The impacts of fire and drought on carbon offsetting projects in the land sector

Australia’s carbon forestry projects were unscathed after the 2019-20 fires. However, the increasing intensity of forest fires and ongoing impacts of drought threaten carbon forestry projects across Australia. Can carbon forestry projects continue to expand in future, or are changes needed to ensure Australia’s Emission Reduction Fund is still viable?

In the aftermath of the 2019-20 fires in eastern Australia, community groups and the media raised concerns about the impact of the fires on carbon emissions. Forests are a crucial component of Australia’s ability to sequester (‘store’) carbon. Australia’s Emission Reduction Fund, now the Climate Solutions Fund, enables landholders to create offsets which remove (or ‘cancel out’) emissions through sequestration. At present, the Australian Government relies on the Emission Reduction Fund to meet its agreed international emission reduction targets. The Fund also provides organisations with the ability to offset their own emissions through Australian carbon credits. The vast scale of forests affected by the bushfires in eastern Australia has created concern over whether forest fires reverse the sequestration benefits of forestry projects and therefore make their offsets redundant.

What happens to a forest during fire?

Carbon is sequestered as wood in the trunks and roots of trees. Below-ground carbon represents around 45% of total carbon for some eucalyptus and acacia forests [1]. It is widely accepted that forest fires release harmful air pollutants to human health, however carbon emissions from forest fires are more difficult to report. Studies have shown that as little as 1-3% of biomass (and carbon) stored is consumed during a forest fire. However, carbon consumed depends on the fire intensity and the existing state of the environment (e.g. in drought), forest age and type, and tree mortality.

Australia’s forest carbon accounting model for the land sector (FullCAM) demonstrates how these finer details are captured, as shown in the example carbon growth curves below. FullCAM shows that if trees survive a fire, total sequestered carbon only decreases slightly. If trees are killed in a fire event, sequestered carbon reduces by about half within one year, and gradually declines to zero in the decades following. To increase carbon stocks again, FullCAM requires a replanting or regeneration event.

Figure: Sequestered carbon over time in a forest experiencing fire in 2030, as modelled in FullCAM in the Bourke NSW region

How is fire accounted for in Australia’s greenhouse inventory?

Australia’s national greenhouse accounts assume that ‘natural background emissions’, caused by natural disturbance fires, average out over time and are thus considered ‘carbon neutral’. Only a change in land use from forest to another land use (such as grassland, pasture or developed land) is registered in our national inventory.

Unlike ‘natural’ fires, emissions from anthropogenic (human-induced) fires are reported in our national inventory. Anthropogenic fires include fires that exceed a natural disturbance threshold of total land area impacted set for each state. Australia’s national inventory has only reported four years between 1990 to 2017 where fires were classified above this disturbance threshold and thus contributed to our country’s emissions. Australia has not yet reported the impact of the 2020 fires on its National Greenhouse Gas Inventory. The impact of fires on our national accounts is expected to worsen over time as drought and rising temperatures compound fire impacts [2].

How do carbon forestry projects account for fire?

For carbon forestry projects, tree mortality is used to assess the impacts of fire on total sequestered carbon and therefore the creation of offsets. Areas impacted by fire must be removed from forestry projects if the fire kills more than 70% of all trees in that area [3]. Following a fire event, carbon emissions are reconciled against sequestered carbon to ‘cancel out’ offsets that no longer represent sequestered carbon. If a project can persist for a few years following a fire, areas that have been removed can be added back to the project if they show signs of regrowth (‘forest potential’). This is a crucial aspect of carbon forestry practices to ensure land use does not change following a fire event.

If a fire kills enough trees to result in large portions of project area being excluded and offsets having to be refunded, landholders may lose the income they depend on to support land management activities and audits as required by the Fund.  Without financial support, a project is at risk of failing and being deregistered from the Fund. Although this has not yet happened in Australia, this fate befell a carbon forestry project in California, USA, after a 2015 fire.

