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Building a business case to confidently manage climate-related risks and opportunities

Climate change impacts will continue to unfold across Australia with increasing severity in the years ahead. This will result in a set of complex and material financial implications for business. For Australian business to confidently rise to the challenge of systematically measuring, managing and mitigating risks and opportunities of climate change it will need a sound understanding of how climate change will most likely impact its finances. This Bulletin discusses Frontier Economics and Edge Environment’s approach to extending climate risk frameworks to build business cases for climate response against the inevitable, and potentially disorderly, climate transition ahead.

Australia is in the midst of cascading and compounding climate impacts

After centuries of relative climate stability, the world’s climate is changing. As average temperatures rise, acute hazards such as floods and fires and chronic hazards such as drought and sea level rise intensify. These hazards are categorised as the physical risks of climate change.

The frequency and severity of weather events in Australia is increasing and may further intensify as ecosystems are pushed beyond tipping points.  Recent weather events in Australia such as the unprecedented rainfall and flooding in South-East Queensland, New South Wales and Victoria, extreme heat in Western Australia and the 2019–20 bushfires have resulted in highly significant financial losses for businesses and the communities they operate in.

Climate risk, however, remains an emerging discipline compared to other traditional risk areas. Climate risk management will necessarily grow in importance over coming years – recently, the Australian Prudential Regulation Authority (APRA) warned business around the need to prepare for “rapidly increasing expectations” on climate risk disclosure.

Against this backdrop, forward looking businesses are taking steps to understand, quantify and manage their climate risk exposures.The good news is we have the tools to address urban heat: integrated planning of our natural and built environment covering blue, green, and grey infrastructure.

TCFD is a lens to grapple with these risks

The Taskforce on Climate-related Financial Disclosures (TCFD) reporting framework has emerged as the global benchmark in climate risk reporting. It seeks to make businesses’ climate related disclosures comprehensive, consistent and transparent. TCFD enables effective investor analysis of a company’s demonstrated performance of incorporating climate related risks and opportunities into businesses’ risk management, strategic planning and decision making.

The TCFD was set up in 2017 by the Financial Stability Board – an international body of regulators, treasury officials and central banks – to provide voluntary recommendations on how business could voluntarily disclose the risks and opportunities from climate change (see Box 1).

Box 1: TCFD in brief

The purpose of TCFD is to provide a framework for organisations to make consistent and transparent climate-related financial disclosures. The TCFD framework document provides the following overview of the types of disclosures that it recommends:

It is recommended that the business provides its disclosures in their public annual reporting.

Source: Recommendations of the Task Force on Climate-related Financial Disclosures

Momentum in the market is growing and norms are being set

Since being first published in 2017, TCFD has been rapidly adopted by a broad range of organisations across the globe – the 2022 status report for TCFD points to TCFD “support” encompassing US$220 trillion of assets and US$26 trillion of combined company market capitalisation.

There is a trend towards mandating climate-related disclosures. Mandatory climate risk disclosures have been announced in jurisdictions including the UK, the EU, Hong Kong, Japan, Singapore and New Zealand. Significantly, the United States Securities and Exchange Commission has proposed rules to enhance climate-related risk disclosure drawing from the TCFD recommendations. Collectively, these actions will set norms and expectations for Australian businesses to develop their own disclosures.

In 2021 the New Zealand Government passed legislation mandating climate-related disclosures for around 200 financial entities.  Further to impacting those covered by the introduction of this mandate, the move is widely expected to act as a catalyst for increased climate-related disclosures across businesses operating in the wider New Zealand economy.

Decision making under complexity needs tangible financial analysis

While TCFD is ultimately intended to support more informed capital allocation by investors, it can also be an important tool for organisations to respond to the risks and opportunities of climate change.

