BAO 3309 Climate Change Risk Assignment Sample
Here’s the best sample of BAO 3309 Climate Change Risk Assignment, written by the expert.
Introduction
Among the main roles of the financial markets is for it to value the risk in order to help in the decisions involving the efficient and informed allocation of capital. In order to make such assessments, some of the basic factors need to be considered and those include the timely and the accurate assessment of the financial and the operating results of the past and present. However, it is also essential that the risk management and the governance factors be also taken into consideration such that the required financial results are achieved. The economic recession which had happened back in the year 2008 stands as a perfect example as to what is bound to happen when the governance of different corporations are weak and the risk management is not up to the mark.
In this study, we are primarily going to focus upon the impact of climate change upon the financial institutions and also the other emerging risks that are involved as a result of climate change. The study would also highlight the external factors of organisations.
Climate change risks:
The risks which are related to the change in climate can be divided into two sections and those include: the risks which arise while transitioning towards low carbon economy and those risks which arise as a result of the physical impacts that are related to the change in climate (TCFD, 2017).
Transition risk
There can be a series of risks which might be involved which a transition is being made towards a low carbon economy and those might include the changes in the market, the technological, legal or extensive policy in order to cater to the adaptation and the mitigation requirements which are connected to the change in climate. The reputational and financial risks involving in the transition process might vary on the basis of the focus, the speed or the nature of the changes.
Legal and policy risks: The actions around the policy in the climate change have been evolving continuously over the years the objectives of which might be divided into two sections – those policy actions which try to restrict actions which contribute to the negative impacts of the change in climate or those actions which try to promote that the climate changes need to be adapted to. A few examples in this regard include the implementation of mechanisms of carbon-pricing in order to restrict the emission of GHG, the promotion of those practices of land usage which are more sustainable in nature, the promotion of employing measure which would increase the efficiency of water usage, adoption of the solutions which are energy efficient and transitioning towards the use of energy which have lower sources of emission. The risks which are connected to the monetary impacts upon the changes in the policy are dependent upon the time and the nature of the change in the policy (Deloitte, 2018).
One more essential risk that needs to be taken into consideration is the legal or litigation risk as we have seen a rise in such cases that were brought forward to the courts by various organisations, shareholders, insurers, states, municipalities and property owners. The reasons behind such litigations mainly include the inability of those organisations to cope up with the affects of the climate change as well as their inability to disclose their material financial risks. Even as several risks related to climate change continue to grow, legal risks are also expected to rise.
Technology risk: Innovations which continuously assist the transition towards an economic system which uses energy efficiently and has lower carbon can also impact organisations to a great degree. For instance, the creation as well as the usage of evolving technologies like carbon storage and capture, energy efficiency, battery storage and renewable energy would impact the level of competency of several establishments, the costs of their distributions and their production and also the demand for their services and products from the consumers. When new technologies make their entries, the older systems get disrupted and several losers and winners emerge out of all the transitions that take place. The time at which a certain technology is developed and deployed remains very uncertain while assessing the risks of technology (Bui and Fowler, 2017).
Market Risk: Although the manners in which the markets can be impacted as a result of climate change are complex and varied, among the main ways include the shifts through the demand and supplies for various different services and products as the risks related to the climate are being taken into account more regularly.
Reputation Risk: The change in the climate is seen as a major factor behind the risk towards the reputation of an organisation as being a contributor or a detractor from transitioning into an economy of low carbon.
Physical Risks
The physical risks which arise as a result of the change in climate could be driven due to a particular event (acute) or even due to the longer term shifts (chronic) in the patterns of the climate (Rankin et al., 2011). Such risks could have a significant amount of financial impact upon an organisation which might include damage to the property or indirect influences as a result of the disruption in the supply chain. The performance of an organisation might also vary in financial terms as it might be affected due to the changes in the availability of water, quality or sourcing; security of food as well as extreme changes in the temperature which would disrupt the working conditions within an establishment. Other aspects which might be affected include the safety of the employee, the needs of transports, the supply chain and the operations.
Acute Risk: These are those risks which are basically driven by an event which might include floods, hurricanes, cyclones among others.
Chronic risk: These are those types of risks which happen over a long period of time and create shifts in the pattern of the climate such as higher temperatures which might cause a rise in the levels of sea water or cause heat waves.
Climate change: How does it differ from other risks?
The risks related to climate change are those that include the potential chronic or acute natural disasters, the change in the pattern of the climate as well as the related legal, market, technology and the changes in the policies risks of the government.
Even though there several other threats that organisations face which include regulatory risks which are very significant in the case of entities, wider technological risks and the risks of the breach of data such as cyber security attacks, many investors have admitted that the issue of climate change normally always finds a mention during their decision making processes but is failed to be addressed by the time of the publication of the annual report of the organisations. While other risks are usually predicted and prepared for by the organisations, the issue of climate change, although being acknowledged as a risk for organisations, is yet to be treated as a priority. Climate change has both the chronic and the acute characteristics and as such eludes the immediate and serious attention of organisations.