Conclusion

The increasing frequency and severity of bush fires and impacts of prolonged drought threaten to disrupt Australia’s plans to sequester more carbon in the land sector in the future. To mitigate fire risks, the Emission Reduction Fund may have to consider how to support carbon forestry projects after fire events so that land can be added back into projects when forests begin to regrow. Appropriate fire management plays a crucial role to increase forest ecosystem resilience and ensure carbon forestry projects remain viable in the long-term. Ultimately, forest protection and sustainable forest management is still critical in the battle to reduce our country’s emissions and mitigate the worst impacts of climate change.

This article was written by Brett McKay, Manager at Point Advisory with a focus on Climate Change and Energy.

 

[1] Refer to Schedule 1: Default values for the root to shoot ratio of Eucalypt Open Forest and Acacia Open Forest used in allometric equations in the Avoided Deforestation Methodology.

[2] Refer to https://www.climatecouncil.org.au/not-normal-climate-change-bushfire-web/ for more information.

[3] As assessed by a ground survey, according to the HIR 2016 FullCAM Guidelines s2.11.

Supply chains and COVID-19: An opinion piece

Recently, I engaged in a robust debate over the perceived, or otherwise, lack of preparedness of our supermarkets and pharmacies to meet the demand of anxious customers, and their obligation and responsibility to provide basic necessities to our communities. Particularly to our most vulnerable. A proportion of the community feels that they are falling short in their social responsibility to ensure that we all have safe access to essentials.

Those of us who work in procurement know that we constantly assess our supply chains for risk. We look at macro risks, supply risks, demand risks, financial risks, transportation and logistics risks, manufacturing risks, sustainability risks, human rights risks and many more. We model scenarios, we calculate worst case, we assess impacts, and we take steps to mitigate those risks. But very rarely do we anticipate a scenario that considers all the risks at the same time.

Procurement teams are working through the responses and looking to minimise disruptions to supply chain in a scenario where the worst case worsens daily. And hopefully this time next year, we will be sharing the stories of how we made it through this state of emergency, the lessons we’ve learned and how, as a result, we build more resilient supply chains. One of the learnings is that many of our ‘best practice’ procurement models, where we seek to optimise and reduce cost – for example just-in-time manufacturing – can be at odds with planning for resilience and continuity in a world of emergency and uncertainty. How we strike that balance will be a key focus.

When shoppers walk into supermarkets and are confronted with empty shelves, it’s easy to see why it feels supermarkets are falling short of their obligations. But the reality is that these supermarkets have been taking some extraordinary measures to meet the unprecedented levels of demand – both on the supply and demand side. They have been restricting quantities for individual shoppers to ensure more people have access. They are broadening supply bases, increasing deliveries, and HR teams are busy recruiting casual staff to assist in stores. Alongside this, the individuals working in stores are dealing with frustrated and sometimes abusive customers, whilst also mindful of the fact that they are ‘frontline’ and, as workers in the community, have a heightened chance of contracting COVID-19.

The role of government in assisting with these specific challenges also needs to be acknowledged. Local government legislation placing curfews on truck deliveries restricted the ability for supermarkets to restock quickly as shelves were being stripped bare. While Queensland lifted these restrictions early last week, other states have been slower to follow, with several joining Queensland only in the last couple of days.

Supermarkets are doing the best they can under challenging circumstances. But, what about our social responsibility as individuals to each other, and to our own communities? Can we really place the burden on organisations who are made up of individuals, and generally hard-working, well-intentioned individuals, and abscond our role in this? Why are we hoarding hand sanitiser and soap, when it’s in our best interests to ensure everyone is kept safe? Why are we purchasing extra freezers to stock months’ worth of meat when we wouldn’t otherwise? Why are we forcing the elderly to line up at 7am to buy groceries? Several people have criticised the latter, but realistically, it is the only time when supermarkets can ensure that the shelves are as full as they are going to be that day. Remember, we as a community, with our panic-buying, have also forced our more vulnerable into this position.

