Season 3, Episode 7 – Game Changers: Rewiring Australian regulation for long-term climate resilience

Elena:

Hello and welcome to ESG Matters @ Ashurst. I'm Elena Lambros, an Ashurst risk advisory partner, specialising in climate change and sustainability. You're listening to season three of Game Changers. From innovators are the cutting edge of technology to impact investors funding a cleaner energy future, each and every one of our guests is changing the game in their field. In today's episode, you'll hear my conversation with Dariel De Souza, a practitioner who focuses on regulation, risk, compliance, performance and governance. She's completed doctoral studies focusing on the regulation of systemic risks with a particular focus on climate change risks. Let's jump in and hear the discussion.

Welcome to the podcast, Dariel. I'm so happy to have you here and talk about a few of my favourite subjects or about law, policy and climate change.

Dariel:

Thanks for having me, Elena. Really appreciate the opportunity.

Elena:

I thought to set the scene a little bit, do you want to tell us a little bit about yourself and what initially drew you to focus on climate change and what is quite an incredibly complex topic?

Dariel:

Yeah, sure. I am a consultant specialising in risk, regulation and governance. And I mostly advise government clients. And while I've been interested in and concerned about climate change for a very long time at a personal level, I only really became involved in the area at a professional level while a director of compliance and enforcement at the Australian Energy Regulator. I joined the AER back in 2006. And if you work in the energy area, as you would know, it's impossible to ignore climate change because the two are inextricably linked. As your audience would already know, certain types of energy generation are major sources of greenhouse gas emissions. And climate change has also reshaped the energy landscape in a very significant way, driving a global shift towards low emissions technologies, renewable energy sources, and more energy efficient systems.

So, it was impossible for us to ignore, as the regulator, the changes to the energy system that were being caused as a result of climate change. And we needed to respond to that. Now, after my stint at the AER, I moved back to a law firm that I'd previously worked at to help kickstart their sustainability and climate change team. And I did that together with John Thwaites, who was the inaugural Victorian Minister for Climate Change, an amazing person to work with. And while working in this team, we were engaged by the federal government to write a report about the role of regulation in facilitating or constraining adaptation to climate change for Australia's major infrastructure.

So, just to unpack that topic a bit. The report was aimed at trying to identify whether the way we regulate our infrastructure positions us well to respond to climate change impacts. And critically, all the regulatory frameworks that we looked at across buildings, across energy systems, across telco systems, across water and waste systems, we found evidence of elements of regulation that both facilitated adaptation to climate change, but also elements that did hinder proper adaptation to climate change. And what struck me about the work is that we didn't identify any regulatory frameworks that enabled a holistic and comprehensive response to climate change, to really ensure that our infrastructure is resilient to the impacts of climate change, which I found quite troubling and concerning.

So, I decided to embark on my own research after we finished the report for the federal government, to really determine whether there's a better way to regulate things like our infrastructure. But I was interested more broadly in all the aspects that are needed for a well-functioning society. So, I started my PhD in 2012. Took eight years to finish it. Finally, finished it in the middle of COVID in 2020. And I published a book in 2022 that's based on the research, as you mentioned, which is called Law, Policy and Climate Change: The Regulation of Systemic Risks. And as the title suggests, what the research was about was how risks to a variety of society’s systems are being regulated. I looked at natural systems, the ecosystems that we need for our food, for our water, for our air.

I looked at social systems, including health systems and financial systems. And I also looked at physical systems, systems of infrastructure like the energy system, to work out how we are regulating them and whether the regulatory frameworks truly set those systems of infrastructure, nature, and human systems up for being resilient to the impacts of climate change. And what I did was I applied the concept of risk governance to determine how governments can more effectively control or govern climate change risk to all of these systems. And I was able to apply my three areas of expertise - risk, regulation and governance – in the context of climate change. So, that's a very long-winded way of how I've become interested in climate change.

Elena:

Thank you. And that's a great introduction. And I love that overview where you think about that changing landscape of the energy market, and infrastructure, and the importance of that, and even talking about having an inaugural minister for climate change. But I really do like the way that you've thought about it from that regulatory perspective, because I do think these challenges, they're quite unique. They're very large things for people to solve, and the regulatory framework really needs to fit in with that. So, maybe you could just talk about, what sort of emerging trends in regulation do you see as most significant for the future of society's ability to cope with the impacts of climate change?

