Elisa de Wit is a partner in the Melbourne office of international legal firm Norton Rose Fulbright, and leads the firm’s climate change and sustainability practice. She has 28 years’ legal practice, spanning jurisdictions in Australia and the UK.
De Wit will discuss climate-related risk. She warns that the extractive industry in coming years could experience pressure from consumers to show it is curbing greenhouse gas emissions in line with Paris Agreement targets. As a result, industry members will need to manage not only the environmental risks of climate change but the financial risks it represents.
What is your key message for the industry?
Climate risk is a broad topic that needs to be on everyone’s radar. The quarrying industry is no exception. The main theme I’ve been focusing on for some time now is the reframing of climate risk as a material financial risk, both short- and long-term.
What is climate risk?
The traditional way of viewing climate change is through a physical risk lens, ie the environmental impacts, be that increased temperatures or increased risks of flooding or bushfires. However, recent developments – eg the Task Force on Climate-related Financial Disclosures report that came out in 2017 – have highlighted other elements: transitional, legal and reputational issues.
The transitional risk is that if the world collectively decides – as it has done under the Paris Agreement – to reduce emissions, what will that mean in a policy or regulatory setting? What new laws will come into effect? What new technologies will be required for emissions reduction? What other societal or community changes will be required?
The legal risk arises from sectors not taking action to address climate change risks, and organisations failing to disclose how they will be positioned in a low carbon future.
The reputational issues are being felt in the energy sector, and increasingly in the resources sector. Historically, both sectors have generated large amounts of greenhouse gases and the position of the investment community and others now is that’s no longer sustainable in a low carbon future.
Why is there a renewed push now within the private sector to address climate risk?
I think it is the reformulation of the nature of the risk and the acknowledgement it’s not just a physical risk. Certainly within an Australian context, legal opinions have had reverberations. Our financial regulators are saying climate risk needs to be addressed, and they will monitor the finance sector’s progress. There are also pressure points on corporates and business, eg the Climate Action 100+ initiative is calling on global corporations with the highest emissions to establish targets for emissions reduction.
Why have the opinions of Noel Hutley SC and other regulators been so influential?
The Hutley opinion (2016) was the first time a senior lawyer advised that directors are potentially exposed if they don’t consider climate risk. He argued climate risk should be on a board agenda, just like any other risk – eg health and safety, or purely environmental risks – and failure to deal with the issue could lead to litigation against directors.
Following Hutley, statements by APRA, ASIC and the Reserve Bank of Australia have consistently elevated climate risk as a priority. Those bodies have conducted surveys and prepared reports to ascertain how this risk is being considered across different sectors. ASIC has issued guidance about how climate risk needs to be dealt with in financial accounting and annual reports.
It’s worth noting corporate Australia has responded. A survey last year by the Australian Institute of Company Directors found directors rated climate risk as the number one issue on their board’s agenda.
Is the change in mindset among corporates due to legal and stakeholder pressures – or is there a realisation old practices and technologies will result in financial losses?
{{quote-A:R-W:175-I:2-Q:"Climate risk is a broad topic that needs to be on everyone’s radar. The quarrying industry is no exception"-WHO:Elisa de Wit, Norton Rose Fulbright}}It’s probably both. Pressure is coming from the investment community, with shareholder resolutions advocating the setting of targets or better disclosure, but I think there has been some step-up. Some leaders have joined insurers and banks to say they won’t fund emissions-intensive projects in future. That kind of activity creates momentum as well.
I should emphasise it’s not solely about risk, it’s also about opportunity. Companies – particularly in the resources sector – looking ahead to a future with zero emissions by 2050 are already questioning how they can be positioned for that future world and how they can adapt or modify what they do now to reach that position. We’ve seen that in the energy sector, from the likes of BP and Shell.
Could quarries risk losing business if they cannot satisfy consumers they are sourcing and processing aggregates in environmentally friendlier ways?
Over time there will be pressure on the extractive sector about the sustainability of its products and the desire to have them manufactured with the lowest carbon footprint possible. BHP’s announcement of its intention to reduce its Scope 1, 2 and 3 emissions really emphasised the importance of the supply chain and how a purchaser/procurer of goods can use its influence to effect change. In terms of construction materials, the pressure will come from procurers within the private sector and within government. We’ll see more emphasis placed on the procurement of products with a lower carbon footprint.
