The AICD Climate Change Governance Initiative launch event was held on 26 August 2021 and included a panel discussion and member Q&A. Speakers included Karina Litvack, Governing Board of CGI and Angus Armour, AICD MD and CEO. AICD's Senior Policy Advisor, David McElrea, chaired a director discussion with Lendlease chair Michael Ullmer AO FAICD, PWR Holdings chair Teresa Handicott FAICD, and MinterEllison partner Sarah Barker. This is an edited transcript.
As we begin, we would like to acknowledge and welcome the traditional custodians of Country throughout Australia and their connections to land, sea and community. We pay respects to the Elders past and present and extend that respect to all Aboriginal and Torres Strait Islander peoples here today.
Welcome to this virtual event. My name is David McElrea, and I’ll be your host and MC, and moderating our panel discussion. The feedback and the level of interest has been amazing as so many AICD members have registered their interest for this event. We’re thrilled to have so many of you join us to talk about climate governance in Australia and the role of boards and of non-executive directors.
This was to be a live event, but COVID-19 got the better of that. I’m sure you’ve all sat through many of these unusual events where people are calling in from their homes and we hope it all goes well, but please bear with us. First of all, we are going to launch the Australian chapter of the Climate Governance Initiative (CGI). Our CEO Angus Armour will explain what it is and why the AICD is thrilled to host the Australian chapter. We’ll also hear from Karina Litvack, founding chair of Climate Governance International.
Karina has joined us on the line from the UK. She’ll talk a little about what the international chapters are and what it means in the work that it does. After that we'll have a panel discussion. We’ve been joined by a fantastic panel who will look at how Australian directors can practically engage with climate risk strategy and opportunity. We want this to be as interactive as possible, so we reserved nearly half the set time to answer questions. We also want to talk about the Climate Risk Governance guide that the AICD has launched today. It was prepared by the AICD and authored by MinterEllison and we will be covering topics that take us through some of the concepts we’re dealing with today. Without further ado, I’ll hand over to Angus to introduce and launch the Australian chapter of the Climate Governance Initiative.
I would also like to begin by acknowledging the traditional custodians of Country across Australia and their special connection to land, sea and community. I pay my respects to Elders past and present and extend that respect to Aboriginal and Torres Strait Islander peoples joining us this evening. Thank you for joining us for the launch of the Australian chapter of the Climate Governance Initiative. We have members present from across Australia and across the globe. We have members representing the spectrum of the Australian community and economy from listed companies, to not-for-profits and charities, private companies, and government boards, regulators and policy makers. I’m grateful you’ve taken the time to join with us this evening, as challenging as the COVID pandemic feels for many Australians, particularly today in NSW, with the vaccine rollout and heightened measures, we are hopefully closer to the end than the beginning.
There has been a clear commitment to science and policy, a sharpened shared focus to tackle a sudden threat with urgent necessary measures. This is not the case for climate change. A threat that has been in evidence for decades. The OECD index survey has consistently ranked climate change as a top policy priority for the Australian government, both in the short and long term. The relative importance of climate change as a policy priority has been trending higher over the lifetime of the survey. The latest Director Sentiment Index also tells us that around one in five members see climate change as one of the top three economic challenges facing Australia, even in the face of a pandemic. Over half of the respondents told us that climate change is a material risk to their organisation.
Climate change is now — and will remain — a critical concern for generations of Australian directors. Your presence here this evening is a clear indication of the depth of concern in our community. The AICD purpose is to strengthen society through world-class governance. Our mission is to be the independent interest and voice of governance, building the capability of a community of leaders for the benefit of society. Every aspect of that mission aligns to our launch of the Australian chapter of the CGI this evening and our policy positions on climate. The breadth and diversity of the audience and in our membership should reassure you that the AICD honours its commitment to be independent in its policy considerations. A stable climate change policy framework should be at the core of Australian policy settings. We need a policy framework that survives changes in government to allow our community to prepare and adapt a clear and certain transition path requires consensus on the destination, our commitment to the CGI and its principles.
As a clear demonstration of our commitment to a policy goal of achieving net zero greenhouse gas emissions across the economy by 2050, given the challenge we face and uncertain path ahead through the AIC content and education, we’ve sought to build the capability of our members to individually and collectively address climate governance. We regularly feature articles on climate change governance in our Company Director magazine. Our April 2020 issue, even at the outbreak of the pandemic, focused on the management of climate risks. In January 2021, we held a director round table with media outlets where leading directors discussed climate opportunity and risk.