While companies work to fulfil their responsibilities, preserve jobs within their business, preserve jobs for workers within their supply chain and generally work to keep the lights on, I hope we also remember that we have a responsibility to each other. Remember to be kind despite the uncertainty and worry. We’re all in this together.

This article was written by Sujata Karandikar, Senior Manager at Point Advisory with a focus on sustainable procurement and social impact.

Forests on fire: A brief discussion of this year’s forest fires

Appropriate stewardship of our forests is vital for people’s livelihoods, maintaining biodiversity and for mitigating climate change. Yet in 2019 we continued to lose our forests to unnaturally large and intense fires.

This year’s fires in the Amazon made global headlines. Between January and August 2019, Brazil experienced around 40% more fires than compared to the previous year. Almost 42,000 fire hotspots were recorded in August 2019 by the Brazilian National Institute of Space Research (INPE) that monitors forest loss. In August, the Brazilian government fired the chief of INPE and further forest loss reports have been postponed. Natural forest fires are very rare in the Amazon. A combination of a changing climate, policies and deforestation pressures have kindled these large human-induced fires.

The Amazon, however, is not the only forest ecosystem on fire. This year, deforestation fires have been raging across the Indonesian archipelago. Land managers use burning to clear land for agricultural purposes. If those fires are not managed carefully and conditions are too dry, they can spread uncontrollably. Forest fires are an annual environmental and transboundary air pollution problem in Indonesia. Annual dry seasons are often intensified by El Niño. The Indonesian government has been active in fighting this year’s deforestation fires, and has generally made progress in reducing deforestation in the past years, however, problem areas remain.

We also saw a significant number of fires burning in Africa, the Arctic, Europe and most recently in Australia. The spring bushfires in Queensland, NSW and Victoria have destroyed large amounts of forest and livelihoods. A combination of prolonged drought and extremely hot, dry and windy conditions have contributed to above normal fire potential, resulting in the declaration of emergency warning levels in many parts of the country. As we have seen, under these conditions, fires can be uncontrollable, unpredictable and fast moving. Fire is an important part of Australia’s ecosystems. However, a recent study analysing variability of Australian fire weather found there is a long-term upward trend in fire weather which is likely due to anthropogenic climate change. Understanding these variabilities and interactions between climate drivers and fire weather will improve forecasts of fire weather and enhance effective fire planning and active fire management. The Australian Seasonal Bushfire Outlook for instance takes key climate drivers into consideration when assessing fire potential.

These large-scale forest fires, whether in Brazil, Indonesia or Australia, are not only devastating regarding livelihoods and biodiversity, but also from a climate mitigation perspective as forests are important carbon sinks. IPCC’s Special Report on Climate Change, Desertification, Land Degradation, Sustainable Land Management, Food Security, and Greenhouse Gas Fluxes in Terrestrial Ecosystems highlights that to limit warming to 1.5°C or well below 2°C, land-based mitigation and land-use change are fundamental. The report stresses large benefits for climate mitigation when maintaining carbon stocks in forest ecosystems, for instance through forest protection, sustainable forest management, reduced deforestation and forest degradation. While the role of forest for climate mitigation has been acknowledged internationally, global tree cover loss and deforestation rates have increased. This emphasises the importance of improving the stewardship of our forests to combat climate change.

This article was written by Amélie Uhrig, Consultant in Environment and Climate Change at Point Advisory.

Modern Slavery, the ‘Trojan Horse’ for Business and Human Rights

In April, our very own Alan Dayeh spoke at the 2019 National Sustainability Conference on the importance of Australia’s Modern Slavery Act to Procurement teams, Sustainability teams, and company Directors. He likened the topic of modern slavery as the ‘Trojan Horse’ for Business and Human Rights. However, unlike the destructive outcome of the Trojan War, he spoke about how the topic of modern slavery is the entry point or the ‘thin part of a wedge’ to a broader focus on human rights across the business.

