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  • https://au.linkedin.com/pub/dr-georgina-davis/52/454/511

‘Carbon’

Directors are now liable for climate-change impact on their business. The complexity of this risk is not to be underestimated. Not only is the multi-national presence and operations of many companies increasingly complex, as are company structures, but the growing awareness at all levels of factors, such as inclusive capitalism through the degradation of essential services (such as air, water, biodiversity values) through to the climate change impacts on our food systems, adds increasing accountability and risk, and also opportunities for critical examination.

Yet, according to a report from the Australian Council of Superannuation Investors (ACSI), the level of climate-related closures by ASX200 companies lags behind the rest of their sustainability reporting. ACSI found that 70 ASX200 companies did not measure greenhouse gas emissions, have a policy statement on climate-related risk, or a related target in 2016. More specifically, 116 of the ASX200 companies reported greenhouse emissions, 88 companies published a policy recognising the impacts of climate change as a business risk, but only 49 companies disclosed a climate or energy-efficiency related target.

This is concerning when you consider the October 2016 legal opinion published by the Centre for Policy Development and the Future Business Council, which concluded that climate change risks would be regarded as foreseeable by courts, and relevant to a director’s duty of care and diligence to the extent that those risks intersect with the interests of the company (for example, by presenting corporate opportunity or risks to the company or its business model). And additionally, “that company directors certainly can, and in some cases should be considering the impact on their business of climate change risks – and that directors who fail to do so now could be found liable for breaching their duty of care and diligence in the future”.

In 2016, Australia became a signatory to the Paris Agreement, which commits us to take necessary action to keep average global temperatures from rising by more than two degrees Celsius above pre-industrial era global temperatures. Yet federal government leadership in Australia to transition to the low-carbon economy required is, at best, nascent.

Whilst this is a period of unprecedented challenges and change for all industries, there are emerging and substantial opportunities for our sector arising from the new biofutures agenda (biofuels and bioproducts), renewable energy targets, through to the Paris Agreement. Our sector has an essential service role in assisting other industry sectors in responsibly achieving both their environmental (including climate-change) obligations and aspirations.

A fundamental requirement for this essential (utility) sector is that our industry investments are secure and remain sustainable in all operations and service delivery throughout the community.   Infrastructure is an essential part of both the waste management and recycling sector. Assets become stranded in dynamic economies, as technological advancements foster disruption in so many markets.   A stranded asset may not be able to generate a return above the cost of capital or where its economic life ends prematurely because of technological, regulatory or market change. The term ‘stranded asset’ is now being used in the secondary-resource market to describe a resource/collected commodity which is located too far away to make it economically viable or where the quality of that secondary-resource is insufficient to be viable. Currently, our sector is experiencing significant disruption, the challenges of geographical remoteness continue and overall risk is increasing.

Despite this risk, our sector is heavily investing in new waste management collection fleets to meet local government service requirements and large-scale advanced waste recovery technologies. Indeed, this investment will increase. This effectively puts our company directors on notice regarding stranded assets.

This risk has already been well articulated for some sectors. The concept of environmentally stranded assets in the climate change context in the resources (particularly coal) and other energy sectors has already placed their company directors on notice for stranded assets. Directors must ensure that their assets are not stranded as the market for renewable energy grows and demand for fossil fuels decreases; particularly as technologies such as solar now generate electricity more economically. These ‘stranded asset risks’ are also transposed onto the associated supporting infrastructure such as the ports and rail lines. Indeed, high value, long-term infrastructure/asset investments are likely to present the most risk.

The introduction of carbon pricing for the landfill sector in July 2012, in Australia and its subsequent removal in 2014 means that our sector, more than most, fully understands the complexity of operating in a carbon-priced environment. The fear of carbon pricing and subsequent inaction has now led to structure economic problems well in excess of those than if we had simply left the carbon price in place.   Undeniably, we now face the real possibility of sudden and ‘knee-jerk’ policy solutions and political interference to address future carbon emissions across our industry. Recently we have seen policy and regulatory decisions which have directly and suddenly impacted asset values and other investments, such as the CSG moratoriums in some states. These decisions were effectively formulated through activist lobbying and, whilst the waste sector has not received the same attention as the resources sector, recent populist press coverage has drawn an unfavourable light onto landfill operations in particular.

Will landfills, for example, present a risk of a potentially stranded asset and therefore a risk to our company directors into the future? Particularly as engineering, regulatory costs (including levies, taxes and a reintroduction of carbon price) rise; the increasing adoption of more ambitious recovery or ‘zero waste’ targets, and as the gate fees of competing alternative treatment technologies decrease. While there will be a place for disposal into the medium future, what about a new landfill in planning today with a 30 year plus lifespan, accepting putrescible, carbon-rich wastes?

Consider then the cost of holding and servicing a significant financial assurance on the landfill for an indefinite period until its full rehabilitation, particularly where the plan to fill the void within 30 years stretches out past 50 years due to changes in the policy settings which impact waste acceptance modelling projections. In the accounting context, a stranded asset is one that has suffered unanticipated or premature write-down or devaluation before being fully depreciated. The asset then has a market value much less than its value on the balance sheet and can even become a liability.

Directors must understand and take account of climate risk when planning for new infrastructure investments. The framework released in June 2017 by the Task Force on Climate-related Financial Discourses is also assisting companies to disclose their climate change risks to meet investor expectations as well as meeting legal due diligence, and is considered as the ‘Gold-Standard’ for disclosure. Financial modelling of asset values is essential for our sector as innovation and technological pressures build and automation becomes more prevalent. Whilst the majority of our infrastructure assets are unlikely to become ‘stranded’, many will see their value fluctuate as political decisions come and go more frequently, waste streams change and markets fluctuate.