We promoted APRA’s Prudential Guide on the management of climate-related financial risk, profiled assets perspective on the regulation of directors’ duties around the disclosure and management of climate risk, and backed the establishment of an International Sustainability Standards Board through our education program. And through the Company Directors Course, we have sought to build the capability of directors to tackle climate risk and opportunity. But this is a global challenge in 2021. Despite a global pandemic, the World Economic Forum’s Global Risk Report identified climate change inaction as the greatest risk to the global economy and climate related risks as five of the top six greatest risks. Climate change and related impacts present unique challenges for directors and boards globally. We have much to learn from each other and from global best practice. So the AICD is honoured to host the Australian chapter of the Climate Governance Initiative.
The CGI has emerged over the past two years and grown rapidly. Hosted by the Econet World Economic Forum, it has launched in 14 countries; 27 other countries are at some point of development, with 19 preparing to launch. Other director institutes in Canada, the US, Brazil and Chile are hosting their chapters. We are excited to collaborate through the CGI with directors from all over the globe, confronting similar issues around climate governance. We can learn from each other, sharing insights, challenges, tools, guides and resources. There will be opportunities to network and collaborate, perhaps just virtually for a while. As a next step, the AICD has convened a working group with experts in non-executive directors. This includes PwC, Deloitte MinterEllison, Herbert Smith Freehills and the Pollination group. I would like to acknowledge their support this evening. This working group will be responsible for taking the Australian chapter forward, establishing a governance structure and a charter and designing a roll up program. The AICD has a report coming out within the next few months, drawn from interviews, on the state of contemporary climate governance on Australian boards AICD members served. We’ll rely on your engagement and support. Again, we’re very grateful for your investment of time this evening, and I hope we can together sustain the momentum from this launch. Now, it’s my great pleasure to introduce Karina Litvack, the founding chair of Climate Governance International and the driving force behind it. Karina is a non-executive director on the board of Eni and serves on several other boards and advisory bodies, including Bridges Fund Management, the global advisory council of Cornerstone Capital, the sustainable development advisory bodies of Lafarge and SAP, and Transparency International’s UK advisory council.
I’m absolutely delighted to be here today to join you in this launch. This is a global initiative and in addition to the statistics that you shared, I wanted to point out that in the very near future, the APEC region is also going to be receiving a number of new announcements. We already have Malaysia. Malaysia was the second chapter to launch two-and-a-half years ago, but we are going to be including New Zealand, India, Singapore and Hong Kong. And we are in the process of creating an ASEAN hub for ASEAN member countries — Indonesia, Vietnam, Myanmar, Brunei and the Philippines. It’s astounding how this movement, which was a little bit challenging to get off the ground five years ago when I started, is suddenly taking off.
None of you will have been able to ignore the fact that climate change is really dominating the airwaves in every imaginable way. I’m sure you’ll have spotted the recent report called the Sixth Assessment Report. It sounds a bit “geeky”, but it’s from the Intergovernmental Panel on Climate Change (IPC), which warned last month in very stark terms that we only have a very narrow path to confront climate change successfully. So, it is absolutely critical and urgent that all of us take action. Now, as Angus mentioned, this issue has now been recognised as the single greatest risk to the global economy, the single greatest risk to global systemic financial stability. By virtue of those two points, this is a board issue. There’s no debate anymore. Climate change must be on the agenda of boards of directors — be they large listed companies, private companies, small and medium companies, nonprofits or government institutions. This is an all-of-us, everybody mission. The problem is that it’s not necessarily a simple, you know, there’s no simple how to guide how to do this. I can say this from personal experience, having myself joined the board of an oil and gas major seven years ago — Eni, the Italian oil and gas major — after a 25-year career in finance, where I specialised in sustainable investments. I thought I knew something about climate change, but what I discovered was it’s much easier to be an investor demanding that boards take action than it is to be a director and respond effectively to those demands. So I basically set to work figuring out how to approach this and ultimately landed with the WEF.
In that process, yes, we developed a set of best practice principles, known as the Principles for Effective Climate Governance, which is a WEF product. You will see [these principles] all over the materials that AICD will be sharing with you because the mission of this chapter — and the mission of our entire family of chapters around the world — is to promote the effective implementation of these eight principles. As directors, you will not be surprised by what you find because they effectively cover all of the things you and I have to do day-to-day when we are fulfilling our director duties. Everything from re-interpreting what our legal obligations are, to underpinning how we undertake scenario analysis, risk management, strategic planning, of course, in the near, medium and long term — and the big change is that long-term used to be a five-year plan.
Long-term is now a 30-year plan, and we therefore have to work backwards to work out what that means in 10 or 15 years. And what that means right now, for next year, because it’s like a long sausage and every link leads us to our destination — to mix a few metaphors. So it’s incumbent on us as directors to understand how all these pieces fit together — and these principles for effective governance help map that out. The purpose of the CGI chapter in Australia, like the purpose of all of our other chapters, is to be there by your side, to help you through this process with practical materials.