While emerging disclosure-based modern slavery and supplier transparency legislation abroad and locally can be considered by some to be simple from a strict compliance perspective, the truth is that it notes the beginning of a larger challenge of human rights for businesses. With this challenge there are hidden dangers that procurement and sustainability teams, and indeed Directors need to be aware of!

The Australian Modern Slavery Act (2018) makes clear its alignment with the UN Guiding Principles on Business and Human Rights (UNGPs). This means that organisations who take a simplistic approach to meeting modern slavery legislation without thinking about their broader human rights impacts do so at their peril.

Here’s a snapshot of the key points:

Procurement managers need to understand that it won’t be enough to simply ask suppliers a few questions on slavery in order to tick a box as other human rights issues impact the supply chain. They need to:

  1. Go beyond tier 1 suppliers
  2. Be aware of other human rights risks that go beyond modern slavery
  3. Capture data and regularly engage with suppliers and the sustainability team

Sustainability managers need to understand that modern slavery is part of a global trend towards increased disclosure and assessment of human rights impacts across the whole value chain of their business and will need to integrate these perspectives in their existing frameworks and reporting. They need to:

  1. Support/guide the business in adopting the UNGPs and creating a human rights policy commitment
  2. Map material topics through to relevant human rights
  3. Determine salient issues and incorporate into human rights due diligence

Directors need to understand that the processes by which their organisations consider the issue of Business and Human Rights will be critical to meeting modern slavery legislation as well as meeting the UNGPs. They need to understand the types of questions they could be asking of management regarding the associated risks.

Questions like:

  1. Across our value chain, including our core operations, what are our most significant impacts on people (not just the business)? – Have we performed a Human Rights Impact Assessment? And do we know our most salient issues?
  2. What are the brand and operational risks as a result of issues in the supply chain?
  3. What are the impacts to the business if accused or responsible for breaches in human rights?

 

This article was written by Alan Dayeh, Managing Principal at Point Advisory.

Solving Victoria’s waste problem – is all recycling created equal?

Recent international restrictions on the import of waste materials have left Victoria’s (already stretched) resource recovery industry reeling. Stockpiles across the state, of otherwise recyclable material, continue to grow rapidly. And, so too does the fire risk. Following the 2017 fire at the Coolaroo recycling plant, EPA Victoria upped its scrutiny and began shutting down such plants until high-risk stockpiles could be addressed (which, in at least one case, meant sending hundreds of thousands of tonnes material to landfill). In light of this, Victoria’s intended transition to a circular economy looks… challenging.

Fortunately, there are a number of promising developments that could help increase our economy’s ‘circularity’. For example, Alex Fraser has just opened a new glass recycling facility, supported by funding from Sustainability Victoria, to create clean, ground, recycled glass sand for use in road and other construction projects. Sustainability Victoria has also provided assistance to Downer EDI and Close the Loop to trial the inclusion of soft recycled plastic in asphalt binder. Given Victoria’s healthy pipeline of infrastructure projects, these (and other similar) technologies present an unprecedented opportunity to boost the demand for recycled materials and to deplete our stockpiles without sending valuable resources to landfill.

However, as promising (and preferable to the current state of affairs) as these recycling technologies are, they cannot alone lead to a truly circular economic model. These technologies ‘down-cycle’ materials from a high value form (e.g. bottles) to a lower value form (e.g. sand). In effect, this aligns the second law of thermodynamics, which holds that all natural systems tend towards higher states of disarray (entropy). A resource recovery model based solely on such technologies risks establishing a ‘downward spiral’, where materials are recycled only until they reach a zero-value form. Waste to energy projects present the same concern.

A circular economy must also include ‘up-cycling’ processes, adding value to reclaimed materials and creating more complex manufactured products. Recent trials by Sustainability Victoria, Integrated Recycling and Monash University of recycled plastic railway sleepers are a good example. Establishing robust up-cycling processes is inherently challenging. Doing so basically pushes against the second law of thermodynamics. However, it is not impossible. The creation order, structure and value from disarray is one of the defining features of the global economy.