Dariel:

Actually, when I did my research, I looked at regulatory frameworks. For my PhD, I focused only on regulatory frameworks in Australia. And I looked at the way in which regulation dealt with climate change impacts in different jurisdictions around Australia. But when I wrote the book, I actually expanded it to a global analysis of regulation around the world. And unfortunately, through my research, I did not see any clear evidence of a concerted effort amongst policy and lawmakers to tackle the need for more effective regulation, to deal with the impacts of climate change on our critical systems in a very concrete way. And this really contrasts to the way in which mitigation of climate change has been dealt with, where there are global initiatives to mitigate climate change. But adaptation, partly because it's so complex and specific to a particular jurisdiction, there hasn't been really significant inroads to determine how we can really more effectively regulate climate change from an adaptation perspective.

But on a more heartening note, I did find some examples of regulatory frameworks that are heading in the right direction. I found one in the US and a couple here in Australia, so I'll share some insights from those examples with you. The first one, which comes from the US, relates to the regulatory framework applicable to the US financial system. And this framework was actually overhauled in the wake of the 2008 global financial crisis, in part because the regulatory framework at that time really focused on micro issues associated with the conduct of individual operators at that very low level, rather than macro issues associated with the stability of the financial system as a whole. So, the US financial system regulatory framework was subject to a major overhaul following the GFC. And in a nutshell, the regulatory framework made three critical changes, which really resonated with me when I was doing my research.

The first is that the financial system as a whole is very identifiable within the regulatory framework. And that may seem like a fairly obvious thing to do, but you'll find many regulations, regulatory frameworks that pick off parts of a system, but don't identify the system as a whole. In the new regulatory framework, the whole US system in all its complexity is recognised in its totality under the regulatory framework. The second important component of the revised regulatory framework is the very clear focus on the need to identify, assess, and manage systemic risks. And this is really important. So, some regulatory frameworks may identify a system, but they may not provide adequate opportunity for identifying, assessing and managing risks. The third element that was introduced through the reformed regulatory framework is a new governance framework. So, the system is extremely complex with sub-markets within the financial system, sub-regulators, but what the new framework did was to set up an oversight body.

The Financial Stability Oversight Council that sits on top of all the regulation, sits on top of all the regulators, and tries to ensure that the whole system is managed in a consistent and coherent manner. And you're probably asking yourself the question, "How does this all relate to climate change?" Well, by executive order that was issued by Joe Biden, he basically required all the regulators that operate within the financial system to account for the impacts of climate change on financial markets to assess the risks, and to ensure within their areas of operation that they are managing those risks in a consistent and coherent way. And the FSOC that sits above that needs to ensure coherence across all the sub-regulators as well.

Elena:

That's a really interesting point, because that links back to the systemic risk point as well. So, regardless of whether the topic is climate change or not, it's using that whole systemic risk approach to really make sure that you're across the issue, right?

Dariel:

Absolutely. And so, this is the point that I make at the beginning of my book that we see different types of systemic risks. We've seen the GFC. When, for example, Brexit happened, we saw this major disruption to the trading system. And these are all examples of systemic risks, and the response is the same. We need to really take stock of the system and make sure that it is capable of responding to these risks, whether they come in the form of climate change or other sources of systemic risks. So, that is exactly the point that I try to make. Now, I do want to talk about the examples back in Australia, because those were also really significant. And what I found were there were two regulatory frameworks that I looked at that stood out. One in Queensland, your home state, Elena. And one in Victoria, my home state. And importantly, both regulatory frameworks were revised significantly following major disasters.

In the case of Queensland, the planning and building system was revised following the terrible floods that you encountered in Queensland in 2010 to 2011. And in the case of Victoria, the planning and building system was significantly revised following the tragic Black Saturday bushfires in 2009. We've had other very significant bushfires since then, but that bushfire really prompted a major change to the regulatory framework. And both tragic disasters actually prompted significant rethink of how we need to regulate, in that case, the building and infrastructure sector. So, take the Victorian regime, for example. The regulatory reform resulted in a more integrated regime to deal with development in bushfire-prone areas, to ensure that land use planning regulation speaks more coherently and in a cohesive way to the building regime, so that you're not allowed to build, you're not granted land use approval to build in a high bushfire risk area.