People need to consider what quarries will look like in a net zero emissions world. We will always need quarry products so it really is about how the industry transforms itself to continue to provide these essential products in a more sustainable way.
How do you persuade businesses to adopt climate risk amidst mixed signals from government and some industry associations that Australia is meeting the Paris targets and shouldn’t need to modify its business model?
Peer pressure is effective in that context. If your peers are setting a high bar, there’s more incentive to match them. A lot of conversations with our clients on climate risk inevitably lead to the question: “Well, what are our peers doing? Where are they at?”
I think the legal risk is potentially a strong “stick”. If organisations feel exposure to litigation, then it will prompt change. There’s enough pressures from different points in the market to effect change.
Ideally, you would have strong legislation at a political level, and certainly in the energy sector we have seen what happens when you can’t get a consensus on the right policy and regulatory settings. That definitely has been an inhibitor but I think in that context there will be global pressure placed on countries that aren’t doing their bit, particularly if they’ve signed up to the Paris Agreement.
Are there test cases yet of organisations being sued for not addressing climate risk?
The litigation has primarily been in the US and overseas. There have been actions against governments for not doing enough, fossil fuel companies for generating emissions contributing to climate events, and companies for not disclosing how they were considering the risk internally. In Australia – and it’s the first action of its type globally – there is action against a superannuation fund for not properly assessing and disclosing how its investment portfolio will be positioned in relation to climate risk.
Earlier this year, the NSW Land and Environment Court upheld a refusal by the NSW Government to grant an application for an open cut coal mine in Rocky Hill. Justice Brian Preston’s decision strongly cited the mine’s likely contribution to climate change. Emboldened by this, could jurisdictions stymie future development applications on climate risk grounds?
It’s a real risk. In any litigation case, you have to look at what the law in a jurisdiction says, and there are differences at state and territory level around what decision-makers must have regard to when deciding on approvals. However, what this decision enshrines is that it is appropriate to consider the impact a development will have in a context where we are meant to be moving as quickly as possible to lower emissions.
The judge gave detailed consideration to that issue, so it sets a precedent for other jurisdictions to have regard when considering whether to allow a development if it has significant emissions. The other important aspect of this decision is the proponent’s assumption that the mine’s emissions would be offset somewhere else. From now on, I would be advising clients who are proposing developments with significant emissions impact to consider submitting an offset proposal with the development proposal.
BHP has announced it will work with its customers to reduce their emissions, as well as its own. Should extractive producers be following BHP’s approach?
BHP has been one of the market leaders on the topic of climate risk. Its plan is very challenging, in terms of its customers’ Scope 3 emissions, but it’s a welcome development. Again, where there is peer pressure and someone sets a high bar, increasingly there will be more pressure on other resources companies to adopt a similar approach.
If a small quarrying business until now has not considered its climate liabilities, what advice should it seek?
The first thing is to gain an understanding of the issues, and ideally that is done at a board level. It might be as simple as a board briefing of what climate risk comprises.
It’s then about taking that information and doing an assessment of the possible future exposure and how best to position for it. It’s a form of prudent risk management, that you assess and address it as you do any other risk. If you do that, you should be well positioned to defend yourself going forward.
How can small quarry operators – eg family companies with limited amounts of resources – protect themselves from climate risk?
Perhaps there are roles for the majors and the relevant industry associations [eg IQA and the CCAA] to do the heavy lifting, in terms of assisting members to better understand how best to tackle this risk, eg case studies, educational events. I acknowledge there are different levels of corporations and it is harder for SME-type and family-run companies to devote resources to one aspect of a number of factors that need consideration.
However, the reality is climate change isn’t going away, it’s with us now, and the trajectory has to be in the right direction to achieve those Paris Agreement targets. So there will need to be changes, and there will be technology development – and potentially costs associated with that – which will need to flow through.
My view is it’s not a matter of sticking your head in the sand. There may be resources constraints in being able to effect change, but certainly the starting point is elevating climate as a risk that needs consideration. Hence, why it’s great the IQA conference has put this topic on the agenda.
Elisa de Wit will deliver her presentation at the IQA’s annual conference at GMHBA Stadium, Geelong, on Thursday, 3 October.