In short, we should certainly embrace technologies that can help us address our immediate resource recovery problems. However, we should not let these quick wins lull us into complacency. The problems faced by our resource recovery industry have been decades in the making. Closing the loop on a circular economy could take just as long. We have only just started the journey. We should keep moving.

 

This article was written by Ben Sichlau, Principal at Point Advisory.

Climate risk series: Deriving strategic value #1

At the twenty first Conference of Parties (‘COP21’) in Paris in 2015 an agreement was reached on the imperative to limit global temperature rise to well below 2 degrees Celsius above pre-industrial levels by the end of the century. The Paris Climate Agreement has since led to increasing calls for governments and organisations to take ambitious action on climate change mitigation and adaptation. In this context, mechanisms such as the Science Based Target Initiative and the recommendations of the Task Force on Climate-related Financial Disclosures (‘TCFD’) have been developed to support organisations in understanding and embedding climate change considerations in the way they operate.

Since the release of the TCFD recommendations in June 2017, 785 organisations have committed to support the framework and 340 investors with nearly $34 trillion in assets under management are asking organisations to report under the TCFD[1]. This has translated in a strong push for action by companies to understand the exposure of their business to physical and transitional climatic impacts.

To monitor the implementation of the TCFD recommendations, the Task Force recently released its 2019 Status Report. In developing this report, the Task Force reviewed financial filings, annual reports, integrated reports and sustainability reports for over 1,100 organisations across 142 countries.

On the back of this report, and informed by other international media and our own observations through the work we do with our clients, we will publish a series of articles to discuss the progress to date, the key challenges faced by organisations and ways to overcome them. This first article discusses the importance of governance and ensuring the relevant people within your organisation understand their role in integrating climate change considerations in defining your business’ strategic direction.

Article 1: Governance

Key finding of the TCFD 2019 Status Report: “Mainstreaming climate-related issues requires the involvement of multiple functions”.

Breaking organisational silos is fundamental to truly embed climate change considerations into the business’ decision-making processes in an effective and efficient manner. Climate change can affect multiple functions within an organisation and therefore they all need to come to the table when discussing how climate-related drivers can impact (negatively or positively) the resilience of the business.

In our experience, an impactful way to bring everyone along on the journey is through tailored, carefully designed workshops. We have designed and facilitated several of these workshops and, gratifyingly, have been able to see Executive Leadership Teams, Board members and cross-functional senior management reach a common level of understanding of how different climate futures can impact their business. We found that the presence of one or more strong advocates from the most senior level of the organisation at these workshops can greatly help set the tone and drive participants to get on board and take ownership.

In some instances, we have observed a disconnection between the Board and the Executive Teams when it comes to driving the implementation of the TCFD recommendations. The Board wants to see the business respond to the challenge, but the Executive Teams may not always be able to prioritise the issue and find the best way to tackle it. This can lead the organisation to undertake climate risk work (frequently led by the Sustainability Manager) without having the full understanding and support of the Executive Team, producing outcomes that become hard to implement and embed within the organisation or that struggle to get the financial or operational support they require. While this will still allow the organisation to report on work done under the TCFD, it does not enable the business to access the strategic value that comes from truly cross-organisational scenario analysis work. It may also lead to incremental rather than transformational action, which is a missed opportunity for the organisation to think strategically about climate change and enhance its competitive edge.

Effective internal stakeholder engagement, not only at the beginning but all along the journey, is the best way to avoid this false sense of progress. This, coupled with a review of the organisation’s governance structure, processes and reporting lines, will ensure climate change is fully embedded in the governance of the organisation and decision-useful processes and disclosures can be developed.

