Net Zero and the resources sector

Lisa France and Professor Paul Dargusch, Directors, Carbon Hub

A GUIDE TO NET ZERO

There’s no doubt that you’ve seen the phrase Net Zero in the news lately. The concept is rising in prominence—but what does it mean and why is it important to the Bowen Basin Mining Club and to the resources sector at large? This article will guide you through key principles of Net Zero and the implications of its growing popularity.

Net Zero refers to striking a balance between greenhouse gas emissions and abatement. For a firm or product to be net zero, any emissions that are released into the atmosphere from that firm or in order to make that net zero product, must be accounted for and subsequently eliminated from the atmosphere.

Going net zero implies that processes are changed in an effort to reduce greenhouse gas emissions to the lowest amount and that remaining emissions are offset as a last resort. While going carbon neutral has a similar result, it relies more on offsets in its implementation.

Notably, all greenhouse gasses have a calculated carbon dioxide equivalence, so you may hear “carbon” and “greenhouse gas” emissions used interchangeably. Many prominent firms, governments and product manufacturers are declaring their intention to go net zero over the next several decades.

For example, Japan has committed to being net zero by 2050, and in the meantime, has committed to reducing its greenhouse gas emissions by 26% from 2013 levels by 2030. Shell has similarly declared that they will become a net zero emissions business by 2050 – they are among the +30% of companies listed on the ASX200 that are making net zero or other environmental commitments.

Climate Risk and Disclosure

Climate risk is a significant component of corporate risk, which most large companies are required to report on each year. While climate risk may seem as simple as assets sinking into a rising ocean or infrastructure damage from wildfire, it is actually much more complex. Climate risk encapsulates various types of risks relating to firms. This is organised into three different risk types: physical risks (such as drought or ice melt), liability risks (exposure to litigation), or transitional risks (such as reputational or market risk).

Physical risks are likely to increase in both regularity and scale as a result of increased emissions (for instance, longer droughts and hotter wildfires), and so are an important part of climate risk assessment and reporting. Physical risks can be both stresses (which present over a sustained period of time, such as drought) or shocks (which present acute risks that are fast and intense, such as a wildfire or typhoon).

Liability risks are the climate-related risks of liability for past or present contributions to global greenhouse gasses. For example, there are increasingly common court cases like the class action brought to the Australian Federal Court regarding the endangerment of children’s and teenager’s futures.

Transitional risks include policy risks, technology risks, reputational risks, or market risks related to emissions. Assessing and disclosing this climate risk is an increasingly vital component of business practices.

For instance, lenders and financiers now address climate risks as a component of physical risk when determining lending capacity. Hence, ensuring best practices of climate risk reporting is important for ensuring access to finance as well as addressing stakeholder and consumer concerns. This is demonstrated by challenges experienced recently in the natural resource sector, as companies such as Chevron and Exxon Mobil have slipping credit ratings based on the rising risk from the energy transition.

Significance for the Australian Resource Sector

In December 2018, the Australian Accounting Standards Board (AASB) and Auditing and Assurance Standards Board (AUASB) released a joint bulletin on the impact of climate-related and other emerging risk disclosures. This bulletin proposes that entities no longer treat climate-related risks only as a corporate social responsibility issue but also include them in their financial statements.

This means that given the importance of climate risks as a financial risk and the drivers in the finance sector in Australia, firms must look ahead to ensure growth opportunities with consideration of climate risk. The disclosure requirements in Australia are comparably rigorous, which places Australia in a unique position for climate risk disclosure and reporting. The Australian resources sector is in a prime position to innovate in this space.

Opportunities for the Australian Resource Sector

The changing landscape of climate risk and reporting presents challenges to the resource sector, but there are also numerous opportunities to improve practices. The way that climate risk is categorised allows for companies to contribute to both emissions’ mitigation and adaptation to the impacts of these emissions.

Going net zero will mitigate future emissions and in turn, reduce future climate risk. While the Australian resources sector will need to play a significant role in facilitating Australia’s net zero pathway, there is also opportunity for the sector to demonstrate leadership in climate risk reduction.

Additionally, environmental taxonomies are being established whereby economic activity cannot be considered truly sustainable independent of the wider system in which it operates. This aims to integrate concepts such as circular economy, sustainable agriculture, ecological restoration, and generation of carbon offsets.

As Australia has a unique access to both resources and land assets, the country is well-positioned to implement environmental taxonomies as a strategy to build climate resilience.  For a firm or product to be net zero, any emissions that are released into the atmosphere from that firm or in order to make that net zero product, must be accounted for and subsequently eliminated from the atmosphere.