day, the toll roads we drive on, and the buildings we live and work in – are all vulnerable to Profiles the destructive force of climate change. But despite the massive development program for new infrastructure assets and ageing existing assets, few companies and investors are actively taking into Free articles account climate change risks in any consistent and quantifiable way. As better data now begins to ethicalinvestor TV emerge about global warming’s impact on our environment, questions are being asked about whether investors can properly analyse the risk of climate change events eroding the returns of the infrastructure Event Registrations assets they own. Prone to disaster If the Victorian bushfires of February 2009 and the repeated floods that have hit the eastern seaboard Corporate Monitor tables early this year are not evidence enough, other quantifiable data is emerging to suggest the number and intensity of catastrophic climate events is ballooning. Ethical funds directory As delegates at Climate Change Risk’s Climate Change and Infrastructure Expert Summit held in Diary of CSR and SRI events Sydney in late July 2009 heard, according to Professor Roger Stone, director of the Australian Centre for Jobs and opportunities Sustainable Catchments at the University of Southern Queensland, “one-in-a-hundred year catastrophic climate events are fast becoming one-in-20 year events”. Useful links At the same time Australia is embarking on an ambitious national infrastructure building program. Infrastructure Australia, the government body coordinating the national infrastructure development program, has forecast that Australia needs to invest $200 billion in the next decade. It already has Your Account announced funding for $8 billion in projects. Subscribe to newsletter Given the recent spate of natural disasters and the boom in infrastructure projects, it should follow that asset owners are starting to get a handle on how their returns on investments in ports, toll roads and Buy back issues housing developments could be impacted by the occurrence of a cyclone, flood or bushfire. But there is scant evidence this assessment is happening. “The interesting thing is that for a long time, there was an assumption that you get one significant Current Issue catastrophic event every two or three years in Australia, but now it’s once a year,” says David Smith, chief executive of insurance group Zurich Australia. Industry statistics show that between 2004 and 2008 large losses of more than $1 million to property were significantly greater in 2007-2008 than 2004-2006, he adds. This is of course of key concern to an insurer trying to figure out the value of future claims from natural disasters. Investors, trained to focus on quarterly, half-yearly or annual returns, are somewhat disconnected from this stark reality, being neither incentivised nor trained to focus on the longer-term impacts of climate change and what that means for the performance of the assets they own. Admittedly these events are often one-off occurrences – there will only ever be one Hurricane Katrina. So while investors might be concerned in the short term that their asset returns might be hurt by disasters, the diversification of their investment portfolio (only one or a handful of their assets are typically exposed to these events), coupled with the inherently singular nature of most disasters, means the impact of climate change on investment returns is not top of mind, other than for specialist analysts focused on sustainability and climate change-related issues. Syndicate Corporate response is the key Many companies with infrastructure assets are able to respond rapidly to disaster, reducing the financial impact on businesses. Telstra (ASX: TLS) is one example. http://www.ethicalinvestor.com.au/index.php?option=com_content&task=view&id=3233&Itemid=402[29/10/2009 12:15:16 PM]
  2. 2. Ethical Investor - Building in climate's path The performance of Telstra’s networks during the recent bushfires in Victoria demonstrated that its networks proved relatively resilient. “Telstra’s recovery plan meant that customers had the majority of critical services restored to an operational status within three days,” says Dr Turlough Guerin, Telstra’s group manager, environment. Telstra’s ‘Triple 3’ recovery plan is to restore all accessible core network sites to operational status within three days, temporary network restoration in three weeks and permanent restoration to customers within three months. “For a long time, there was an assumption that you get one significant catastrophic event every two or three years in Australia, but now it’s once a year” David Smith, Zurich Australia As devastating as the February disaster was, there was little material impact on Telstra’s business. But the increasing frequency and intensity of fires are not the only risks from climate change that might lead to a material impact, Guerin says, citing Telstra’s response to the Carbon Disclosure Project (CDP). “Telecommunications companies need to be aware of the potential for impacts on fixed line and mobile network infrastructure from reduced stability of structural foundations, degradation of above-ground cables from solar radiation impacts, and to underground infrastructure from increased intensity and frequency of flooding and droughts. Storm damage, extreme wind, and lightening also have the potential to lead to a loss of above ground services.” It is the loss of power to telecommunications services which is the greatest cause of network failures during extreme weather events, which is highlighted in Telstra’s publicly available CDP submission. Another significant factor for a service provider such as Telstra is that customers’ expectations change in the face of increased risk. For example, banks expect the business to act on climate change and they also want to understand what impact their major suppliers’ climate change issues could have on their business. Transurban’s (ASX: TCL) operations - toll roads in both Australia and the US – lie in the path of climate change’s destructive force.