When assisting our clients with climate risk-related governance and stakeholder engagement work, we involve our most senior staff, bringing the required strategic thinking, industry knowledge and relevant expertise to facilitate the discussion with your Board and Executive Team to achieve the desired outcomes. We are experienced workshop designers and facilitators, and bring a deep understanding of governance structures and processes gained through both in house and consulting experience. Some examples of our work to date include the design and facilitation of a climate risk workshop for Treasury Wine Estates’ Executive Leadership Team, the delivery of a climate-related physical risk assessment for a large multi-site industrial client, a TCFD disclosure gap analysis and climate risk assessment for Incitec Pivot Limited, and the development of Westernport Water’s Climate Change Adaptation Plan, amongst others.

If you would like to know more about our team and how we can help, please refer to our Climate risk & TCFD services or contact Marisa Sánchez Urrea.

This article was written by Marisa Sánchez Urrea, Senior Manager Climate Change & Energy.

[1] TCFD 2019 Status Report: https://www.fsb.org/wp-content/uploads/P050619.pdf

Businesses lead the way with voluntary carbon offsets

The international carbon market, which includes both compliance and voluntary offsets is currently experiencing significant change as it evolves from the old ‘Kyoto Protocol’ to the new ‘Paris Agreement’.

Negotiations around Article 6[1] are ongoing and whilst some progress was made last December in Katowice at COP24, the draft text was scuttled at the last minute and subsequently removed from the (Paris) rule book. As such, governments have agreed to revisit Article 6 again this year at the UN’s mid-year intersessional in June with a view towards trying to reach final agreement at COP25 in December.

Once finalised the Paris Agreement (including Article 6) will essentially create one big new international voluntary carbon market as opposed to the old Kyoto Protocol which was a compliance based system. This is due to the nature of the pledges that have been made, known as INDCs (Intended Nationally Determined Contributions) which are non-binding at a government level.

Whilst the Paris Agreement is not the only game in town, on balance it is likely to increase international carbon prices post 2020 once the new rules around Article 6 (market-based mechanisms) are finalised, particularly the ones around the eligibility of specific unit types. Internationally several compliance markets are currently trading above AU$10/t (Source: Carbon Pulse) with some markets such as EUAs in Europe already north of AU$20/t. The exception to this rule is China’s new (pilot) emissions trading scheme that is currently sitting around AU$6-8/t.

Under the Paris Agreement, governments have agreed to (voluntarily) manage their own commitments going forward and to report back to the UN on their progress every five years whilst also scaling up their ambition as they go. Thus, attempting to prevent catastrophic global warming under a system where countries have agreed to monitor their emissions and collectively rachet them down going forward – assuming all goes to plan.

Whilst this voluntary top down approach is not perfect, it gives individual governments the opportunity to decide what levers to pull locally to meet their targets, the mechanics of which, the UN has been wrestling with for years.

In addition to Article 6 there are also several other interesting things happening globally which may or may not intersect with it (and the Paris Agreement) depending on the final text that is chosen. This includes how the old Clean Development Mechanism (CDM) and Joint Implementation (JI) mechanisms may or may not play a part under Article 6, the aviation industry’s intent to mitigate its emissions under CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation) and the existing voluntary carbon market driven by motivations other than compliance.

Of particular interest in Australia is the existing voluntary carbon market which has been surprisingly buoyant of late. No longer are Australian businesses and numerous local governments prepared to sit around and wait for international negotiations to be finalised. Instead they have decided to step up and take a leadership role in the battle against climate change by committing to becoming carbon neutral.

This bottom up approach by leading organisations compliments the UN’s top down international method well, hopefully at some point allowing us to break through the political barriers that we are currently seeing.

In the short term, savvy carbon buyers are also taking advantage of historic low (voluntary) carbon prices internationally and banking offsets as part of their internal procurement strategies.

Last year Ecosystem Marketplace reported the average price internationally of all voluntary offsets transacted across all project types to be AU$3.35/t or US$2.4/t (Source: 2018 Outlook and First Quarter Trends), noting that it is still possible to procure carbon offsets at even lower prices if purchasing in volume. This is due in part to the current lack of certainty around Article 6 and which type of emission reductions may or may not be eligible under it post 2020.