The regime specifically calls out bushfire risks. And this is important for me, because if the risks are just ambiguous, you don't really know which risk you're talking about. The people that are administering the regime may not think that that's an important risk and may ignore them. But if you call out the risks explicitly in the regulation, the regulators are forced to take those risks into account. The third important aspect of the reformed regulatory framework, both in Victoria and in Queensland, is the need for a risk assessment to really take stock of those risks, flood risks in the case of Queensland, bushfire risks in the case of Victoria, ensure that those risks are assessed using the best available information, and science, and ensure that those risks are responded to.

So, what I've seen is that there's no perfect model out there, but there are examples of us moving in the right direction. It's quite sad for me to know, though, that these frameworks have resulted from major disasters. And I don't think we can afford to take this reactive approach to regulatory reform moving forward, because we are going to see the incidence of these systemic risks all over the world more and more frequently. So, governments need to shift from a reactive response to more of a proactive approach, where they recognise the systems and they take action before these systemic risks actually materialise.

Elena:

I would agree that there are obviously quite large disasters that you referenced, both in Queensland and Victoria, but unfortunately not the last disasters that we will either here or globally. I think that proactive regulation and preparing for what is coming is an incredibly important part. And so, you mentioned the US one, which I thought was really an interesting one at the moment. And it's such a big market and a lot happens there, so it's always interesting to see what they're doing. But is there any other kind of inter-regulatory approaches or models that you're seen globally that might be a little bit more transformative if we adopt it widely, particularly in terms of we're thinking about making society more resilient to the impacts of climate change? Are there any other ones that you thought you'd wanted to mention?

Dariel:

Yeah. Thanks, Elena. There is actually an example, at least on paper, of a pretty good regulatory model right here in Victoria. And I'm not trying to suggest because I'm Victorian that we know how to do it best at all. But I'm referring to the Victorian Climate Action Act of 2017. Now, this Act is actually the successor to the Climate Change Act of 2010. And the Act was established back in 2010 as a framework for the State's response to climate change. And it had mitigation aspects. But in the adaptation space, it provided for the development of the Victorian Climate Change Adaptation Plan to guide the State's adaptation to climate change impacts across the entire state. Amongst other things, it required decision-makers to consider climate change risks when making administrative decisions under a variety of different pieces of legislation. Albeit a limited suite of legislation, but including the Environment Protection Act and the Flora and Fauna Guarantee Act.

And it sought to promote a whole of government approach to adaptation to climate change. Now, the Act was amended in 2017 and then again in 2024. And there are three really important elements that I wanted to highlight. And I think representative of what I believe to be the key elements that should form the foundation of a resilient approach to climate change through regulation. The first is that, as a result of the amendments, the adaptation action plans need to be put in place across seven systems that are specifically called out in the legislation. So, in the legislation, they call out a variety of natural, physical and social systems. They call out the built environment system, the education and training system, the health and human services system, the natural environment system, primary production system, transport system, and the water cycle system.

So, they actually use the word system, which I think is very important because it basically speaks to this notion that there are these complex systems that we need to take stock off, and we need to regulate in a comprehensive and coherent manner. So, that's the first element.

Elena:

Yeah. I was going to say, and that's just acknowledging the impacts that it has across all of those different areas. And you can't just focus on one part to try and solve what is an incredibly critical problem.

Dariel:

Exactly. And we'll talk about the opportunities and challenges that this approach entails. But the fact that they've called out these systems for me is really significant. The second thing that they provide for under the legislation is that for each of these systems, there needs to be an adaptation action plan in place that needs to be revised every five years. And as part of the adaptation plan, basically the responsible entity needs to identify the climate change risks, assess those risks, and ensure that those risks are managed through the action plan. And then the third critical element is the governance framework for these systems.

It basically recognises that these systems are so large and complex that they may involve multiple ministers, they may involve multiple responsible entities. And there is a need for consistency and coherence across the way in which the whole system is managed. So, I think these elements are really important and could be represented in different frameworks across Australia, as well as in other parts of the world. And they can be used to manage not just climate change risks, but other sources of systemic risk.

Elena:

Thank you, that's a really great example. That's quite close to home as well. I was wondering, when I think about that and the legislation that's there in Victoria, do you think there's other upcoming challenges or opportunities that now you think governments and private sectors should start preparing for, or how they should think about that?