For an approach to inform practical decision making it needs to provide climate-related impacts in financial terms:

Clearly this is a complex task, but it needn’t be daunting if we have the right tools and systematic approaches. Finding a solution requires assessing the changing climate exposure and vulnerabilities of an enterprise through time. A collaborative approach which brings together the key stakeholders across an enterprise provides the means to map the material climate impacts, their drivers and the likely financial consequences to the company. This collaborative approach also enables joint ownership of critical uncertainties to be addressed within business’ operations, financial reporting and data management. A structured approach is then required to cut through the uncertainty and deliver a clear path forward to adequately measure, manage and mitigate climate risks.

Frontier Economics and Edge Environment have partnered to combine our skills in financial analysis, ESG, risk management, climate science and sustainability to work through this complexity (see Box 2).

Box 2: Frontier Economics’ partnership with Edge Environment

Edge Environment and Frontier Economics have worked across a broad range of climate risk and resilience projects, mostly within the property, infrastructure and government sectors. Together, this partnership provides a unique opportunity to better understand both financial risks and opportunities of climate change for Australian and New Zealand businesses.

Edge is a specialist sustainability services company focused on Asia-Pacific and the Americas. Its teams are based in Australia, New Zealand, the United States and Chile. Edge exists to help its clients create value from tackling one of world’s most fundamental challenges: creating truly sustainable economies and societies. Edge does this by combining science, strategy and storytelling in a way that gives clients the confidence to take ambitious action, and do well by doing good.

Source: Frontier Economics

A collaborative approach is required to address this complexity

Confident climate-risk decision making requires a multi-disciplinary approach, incorporating climate science and financial analysis. However, deep technical expertise alone is not sufficient.

There is also a need for broad buy-in and engagement from within and across an organisation in order to access information, form granular insights, identify key operational climate-related impacts and quantify financial consequence. Organisations are encouraged to systematically look beyond the acute and direct impact of extreme events but also to the aggregated impacts of chronic and indirect effects of climate extremes.

Even with all these elements, it can be difficult to know where to start a climate-related financial analysis.

Frontier Economics and Edge have developed a practical approach

A useful starting point in analysing climate-related risk and opportunities is to assess the impacts of recent extreme climate events – such as the Eastern Australia bushfires and drought of 2019-20 and the extreme rainfall of 2021-22 – on a business’ operations and related cashflows.

This “looking back to look forwards” approach provides multiple advantages. It allows the:

The logic mapping and notional financial consequences can then be tested and validated using actual operational and financial data to identify the impacts of recent extreme events.

This approach also clearly highlights any data gaps which limit the extent to which financial consequences can be isolated – providing insight to improve risk management systems.

This baseline analysis has standalone value as it provides a snapshot of the resilience of an organisation to recent climate change events which can be linked back to materiality thresholds in a firm’s enterprise risk framework. It is also vital in building a foundation for robust and defensible scenario analyses of the likely impacts of future climate extremes on an enterprise. It can be used to inform forward looking analysis of climate change impacts, which considers both cash flow and asset valuation risks and opportunities.

The approach taken by Frontier Economics and Edge Environment focusses on undertaking robust, transparent and actionable analysis. For example, we focus first on the short-term (to 2025) before extending analyses further into the future. A short-term lens reduces uncertainty and allows organisations to home in on impacts which require urgent action. It also allows for extensions such as cost-benefit analysis to support investment decisions around certain interventions.

Building the business case to confidently make decisions about managing your organisations climate risk is a journey – come and talk to us about getting started.

Figure: Logic map framework



Frontier Economics and Tim Cummins & Associates have analysed the social and economic issues associated with water recovery for the environment in Victoria under the Murray Darling Basin Plan. The report can be found here.

This 2022 report updates previous analysis undertaken in 2017, both commissioned by the Victorian Government to help inform Victoria’s policies on water recovery and Basin Plan implementation.

Under the Basin Plan, the relevant Governments agreed that 2,750 GL of water would be recovered for the environment by 30 June 2024 — the ‘Bridging the Gap’ water recovery requirement. This water was to be recovered mostly from buying water entitlements from farmers, by enabling water efficiency projects, or by investing in projects that deliver the same environmental outcomes using less water. Beyond the ‘Bridging the Gap’ water recovery, the Basin Plan allows for enhanced environmental outcomes from the recovery of an additional 450 GL per year of environmental water through efficiency measures.