This in turn allowing “early-movers” a cost-effective transition towards their public carbon neutrality commitments and the opportunity to get ahead of the curve.

 

[1] Article 6 of the Paris Agreement forms the legal framework to allow use of market-based climate change mitigation mechanisms to meet emission reduction targets.

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This article was written by Nathan Dale, Head of Origination at Bundle

Bundle (a Point Advisory brand) is a brokerage firm working across several sustainability and environmental markets. Bundle specialises in voluntary carbon offsets, low carbon finance and project advisory services, both in Australia and across South East Asia.

For further information please contact nathan@pointbundle.com

Expanded service offerings – Human rights

Point Advisory is pleased to announce that we are expanding our service offerings in 2019 to include a new business line – human rights.

Time to get started on ‘Business and human rights’

With the enactment of Australia’s Modern Slavery Act in late 2018, companies with annual revenue over $100 million will need to make annual public reports (Modern Slavery Statements) on their actions to address modern slavery risks in their operations and supply chains. The below diagram summarises the requirements that commence in financials years commencing in 2019.

What is modern slavery?

Modern slavery relates to a range of significant human rights breaches typically on people in vulnerable situations and includes human trafficking, slavery, child labour, debt-bondage, forced labour and personal servitude. It can occur within an organisation’s operations and supply chain.

Point Advisory can support your organisation in meeting the requirements of the new Act and enhance your approach to respecting and advancing human rights. Our team has practical experience in implementing responsible sourcing practices, meeting the requirements of modern slavery legislation globally, developing human right policies, and benchmarking human rights performance.

For further information on our human rights services visit our website or contact Alan Dayeh

Climate change and human rights: Our integrated sustainability approach

The Human Rights Council has stressed that it is critical to apply a human rights-based approach to guide policies and measures designed to address climate change. To support this, our climate change and human rights specialists work together to incorporate a rights-based approach to ensure that climate change strategies, risk management, mitigation and adaptation programs do not detract from the corporate responsibility to respect human rights. This includes considering risks of creating unintended inequalities, vulnerabilities, or discriminatory practices as a result of our clients’ climate change responses. Climate risk and the recommendations of the G20’s Financial Stability Board’s Task Force on Climate-related Financial Disclosures (‘TCFD’) are increasingly becoming a topic for discussion for Boards and investors.

Showcase – Climate Risk

As ASIC said towards the end of 2018, “Climate change is a foreseeable risk facing many listed companies in the Australian market in a range of different industries. Directors and officers of listed companies need to understand and continually reassess existing and emerging risks (including climate risk) that may affect the company’s business.”[1]

Point Advisory has developed a suite of services that brings together our team’s capabilities in risk management, economic modelling, scenario analysis, carbon management, target setting, adaptation planning and corporate reporting to offer end-to-end support as organisations look to understand and manage their climate-related  risks and opportunities in line with the TCFD recommendations.

We are pleased to have supported several clients in their climate risk journeys recently, including the delivery of a climate-related physical risk assessment for a large multi-site industrial client, a TCFD disclosure gap analysis and initial climate risk assessment for Incitec Pivot Limited, and the development of Westernport Water’s Climate Change Adaptation Plan, amongst others.

For further information on our climate risk services visit our website or contact a member of our team – Christophe Brulliard and Marisa Sanchez Urrea

[1] Australian Securities and Investments Commission, September 2018, Report 593: Climate risk disclosure by Australia’s listed companies.

The Seven Steps of Climate-related Scenario Analysis

Planners and decision makers are often required to develop strategies in the face of an uncertain future. Climate change adds an additional (and substantial) layer of uncertainty to the mix.