Dariel:

I really believe that there's a good opportunity to re-conceptualise the use of regulation in this space. Usually, when we think about regulation, we think about rules that are used to prohibit or limit activity. But I think regulation can be used in a more positive manner, a bit like the way in which enterprise risk management is used by large organisations. So, enterprise risk management frameworks are used, including for multinational organisations that have operations across the world, to manage the spectrum of risks that they may face. And help the organisation ride out the bumps, the ups and downs of the various risks that they may face, and land the organisation in a positive place, notwithstanding all the risks that they may encounter along the way. And I believe that regulation can actually be used in a similar way, although we don't think of regulation as having parallels with enterprise risk management.

So, that's the model that I've fleshed out in my book. How can we re-conceptualise regulation and use it in a more positive way? You talked in your question about the opportunities. But re-conceptualising regulation in this way also has significant challenges. And I just want to highlight them, because it's easy to say this is what we need to do, but we also need to take stock of the challenges that this approach may exist. So, the first main challenge is we need to be able to identify the systems. And when I say identify them, it's not just calling them out as the Climate Action Act in Victoria has done, but to really understand the boundaries of that system in very tangible and concrete terms. Where does the system start? Where does it extend to? Where does it end? And who is involved in managing this system, both private sector and public sector entities?

The other thing that we need to do, as I said when I was talking about the bushfire risk example, is what are the spectrum of risks that we need to regulate for? Should we be calling them out explicitly? Or should we have a framework like the US one where an executive order was used to basically apply that systemic approach to particular risks as they become known and identified? The third challenge is, who do we impose obligations on under the regulatory framework? These systems are so vast and complex, involving many different entities within government, outside of government. Who should be charged with being involved in managing these systemic risks?

And then our fourth challenge is, what regulatory tools should be provided for under the regulatory framework? What tools will help us really ride these waves of risk as they buffet these big systems that we're talking about? And then finally, we can't ignore implementation. The skillset of the bureaucrats that are called on to administer this regulation will be very different from the conventional skillset of regulators that administer regulation, that does impose obligations to prohibit or limit entities. So, I think that there are opportunities to really rethink the role of regulation, but we can't discount the significant challenges that this will necessarily entail.

Elena:

Thanks for going through all those challenges in detail, because I think it is really important to consider that. And I've had the benefit of reading your book, so I really appreciate the amount of research that you've put into this. But I will just highlight that I really like the concept of re-conceptualising regulation. I think that's really important to actually think about the benefits, and how it can actually support people get to a positive outcome and meet their commercial imperatives. While we're thinking through that, just as professionals and organisations, if they're just starting to grapple with the resilience related regulatory risk and how they do that, what sort of advice do you offer?

Dariel:

I think there's a role for contributing to the resilience of our systems for everybody, starting with individuals just trying to manage your own climate change risks at that very micro individual level. There's a role for organisations and there's a role for government. Now, what I say in the book is that I think the primary role does need to be taken on by the government, because if we left it only to individuals and to organisations, we'd end up with a patchwork of responses that are not necessarily consistent and coherent. So, I think the government needs to lead the way as the Climate Action Act of 2017 in Victoria has done, to lay the main parts of the architecture for a resilient response in place in regulation.

But the regulation needs to provide a role for private sector organisations and for individuals to contribute in their own way to resilience. So, in summary, I think there is a role for all of us to play in ensuring the resilience of our own individual operations and activities. And all of these efforts will build upon each other, so that in totality, we will be resilient to these impacts as they occur. But I think the government needs to take the primary role in setting that architecture up, so that our individual responses are consistent and coherent, and we'll all add to each other or meet each other rather than operating at odds and potentially being inconsistent.

Elena:

Thank you. I just want to say I really appreciate you coming on today, and I really enjoyed that, and I think that is a great note to end on. I also wanted to say I really loved your book, and I highly recommend reading it. I meant to say congratulations at the start. Thank you again for coming on.

Dariel:

Pleasure. Thanks so much for having me.

Elena:

Thank you for listening to this episode of ESG Matters @ Ashurst. I hope you found this episode insightful. To subscribe to future episodes of Game Changers and to hear previous episodes, click on the link in the show notes or search ESG Matters @ Ashurst on Apple Podcasts, Spotify, or wherever you get your podcasts. And while you're there, please feel free to leave a rating or a review. And finally, to learn about all Ashurst podcasts, visit ashurst.com/podcasts. In the meantime, thanks again for listening, and goodbye for now.