There is unambiguous evidence that environmental watering is restoring the environmental values of the Basin. However, we found that Basin Plan water recovery has had significant socio-economic impacts on irrigators and communities in northern Victoria, and that further water recovery from the consumptive pool will add to the impacts already being experienced. The socio-economic impacts of the Basin Plan in Victoria are particularly apparent in the Goulburn Murray Irrigation District (GMID) — without the Basin Plan, water use in the GMID could be expected to have been about 50% higher in recent years (2018-19 to 2021-22) and GMID milk production could also have been expected to be about 50% higher than was observed. In a repeat of the Millennium Drought, the socio-economic impacts of the Basin Plan will also affect the horticultural industries of the Victorian Mallee and surrounding areas — requiring an extra 25,000 hectares of high value horticulture to be dried off due to the reduced consumptive pool.

The report considers the range of mechanisms that have been used to recover water for the environment and enhance environmental outcomes — including water entitlement buyback, on-farm investments, off-farm investments, and Sustainable Diversion Limit Adjustment Mechanism (SDLAM) projects. As a result of the way in which water was recovered, there is now more volatility in the total volume of allocations available for irrigation from one year to the next.

There are reasons to be optimistic about meeting most of the ‘Bridging the Gap’ requirements of the Basin Plan by 30 June 2024. On current estimates, up to 94% of the 2,750 GL requirement could be achieved (leaving a shortfall of 160.3GL). However, if various identified risks cannot be managed, the shortfall in the 2,750 GL requirement at 30 June 2024 may be significantly larger —up to 372.3GL. ‘Constraints projects’ constitute most of the projects at risk.

After considering four scenarios of future implementation of the Basin Plan and the current state of play, we consider a sensible and plausible scenario is for Basin Plan implementation to focus on current or alternative SDLAM projects to offset the full 605GL in a timely manner (rather than by the current 30 June 2024 deadline). Buying back an additional 372.3 GL of water entitlements, instead of extending the deadline, would involve significant socio-economic impacts.

Information about the broader set of reports and a fact sheet are also available here.

Today Austroads, with the assistance of Frontier Economics, released a Regulatory Impact Statement seeking feedback on proposed reforms to Heavy Vehicle drive licensing.

With a growing freight task and changing vehicle fleet, Australia needs a lot of well-trained and capable heavy vehicle drivers.  Because of this transport Ministers requested Austroads look for ways to improve the National Heavy Vehicle Driver Competency Framework (NHVDCF) which informs state and territory heavy vehicle driver licensing arrangement.

Today Austroads, with the assistance of Frontier Economics, released a Consultation Regulatory Impact Statement (CRIS) seeking feedback on proposed reforms which include:

The C-RIS is available here and is out for comment until 28 October.

Frontier Economics regularly advises clients on a range of policy and regulatory matters in the freight sector.

A report into the economic, social and environmental costs of failing to manage feral deer numbers in Victoria has been released by the Invasive Species Council and Frontier Economics.

The report, Counting the doe: an analysis of the economic, social and environmental costs of feral deer in Victoria, estimates costs of over $1.5 billion (7% discount rate) or $2.2 billion (4% discount rate) in present value terms, over the next 30 years. Avoiding these costs represents a benefit to society. The expense involved in managing feral deer population is a fraction of the cost these invasive species impose on society and the environment.

The Victorian feral deer population and distribution have rapidly increased, with analysis by the Victorian Department of Environment, Land, Water and Planning estimating that the population of deer could be between “several hundred thousand up to one million wild animals or more”.* It is likely to become more challenging to manage feral deer in future, with populations expected to increase further over the next thirty years, driven by a combination of climate change, natural dispersal and deliberate releases and farm escapes.

Feral deer numbers are having a significant and detrimental impact on a range of economic, social, cultural and environmental impacts in Victoria.