Scenario analysis is an established method for developing and stress testing management responses under such conditions of deep uncertainty. Effectively a ‘what-if?’ test, each scenario presents a combination of plausible and internally consistent future events to planners and decision makers. A set of scenarios is used to span a range of possible futures that are outside the timespans of day-to-day decision-making.

In June 2017, the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (FSB TCFD) suggested that “organizations should use scenario analysis to assess potential business, strategic, and financial implications of climate-related risks and opportunities…”. The FSB followed this with a Technical Supplement on the use of Scenario Analysis.

Point Advisory have found the FSB’s technical supplement to be useful in application. However, we have also found that some organisations have difficulty in translating the FSB’s guidance into tangible steps. To assist, we have developed the following seven-step approach:

  1. Establish the organization’s context: Scenarios should be relevant to the organisation’s environment, including markets and competition, supply chains, etc. The planning horizons will be important in defining scenarios’ own milestones.
  2. Understand current governance: Scenarios will facilitate decision making; scenario development therefore need to be cognisant of how decisions are made.
  3. Assess climate-related risks and opportunities: This step could be the subject of its own article (or text book). Climate related future scenarios will modify these risks, but it is important to have a solid starting point and understand the risk areas to make sure scenarios have a higher level of resolutions within those areas.
  4. Develop the scenario set: This is the crux of the matter. Based on research and consultation, a set of scenarios can be defined. To ensure they are useful all assumptions should be clearly stated and then reviewed by key internal participants. The resulting scenarios should be plausible, internally consistent, relevant and challenging.
  5. Apply the scenarios: The scenarios are but a tool. Planners and decision makers use them to explore the implications of scenarios on decisions, strategies or objectives. This is the “stress test” and the key question to be asked is: How would existing (or proposed) strategies, decisions or actions perform under each scenario?
  6. Use the results of scenario analysis to influence strategic planning or to improve existing management responses. This is best done by embedding insights from the previous steps into processes, policies and the culture of the organization.
  7. Close the governance loop: Monitor, review, document, disclose and repeat as appropriate.

For further information please contact Christophe Brulliard and Ben Sichlau.

Scope 3 emissions and Science-Based Targets

Companies responding to the CDP Climate Change questionnaire are rewarded for setting science-based targets. However, many companies committing to the Science-Based Target initiative (SBTi) are failing to meet the SBTi criteria, and the largest reason for failure is the inability to meet the Scope 3 requirements.

For many global businesses such as BT, Optus and Pfizer, supply chain emissions contribute a significant proportion of their total carbon footprint. In an ideal world, everyone would commit to their fair share of the effort required to keep the world under a 2 degree increase in average temperatures and hence scope 3 emissions would not need to be considered. We are however far from this ideal situation. Therefore, all Science-Based Targets need to include these Scope 3 emissions sources and companies need to work with their upstream and downstream partners to reduce their Scope 3 emission inventory. However, assessing supply chain carbon emissions is typically not an easy task, and the more diversified the supply chain is, the more difficult it becomes. Therefore understanding where greenhouse gas emission ‘hotspots’ are in a company’s supply chain is often the first step in developing a pathway to setting and achieving a Scope 3 SBT.

One way of identifying and quantifying these supply chain emissions is to apply an Economic Input-Output Life Cycle Assessment (EIO-LCA) method to supply chain expenditure. This estimates the materials and energy resources required for, and the greenhouse gas emissions resulting from, activities in the economy, and can be applied to a company’s supply chain, for a first estimate relying on industry averages. The image below shows a high-level overview of Optus’ SBT setting process, which used EEIO methods to identify supply chain emissions, and was integral to their Sustainable Supply Chain Management (SSCM) strategy.

Point Advisory have the capability to assist your business in:

  • Completing a Scope 3 screening exercise in line with the SBTi requirements
  • Identifying primary and secondary data sources for calculating your Scope 3 emissions
  • Developing a Scope 3 supply chain inventory using the latest EEIO models.

Please contact Ben Sichlau or Caoilinn Murphy for further information.