Ian Dunlop | Corporate Heads in the Sand: Global Warming, Risk & Governance

Global warming is about risk and uncertainty.  Many factors probably contribute to it, including natural variability. However, it is beyond reasonable doubt that the world is warming and that human carbon emissions are a major contributor.   The risks of destabilizing the climatic equilibrium under which humanity as we know it has developed through the 11,000 years of the Holocene period are now escalating rapidly.

The glaring omission in current national discourse is any mention of these risks.  The credible climate scientists have been sounding urgent warnings for some time.  Politicians interpret these warnings in terms of  “political reality”, proposing action which is far from that required.  No-one is addressing the real risks.  The science on an issue this complex will not be settled for a long time, but that requires even greater prudence in managing risk and uncertainty, particularly where climatic changes may be sudden and irreversible.

Sound corporate governance requires boards of directors to act honestly, in good faith and to the best of their ability in the interests of the company in perpetuity. They must also ensure risks are identified and suitable systems put in place to manage those risks. Global and national institutions are now indicating that global warming is one of the greatest risks we face, in both the short and long term. Thus its risk management should be a major concern and responsibility of the corporate sector, a responsibility the sector in Australia has steadfastly refused to acknowledge.

Which makes recent public pronouncements by some corporate luminaries of particular concern; David Murray, Chair of the Future Fund, opined that carbon dioxide was not a pollutant, there was no correlation between carbon dioxide and global warming, and that the amount of ice in the world was slightly increasing, not decreasing (AFR “Lunch with David Murray” 10th June 2010)

Belinda Hutchison, Chair of QBE Insurance, insisted that the recent natural disasters in Queensland had nothing to do with climate change, as demonstrated by “research received” (SMH “QBE blames La Nina for Disasters” 20th April 2011).

Dick Warburton, Chair of the Board of Taxation, Citigroup and other public companies, Peter Farrell, Chair of Resmed, and Geoff Lehmann, former Chair of the Australian Tax Research Foundation, re-iterated at length minority scientific opinion, accepting that carbon dioxide emissions have a warming effect on global temperature, but implying that the sensitivity of temperature to increasing carbon dioxide concentration was far less than claimed by majority scientific opinion, to the point that the effect was unimportant. The bottom line being that “Adaptation to adverse climate change, if and when it does occur, may be the best and only viable strategy.” (Quadrant “The Intelligent Voters Guide to Global Warming”, March/April 2011)

These categoric statements stand in stark contrast to the opinion of major Academies of Science around the world and key scientific organisations such as the CSIRO, WMO, BOM, NOAA etc. that most of the global warming in recent decades can be attributed to human activities and that urgent action is required to reduce emissions if potentially catastrophic outcomes are to be avoided.

The risk equation is simple.  If we take serious action to reduce emissions, the cost is likely to be a manageable 3-5% of GDP, increasing the longer action is delayed.  If global warming turns out to be as the scientific majority believe, with major adverse implications, we are as prepared as we can be to minimise the effects, and to adapt to those we cannot avoid.  If the minority view proves correct, with minimal climate impact, we end up with a cleaner, less polluted and healthier environment, which we need for a multitude of other reasons.

If we take no action and the minority view proves correct, then it is “business-as-usual”. On the other hand, if the majority view proves correct, the world faces catastrophic outcomes totally unprepared, with an impact potentially worse than the Great Depression, WW1 & WW2 combined and a global carrying capacity of less than 1 billion people compared with 7 billion today. The impact on Australia would be particularly severe.

The empirical evidence of what might be termed the key performance indicators of global warming – melting of the Arctic and Antarctic sea ice and ice sheets, mountain glaciers and permafrost, ocean acidification, declining natural carbon sinks – all suggests that the warming impact is accelerating ahead of the scientist’s previous expectations.  This is reinforced by the increasing frequency of extreme weather events, particularly over the last decade.

Most importantly, the inertia of the climate system, particularly the slow warming of the oceans, means that the full impact of our emissions today only become evident decades hence.  Thus unless we take rapid action now, we may well be locking in irreversible climate change of catastrophic proportions for future generations; indeed we may have already done so.  Adaptation will be too late.

The need for urgent precautionary action should be obvious.

Everyone is entitled to their own opinion on this issue and it is reasonable to assume that the public statements above are reflected in the corporate approach to global warming being taken by organisations with which those individuals are involved.  That would not be of great moment, except that those organisations exercise substantial influence and corporate power, with a major impact on Australian society.

Sound governance requires that directors take a balanced view of risk and uncertainty.  To propose a strategy of either denial, or wait, see and adapt, in the light of current empirical evidence and the balance of expert advice, is a serious breach of fiduciary responsibility, both corporately and nationally – a breach which is only too evident in the current business approach to carbon pricing, where long term implications are dismissed in the interests of short term expediency.

It is high time major Australian corporations acknowledged the real risks we confront, took leadership in implementing genuine precautionary measures urgently, and in particular woke up to the opportunities these present.

An edited version of this article was published as an Opinion Piece in the Australian Financial Review on 23rd June 2011.