“Without effective controls on feral deer numbers our analysis shows that the population is likely to significantly increase, imposing a substantial cost on the Victorian community”, Frontier Economics’ managing director Danny Price said.

Even with conservative assumptions around the detrimental impacts of feral deer, key findings include:

Given the availability of information on the impact of feral deer, these figures do not capture the full range of potentially significant costs of feral deer in Victoria, such as the impact on:

As such, it is likely that the true economic, social, cultural and environmental costs imposed on the community as a result of feral deer in Victoria are larger than this estimate.

“While there is uncertainty around the number of feral deer in Victoria, what is certain is that the Victorian community is losing out by not managing feral deer. These losses will only grow as long as the Government fails to control feral deer numbers now and into the future” Mr Price said.

Today the Federal Court fined Peters Ice Cream $12 million for substantially lessening competition in the market for the supply by manufacturers of single service ice cream and frozen confectionary products.

The Australian Competition and Consumer Commission (ACCC) had issued proceedings against the Australasian Food Group, trading as Peters Ice Cream. The ACCC alleged that Peters acquired distribution services from PFD Food Services on condition that PFD would not sell or distribute competitors' single serve ice cream products in various geographic areas throughout Australia without the prior written consent of Peters - and that this condition substantially lessened competition in the market for the supply by manufacturers of single service ice cream and frozen confectionary products.

Peters admitted the allegations just prior to trial and the Federal Court imposed a penalty of $12 million. Frontier Economics advised the ACCC and a witness statement by Philip Williams was lodged with the Court.

Frontier Economics advises clients on a range of competition and dispute support matters and our economists regularly act as expert witnesses.


In September 1990, Scientific American published a special issue entitled ‘Energy for Planet Earth’. In this publication, Scientific American explored the sources of energy, the future for energy, made predictions on technological breakthroughs and suggested solutions for what they considered was an imminent energy crisis.

Many of these predictions by Scientific American were made for 2020. Given we have reached that date, we can look back and compare the predictions with what actually happened. In a three-part series, Frontier Economics compares actual outcomes to 2020 with the predictions made by Scientific American.

This comparison of actual versus predicted outcomes, especially where technological change is involved, can help us learn about the factors that have been determinative to the global community and provide guidance on how we can improve economic forecasts.

We focus on three areas where Scientific American made long term forecasts:

This is the third and final part of this series, examining the performance of Scientific American’s forecasts of emissions intensity.

Scientific American gets it right in Parts One and Two

In Part One - Energy demand we reviewed the performance of Scientific American’s long-term forecasts on primary energy demand. We found that, overall, Scientific American’s forecast was reasonably accurate. However, Scientific American did not perform as well on the growth performance by country. Most significantly, Scientific America materially underestimated the rapid and large increase in the growth of developing nations, such as China and India. That is, countries that were relatively poor in 1990 grew more quickly than expected, and they used energy to achieve this growth.

In Part Two - Energy intensity we reviewed the performance of Scientific American’s forecast of energy intensity. While Scientific American’s original historical depiction of energy intensity was stylised, it did accurately convey the historic profile of energy intensity – rising as countries develop, and then falling as economies mature. Given the size of the populations in developing countries in 1990, there was a genuine concern about the impact on energy demand (and resulting environmental problems) if these countries followed the same energy intensity profile as developed countries. However, Reddy and Goldemberg predicted that developing countries would benefit from improvements in materials science and energy efficiency innovations from developed nations. This technological transfer would avoid the high energy intensity peaks that occurred over the course of the previous 150 years of economic development of, now, developed economies. Reddy and Goldemberg were correct. The energy intensity of developing countries, while starting on the higher side of developed countries in 1990, quickly fell as they adopted the latest technologies. By 2015, developing countries had lower energy intensity than the developed countries originally analysed by Reddy and Goldemberg. In fact, by 2015, developing countries exceeded the most ambitious energy intensity decline forecast by Reddy and Goldemberg.

We conclude our three-part series by looking at Scientific America’s global projections for CO2 emissions from fossil fuels.

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