A guidance note on how to approach the financial audit process. It’s true what audit committees have to do, but through a climate lens, for example, how do we look at impairments and provisions in the content? A very changed world with different assumptions.
That’s just one example of how this seemingly abstract principle gets translated into what you and I have to be doing in our role as directors and committee members. Same with remuneration. We will be coming out very shortly with a very practical guide on how to incorporate climate-related key performance indicators into the remuneration structure. And it goes on like this for all of the key areas where we need to do our jobs effectively and put climate change and the climate transition at the heart of board decision-making, board culture and corporate culture. This is a period of transformation we have entered and we need to embrace that transformation. We need to understand what our role is in driving that transformation and ensuring our companies navigate those risks effectively, but also see the opportunities that exist in a transforming economy so we can reap the benefits for our shareholders and stakeholders.
I wanted to share a couple of reflections with you because, as I said earlier, when I landed on my board, I didn’t really know what I was doing. That is despite having spent an entire career looking at these issues through the lens of investment. What I also found is that it can be a little bit challenging when you are the messenger of change and with wisdom of what it is that our job is as board directors. And it does involve engaging constructively with colleagues on the board with our CEO and chairman with our management teams. I found that although I had colleagues ranging from indifferent to outright obstructionist, there was also an enormous appetite to deal with this well. But there was also confusion about how, —and I want you all to realise you’re not alone in sometimes feeling overwhelmed by the enormity of this challenge, its urgency and complexity. There are resources here and there are peers available to share their experiences of what can work and what can backfire and how to take this forward, step by step, without losing sight of the urgency of what we all need to be doing.
I also want to stress that there is often an assumption that climate change is really the purview of a certain subset of the economy, the oil and gas companies, obviously, where I serve, and the entire coal value chain, be it mining, power generation transport, et cetera. No, it’s not just the companies on the front line who are major contributors to climate change. Although clearly, for them, this is an existential issue. But if you look at the pandemic you see how an issue of a systemic nature pulls everybody down with it, irrespective how well-prepared they may be.
In my company, we have a chief medical officer and we have an entire occupational health infrastructure — and a long experience of dealing with Ebola, H1N1 and SARS. Literally, in January of last year, our CMO put out the warning to the entire global organisation ‒ 34,000 employees ‒ that we needed to be in pandemic response mode. Right? And so we were very well-organised. We lost a handful of people out of 34,000 employees plus all the contractors. However, no matter how good our medical infrastructure was, it certainly wasn’t up to the task of countering a global collapse in demand for oil. And that’s the point about systemic risk — it’s like one piece of the domino that knocks everything down with it. So is it with climate change. You could be the director of a software company that's not really in the firing line when it comes to climate change and yet, as the economy goes down, we all go down.
It’s like the pandemic — nobody is safe until everybody is safe. In the case of climate change, no business is resilient unless everybody is resilient. Therefore, we all have a role to play in driving the response. It’s also something that involves business leadership and that business leadership involves collaboration with other societal leaders, political leaders, civil society leaders. You’re seeing religious leaders becoming involved in this — the Pope is involved, Islamic leaders are involved. This is something that engages everybody in order to develop a response. We are part of that system. We, as directors, have inordinate influence in the boardroom to drive change, but we don’t always have all the tools and knowledge to exercise that influence as effectively as we could. This is where the climate governance comes in. It’s about giving you those tools you need to really be that effective agent of change, and to go into the boardroom tomorrow morning, armed with the guidance note you’ve just heard, described in many other tools that are going to be coming out of this, that you can take into your audit, into your remuneration committee, into your nominations committee to deal with all of the issues the board is responsible for day to day.
So with that, I’m going to wrap up and hand over to our wonderful panel. I know some of the speakers here and you’re in excellent hands. I am absolutely delighted to be working with this such a distinguished group of experts. So, good afternoon everybody, and wishing you a very productive session.
You saw some of Karina’s passion and knowledge there on display. We’ve worked with Karina for a little over 12 months to bring this partnership together and it’s been a pleasure. We’re grateful for her support, her passion and for the driving role she’s played in bringing this international group together. It’s exciting for us in Australia to collaborate with other countries and with directors from other jurisdictions across the common themes. With that, I’ll introduce our panel, starting with Michael Ullmer. Michael is the chair of Lendlease and a director of Woolworths. He retired in 2021 as chair of the Melbourne Symphony Orchestra and trustee of the National Gallery of Victoria, but has continued his involvement in advisory roles.
We also have Theresa Handicott, currently chair of PWR holdings and a director of Downer EDI Limited. She was formally a director of Bangarra Dance Theatre and a council member at the Queensland University of Technology. She is also a member of the Queensland divisional council of the AICD.
