Opportunities abound to create competitive advantage from adapting to climate change and the need for sustainable business

1. Can climate strategy create value?
revenues, costs and capex might be impacted by There is nothing new about being in an
changes to strategy and resolution of environment- environment of uncertainty. We live with
"…the social responsibility of business is to increase related uncertainties. uncertainty every day. Sometimes the resolution of
profits", Milton Friedman, Economist (1912-2006) uncertainty has a major impact on our operations.
The basic hypothesis is that, absent intervention by
Introduction management, climate change is likely to be value- Rarely do we think about uncertainty in terms of
destroying. probability and magnitude of impact in the way
It is generally accepted that: that (e.g.) banks, oil companies and drug
Consequently, the only logical value-creating companies do.
1. Notwithstanding its amazing resilience and strategy is to:
re-generative capability, our planet is a Climate change and its impact on business is an
finite system 1. Measure the likely size of the problem uncertainty which will take many years to play out.
2. Humanity “draws” from the planet’s 2. Develop responses (some of which might We can form views about the possible impacts and
resources at an ever-increasing rate be very small “bets” on the future) the likelihood of certain outcomes but business
3. Our “draw” on the planet exceeds our 3. Road-test the responses decisions based on a particular outcome are
“reinvestment” rate and is increasing 4. Monitor the sources of uncertainty and the incredibly risky: what if our crystal ball is wrong and
impact of the initiatives we’ve only placed a bet on a single outcome?
Many consequently believe that failure to change 5. Adjust the responses
the current relationship between humanity and The answer lies in placing small bets in an informed
nature will lead to catastrophe. manner and upping the stakes as the uncertainties
Ultimately, the objective is to turn inevitable value-
resolve.
destruction into a source of competitive
The key message from this paper is that developing
advantage and value creation.
climate-responsive strategies which create Michael Churchill BAdmin GradDip MAICD CPA SfFin
management flexibility are critical to the success of
Uncertainty is the norm
Australian businesses. Michael is CEO of Value Adviser Associates Pty Ltd and a
founding director of Climate Capital Pty Ltd. He regularly
As with all major uncertainties, two groups emerge provides expert testimony and is a regular presenter and
Good strategy and execution is at the core of all
over time: author on the topic of valuation. He is co-author of
successful businesses…
Business Valuations Digest and many published articles on
• those which are able to use the resolution valuation-related topics. His work has been used or
Can a business create competitive advantage referenced by the NSW Public Accounts
of the uncertainty to create competitive
AND improve it’s environmental impact? Committee, Deakin University MBA
advantage; and
Programme, Industry Commission
• those which are permanently competitively
Good strategy executed well manifests as rewards and the CPA Public Sector
disadvantaged. COE.
to shareholders.
One of the critical lessons from an analysis of the
The converse equally applies: a bad strategy (or
winners and losers from any major change is that
poor execution of a sound strategy) is value-
“dumb luck” does not play a part in success. What
destroying.
is shown to be a major defining characteristic of
successful businesses is their preparation, planning,
We know that value arises from future cashflows, so
the question can be directed to the subsidiary ability to navigate uncertainty and deliver swift and
decisive responses as uncertainty resolves.
issues of how the timing and magnitude of
Level 2, 65 Southbank Blvd Southbank Vic 3006
0412 066 019 m.churchill@climatecapital.com.au

2. A climate agenda for CFO’s
Do investors care about climate change? competitive advantage if the strategy is • How should customers, shareholders and
right suppliers be educated about the business’s
The short answer is: yes and there is plenty of • Member pressures – popular interest and operations and environmental impacts?
evidence. The challenge for CFO’s is to adequately awareness “notched up” several levels • What is the intensity of impact on the
respond to the investor questions. following Gore’s “Inconvenient Truth” environment – air, water, biodiversity etc?
documentary; industry funds are often • What is the relative competitive advantage
Some of the evidence of investor interest in climate supported by groups with a “voice” that the business has from the perspective
change is set out below. • Peer pressures – spontaneous creation of of environmental impact?
organisations such as the IGCC evidences
Funds managers are allocating capital based on the importance of the issues Next, the CFO should be time-lining the enquiry,
environmental performance. Many have signed up projects and initiatives and embedding climate
to the UN Principles of Responsible Investing. A valid and value-creating response is to not place change in the budget/reporting cycle at each
Investors representing over $500bn of capital have big bets early on but to develop a suite of options – level. Then there will be five key messages for a CFO
joined the Investor Group on Climate Change. effectively placing a lot of small bets whilst the to relate to the investor market:
uncertainties resolve – the CFO shouldn’t be telling
The Saudi sovereign wealth fund has committed to analysts that they have a crystal ball which presents 1. The threats and opportunities arising from
$2bn to sustainable investment. all the answers! climate change
2. The impact of an ETS on shareholder value
Asset consultants and analysts are increasingly Thoughts for a CFO’s agenda on climate change 3. The mitigation strategies adopted
embedding ESG (environmental, social and 4. How the company ranks relative to peers
governance) research into analyst reports and Is there an agenda which CFO’s should be running 5. The suite of value-creating strategies which
research. Specialist are emerging (e.g. WilderHall, within their businesses in order to respond to investor are not reliant on ever-increasing rates of
Innovest, Reputex, Regnan, Generation Investment, enquiry? consumption of the environment
Climate Capital).
A starting point is to understand the environmental
Rod Douglas MBA FAICD Chairman
Valuation mandates in relation to direct, unlisted impacts of the business by asking questions like:
assets are asking the question “how exposed is the Rod is a director of Greening Australia Ltd, and President
business to climate change”? of Greening Australia Queensland Ltd. He is a director or
• What is the direct impact of core chairs the advisory board for 7 of his clients. His clients
Funds managers are not known for making frivolous processes? span leading ASX listed financial and industrial
or risky decisions. They are taking an interest in • How do customers use the products and organizations through to professional services firms. As
climate change and the environment based on a services supplied? Chairman of Climate Capital, Rod is drawing on a lifetime
range of motivations: • What environmental impact arises in the of passion for sustainability and a belief that
social entrepreneurship (the marriage of
supply chain?
profit-seeking capital and social
• Long term view – superannuation presents • How do customers view our environmental outcomes) is the basis for Climate
a long-tail liability; pension liabilities will out- footprint? Capital's success.
live the management of most Australian • What is the elasticity of demand?
businesses • What is the potential cost of inaction?
• Competitive advantage – many believe • What is the cost of action?
that climate change represents a short- • What actions are available?
term (if not sustainable) source of
Level 12, 23 Creek St Brisbane Qld 4000
0409 553 335 r.douglas@climatecapital.com.au