Climate related opportunities
When an organisation takes up efforts in order to adapt and mitigate toward climate change while also creating a great scope for organisations, say for instance, via cost savings or resource efficiency, adopting those sources of energy which emit low carbon, the creation of new services and products, breaking into newer markets as well as growing a sense of resilience throughout the chain of supply. The opportunities in this regard would depend upon the industry, the market as well as the region within which a particular organisation functions (AASB, 2018). There are also several regions in which an organisation might be introduced to various opportunities. Given below are some of those:
Efficiency of resources: There are a lot of examples and evidences of organisations which have minimised the cost of their operations to a great extent and also have improved the level of efficiency throughout the distribution and the production process. Actions like those can help towards the reduction of the cost of operations in the short, middle and the long terms while also contributing towards the purpose of curbing carbon emissions. When an organisation turns towards innovation, it can also help it towards the development of technologies such as LED lighting or technology of industrial motors, electric vehicles, water treatment and usage solutions, geothermal power among various other such innovations (Haque et al., 2010).
Energy source: The IEA had noted that in order to meet the global requirements for cutting down on the emission of carbon, nations would have to change a big share of their source of energy towards other renewable forms of energy such as biofuels, nuclear, geothermal, hydro, tidal, wave, solar and wind. The investment towards the renewable forms of energy throughout the world is said to have improved substantially every year over the last five years. This change towards such sources of energy has not only reduced on the total expenditure but has also improved the capacity of the storage.
Services and products: Those organisations which work towards the development and the innovation of low emission products have an advantage over their rival companies and can also shift the interests and the preferences of the producers and the consumers. Examples might include the services and the goods which lay a great amount of emphasis upon the carbon footprints of the product in its labelling and marketing like recycling services, fashion, printing, mobility, consumer staple foods, beverages and travel along with producer goods which emphasize upon the reduction of emissions such as adopting those measures which are energy efficient throughout the chain of supply.
Markets: Those establishments which are almost always constantly eyeing to break into newer markets have the capability of diversifying their processes and are at a better position of making the shift towards an eco friendly economy. A great amount of opportunities are also open for organisations looking to break into newer markets and are taking the help of the community groups of those countries, the local entrepreneurs, the development banks along with the local governments. In doing so, organisations help towards speeding up the process towards a low carbon economy. By financing the green bonds as well as underwriting can also help in the creation of new opportunities.
Resilience: Resilience with respect to the climate change involves the establishments to develop the capacity to adapt and respond to it in order to manage the risks better and also to seize the opportunities that are available. Opportunities might include the development of newer products, creating new processes of production as well as improving on the levels of efficiency. Opportunities are more available for those establishments which have a big chain of distribution and supply as well as a big range of fixed assets. Also those organisations which have a great amount of dependency upon the natural resources or the networks of infrastructure and those which need investment and financing for longer periods of time would be hugely benefitted.
Financial impacts of climate change
The insurance underwriters, the lenders and the investors need to know the opportunities and the risks which are related to change in the climate and would eventually influence the financial position of an organisation in the future. The change in the climate has a significant amount of impact upon all the sectors of the economy, the type and the level of exposure and the influence of those risks differs on the basis of the geography, type of industry or sector (Linnenluecke et al., 2015).
Basically, how much climate change would affect an organisation financially would depend upon the various different opportunities and the risks towards whom the company is exposed as well as its decisions on risk management or strategic management with regard to the controlling, accepting, transferring or mitigation.
Income Statement
Revenues: Physical risks or the transitions might influence the demand of the services or the products of a company. The establishments must also ponder upon the various impacts on the profits and also keep a check on the opportunities in order to enhance or develop newer revenues. The organisations must particularly consider about the rise in the prices of carbon and try to understand how that would impact the revenues of the business.
Expenditures: The response of an organisation to respond towards the change in the climate might depend upon the cost structure of that organisation. Suppliers with lower cost might be more resilient towards the changes in the cost and end up being more flexible while addressing those subjects. When an organisation is able to correctly convey to their consumers about how they are flexible in adapting, it would augur the overall business conducted (Ernst and Young, 2017).
Balance Sheet
Liabilities and assets: Demand and supply changes as a result of the changes in the dynamics in the market with relation to the technology, policies, or change in the climate might influence the valuation of the liabilities and assets of an organisation. The usage of reserves and long lived assets might be influenced as a result of complications arising out of the change in the climate. It is also necessary for the establishments to address the probable impacts upon the liabilities and assets as a result of the climate change. They might also focus upon their decisions with regard to the impairment, writedowns, restructuring, committed and existing activities of the future as well.
Financing and capital: The complexities which arise out of the opportunities or the risk related to the change in the climate might alter the profile of the equity and debt structure of the organisations. This might happen either by raising the levels of the equity or the debt structure or by raising the levels of the debt in order to make up for the reduction in the cash flows or for the resource and development.
Recommended disclosures
Governance: With regard to governance, a company must correctly communicate the oversight of the board with relation to the opportunities and risks that are associated with the change in the climate. The organisation must also describe the role of the management in managing and assessing the opportunities and risks related to the change in climate.
Strategy: The organisation must categories the risks identified on the basis of long, medium and short term. It must also communicate how much the changes would influence the financial planning, strategy or the organisation of the businesses. It must also tell how it intends to deal with those circumstances.