“We are committed to doing something about climate change as we want to be part of the solution, not part of the problem,” the company’s manager for sustainability, Melissa Clarkson, says. Transurban’s recent sustainability report outlines the risks that it believes are associated with climate change, including the increase in road maintenance due to higher temperatures cracking bitumen on their roads, as well as extreme weather conditions reducing the amount of road toll revenue. “Rainfall changes can alter moisture balances and influence pavement deterioration,” the sustainability report states. “Temperature can affect the ageing of bitumen, causing road surfaces to crack. This results in potholes and rapid wear and tear. “More frequent resealing treatments will overcome the problem, but at a cost. Changes in temperature and rainfall patterns can interact, with hotter conditions compounding the effects of increased rain.” According to research conducted by CSIRO in 2006, road maintenance in Australia will increase by 17 per cent for every two-degree Celsius increase in average temperature. “All the work done so far shows that our roads are built pretty solidly at the moment,” Clarkson says. “However, we continue to monitor our road assets to look for any signs of accelerated wear and tear.” Looking for data A big hurdle to investor engagement on climate change issues that could affect the performance of their assets in the long run is the dearth of material, quantifiable data about these issues. The flipside of this is investor apathy about understanding these issues. One exception is Dr Ian Woods, senior researcher with AMP’s sustainable alpha team. Woods takes into consideration three variables when assessing climate change risk: regulatory, market and weather risk. “Telecommunications companies need to be aware of the potential for impacts on fixed line and mobile network infrastructure from reduced stability of structural foundations, degradation of above-ground cables from solar radiation impacts, and to underground infrastructure from increased intensity and frequency of flooding and droughts” Dr Turlough Guerin, Telstra “I look at those things and how they impact customers and suppliers. All three factors change and vary across sectors and across the economy,” he told the Climate Change Risk summit. From his assessments, Woods says three major risks have emerged: business interruption risk; decreases in property values from climate change events such as floods; and widespread impacts from climate change on the agricultural sector. But while it’s possible to isolate these risks, the more difficult part is valuing the risk, Woods says. When evaluating the climate change risks, Woods assesses three factors for their impact on an entity’s investment potential: the impact the risks pose to operating margins; the impact on revenue growth; and the impact on insurance risk premiums. http://www.ethicalinvestor.com.au/index.php?option=com_content&task=view&id=3233&Itemid=402[29/10/2009 12:15:16 PM]
  3. 3. Ethical Investor - Building in climate's path On a more granular level, Woods also assesses risks from both a short- to medium- term perspective and a medium- to long-term perspective. AMP research shows that across all time horizons, “increased weather variability and extremes increases the risk of business interruptions, earnings volatility and potentially decreases the P/E ratio of an asset,” Woods says. A strategic concern The real question remains to what extent and by how much do these risks impact on assets and how are companies adapting their operations to these risks? It’s a question being closely considered at diversified property group Stockland (ASX: SGP). According to Siobhan Toohill, general manager, corporate responsibility and sustainability, the business’s ability to adapt to climate change risk is becoming a strategic concern, particularly given the focus of local, state and federal government on these issues. “In the past 12 months governments have been looking much more closely at these issues, especially at potential sea level rises and the impact of storm surges over 50 and 100 years,” Toohill says. In response to this, Stockland is undertaking an analysis of its projects nationally to “understand the risks of climate change and what it can do to address these risks and avoid these risks in the future.” In particular, analysis is being done on projects located in low-lying coastal and river areas, in consultation with governments and bodies such as the CSIRO. Analysis also is being done on the potential impact of bushfires on Stockland’s assets. “We need to understand what the risk is for us and how we can address these risks. Different states have different levels of controls [regarding bushfire risk mitigation] and we need to understand those controls and develop standards to respond to these regulations,” she says. Another company taking a close look at climate change risk is Lend Lease (ASX: LLC). Tony Lombardo, head of strategy and M&A, says when the company develops a project it “looks at the environment and assesses the risk of natural disasters affecting a building’s structure and we build so that it can withstand adverse conditions.” An example is the company’s properties in Florida. “There are lots of natural disasters in Florida and we look at a building’s structure and cater to the environment,” Lombardo says. Additionally, to mitigate the risks of water shortages impacting its properties, Lend Lease designs properties so that water can be recycled and there is the ability for on- site energy generation so building structures can be more self-sufficient and less impacted by environmental conditions. Slow change Despite moves by companies such as Stockland and Lend Lease to address the impact of climate change on their businesses, and specialist sustainability analysts’ queries to companies on how they intend to mitigate the risk of climate change events affecting their assets, mainstream analysts are yet to come to the party. But this should change should the emissions trading scheme materialise and impose costs on companies that are large greenhouse gas emitters. “Investors are talking about climate change issues more, especially in terms of our compliance with environmental legislation,” says Lombardo. Indeed, it’s still early days in terms of moves by companies to mitigate the risk of climate change having an impact on their business. On top of this, investor awareness is still emerging about how the risks imposed by climate change could affect the returns of the assets in which they have an interest. But over time, it’s likely that companies will routinely communicate how their businesses are responding to climate change threats and investors also will develop better tools for analyzing how these threats could affect investor returns. Samantha Elley contributed to this article. For a profile of Transurban please see p19 < Prev Next > [ Back ] http://www.ethicalinvestor.com.au/index.php?option=com_content&task=view&id=3233&Itemid=402[29/10/2009 12:15:16 PM]