Risk Management: The company must convey how it intends to identify, assess and manage the risks related to the change in climate.
Targets and metrics: The organisation must reveal the metrics which it uses in order to assess the opportunities and risks related to climate change with regard to the process of risk management and its strategies. It should also be clear with the emission of greenhouse gas among other related risks. It must also talk about the targets which would be used by the organisation in order to manage these opportunities and risks.
TCFD principles v AASB/IASB conceptual framework
The recommendations of the TCFD are very much in line with the conceptual framework of the AASB as both emphasise upon creating a foundation for the consumers, investors and all other stakeholders of a company to be able to correctly assess the organisational opportunities or the risks related to the change in the climate upon the organisation in which they intend to invest their money upon or to simply use their services or consume their products.
The principles or TCFD as well as the conceptual framework of the AASB also aim upon making organisations more ambitious in their approach but also in emphasising them towards being more practical. Both also aim towards increasing the engagement of the investors with the senior or board managers with regard to the impacts that are related to the change in the climate.
BHP and Commonwealth Bank: A comparative study on sustainability
For doing this comparative study, we have taken into consideration the BHP Billiton group and the Commonwealth Bank and are trying to study both these organisation with regard to their performance on sustainability in the years 2017 to 2018.
Governance: BHP in their sustainability report has noted that their focus on governance is by enabling relationships between the organisation and their global, regional and local stakeholders to flourish and lay a great amount of emphasis upon their environmental and operational performances, the impact of the company on the society as well as upon the creation of benefits which last the test of times (BHP.com, 2018).
Commonwealth Bank, on the other hand, focus more upon the development of bank which is simpler in its transactions are more focused upon achieving the requirements of their customers in their main markets with greater emphasis upon the management of risk and committing themselves to good customer service and innovation (commbank.com.au, 2018)
Strategy: The strategy of the BHP group was to set clear objectives for themselves which would also benefit their innovation and development as well as help them in making correct assessments regarding their company. The strategy of Commonwealth Bank is to do what is be simpler and to deliver outcomes which are sustainable and are balanced for their stakeholders as well as for the business and to outperform themselves in the coming years.
Risk Management: Both BHP and Commonwealth Bank emphasise upon the employment of a risk based approach towards sustainable growth in which they identity the potential financial, legal, reputational, community, environmental, safety and health related risks and to employ risk managements throughout the establishment.
Targets: While BHP is emphasising more upon a sustained and a calculated progression towards achieving their targets, Commonwealth emphasises upon the need for connecting with the local groups and stakeholders and providing them with superior services as their sole target.
Conclusion
Climate change has significantly increased the level of risks among businesses but has also thrown open a wid range of opportunities to not just reduce costs but also on the efforts that are required to perform the tasks. In order to do this, organisations must seriously consider and study the various impacts climate change have upon their businesses and must also work towards developing the quality of the work force in a manner that they become self reliant and prepared for the challenges that lie ahead in future and adapt themselves along with the changing circumstances.
References
ANZ Bank. (2018), Climate-Related Financial Disclosures Australian Accounting Standards Board (AASB) and Auditing and Assurance Standards Board AUASB, Climate-related and other emerging risks disclosures: assessing financial statement materiality using AASB Practice Statement 2. December 2018
Bhp.com, (2018), BHP sustainability report 2018, viewed on 25th May, 2019, retrieved from https://www.bhp.com/-/media/documents/investors/annual-reports/2018/bhpsustainabilityreport2018.pdf
Bui, B. and Fowler, C. J. (2017), Strategic Responses to Changing Climate Change Policies: The Role Played by Carbon Accounting. Australian Accounting Review. doi:10.1111/auar.12213
Commbank.com.au. (2018), Becoming a simpler, better bank, viewed on 25th May, 2019, retrieved from https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/results/fy18/cba-annual-report-2018.pdf
Deloitte. (2018), Climate-related risk assessments and financial disclosures Our services to answer the challenge of the TCFD recommendations. June 2018
Ernst and Young. (2017), Reporting climate change risk A step-by-step guide to implementing the Financial Stability Board Task Force Recommendations for disclosing climate change risk.
Haque, S. and Deegan, C. (2010), Corporate Climate Change‐Related Governance Practices and Related Disclosures: Evidence from Australia. Australian Accounting Review, 20: 317-333. doi:10.1111/j.1835-2561.2010.00107.x
Linnenluecke, M. K., Birt, J. and Griffiths, A. (2015), The role of accounting in supporting adaptation to climate change, Accounting and Finance, 55: 607-625. doi:10.1111/acfi.12120
Rankin, M., Windsor, C., and Wahyuni, D. (2011) “An investigation of voluntary corporate greenhouse gas emissions reporting in a market governance system: Australian evidence”, Accounting, Auditing & Accountability Journal, Vol. 24 Issue: 8, pp.1037-1070, https://doi-org.wallaby.vu.edu.au:4433/10.1108/09513571111184751
Task Force on Climate-related Financial Disclosures (TCFD). (2017) Final Report Recommendations of the Task Force on Climate-related Financial Disclosures June 2017
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