And we’re also joined by Sarah Barker. Sarah is a partner at the law firm MinterEllison, where she’s head of climate risk governance. She’s an academic visitor at Oxford University Smith School and teaches sustainability in corporate governance for Cambridge University's Institute for Sustainability Leadership. She’s also a director of the $30 billion emergency services and State Super superannuation fund. Thanks, Sarah, for joining us.
I’m going to start with Sarah Barker. Sarah, at the outset, I talked about the guide that you’ve authored and that we’ve launched today, which is fantastic and I urge people to read it. Could you please outline for us just some of the highlights of that guide and maybe some of the key issues directors need to look at when they’re examining issues around climate governance?
It certainly has been a pleasure for MinterEllison to collaborate with the AICD day on this very important guide in our own work on climate change in boardrooms. We’ve seen, in the last couple of years, a real shift in understanding of directors on the nature of climate change as a risk. It’s evolved from something that was saying environmental, ethical, non-financial issue, to the understanding that it can present financial risks and opportunities. But where a lot of directors still struggle is the why and the how — why is it an issue for my organisation and how do we govern for it? So that is exactly what the guide attempts to do. It provides a practical, clear, concise guide, introductory resource for directors on why is climate change a financial risk and opportunity that may be relevant for my organisation.
Secondly, how do we go about embarking on the journey they’re governed for? On the “how” it provides a step-by-step practical guide to, first of all, introducing climate change as an issue for discussion in the boardroom, it then goes on to provide guidance on how to assess risks and opportunities associated with climate change and to connect those risks and opportunities back to your strategy, back to your risk oversight, back to your disclosure, and then finally helping you to put structures in place that are appropriate to your business, to allow you to continue to oversee and strategise around this issue and in doing it, the guide ties all of those issues back to duties as a director. So it’s all very much done in the context of your duties as the director.
I suppose that really goes to why is climate change so relevant now for directors? What the guide seeks to do upfront, is to reframe this issue simply and clearly as a financial risk and opportunity that directors need to consider. Now, climate change isn’t an issue that’s going to be relevant for business or any organisation in 2100 or 2070, or even 2030, it’s relevant now, certainly within mainstream investment horizons. The guide explains the different kinds of physical risk, economic transition, risk and litigation risk associated with climate change in terms of their contract contextual relevance for now. So, physical risks. You heard from Karina a bit of an overview of the recent intergovernmental panel on climate change report into the physical science basis on climate change, the new United Nations report that the guide refers to.
One of the very interesting takeaways from that report has been that Australia is now 1.4 degrees warmer than it was prior to the industrial revolution.That means we’ve already seen a significant shift in the frequency and intensity of extreme weather events, changes in temperature, envelopes, rainfall pattern patterns. That says to directors we can’t presume the way we conduct a business now, and the way we conduct business into the future are going to be in the same environment as we’ve been able to presume in the past.
The second key thing to take away is about economic transition risks. These might be new to a few people. Economic transition risks are the responses of markets to climate change, not the physical risk impacts themselves. This is where the guide makes very clear that markets all around the world are starting to coalesce their focus around reaching net zero greenhouse gas emissions, to decarbonise their economies before 2050, as Angus mentioned. This means even if you think the science on climate change is, a United Nations-backed “socialist conspiracy” to harm the US manufacturing sector, that actually doesn’t matter because markets have shifted policy regulation and technology; the preferences of your banks, insurers, customers — have all shifted. So it adds all of those risks together and provides a clear platform of financial risk and opportunity directors can consider in the context of their own organisation.
That’s a great oversight of not only the guide, but some of the issues we need boards and directors to consider. And I want to pick up on two words you referred to — “risk” and “opportunity” — and I’m going to put these two out to directors.
I’m going start with you Theresa. You and I have spoken about this many times about a core job of a director being to apply a risk and opportunity lens to what’s in front of them. So can you talk us through how you’ve taken that lens and those skills and applied it to issues around climate change?
To me, this is the natural place to start your climate change journey for any company. Understanding and managing risks, identifying and pursuing opportunities is at the heart of what companies do. And it’s at the heart of our obligations as directors. You’ll find if you approach this topic through the lens of your existing governance practices around assessment and management of risk and your existing governance practices for strategy short, medium, and long-term, it does help to demystify the task, use your existing skills, your existing processes to tackle this subject the same way you would any other risk and opportunity. This is core skills for directors. We actually know how to do it. We’re set up to do it. Just look at this subject through those exact same processes, utilising the same skills.
I’ll give a few examples of the outcomes from these sort of assessments from my companies — far broader than this, but just a few top-line examples in risk assessments. We obviously immediately identified our exposure to similar cold contracts and the risks there would be declining demand for our services in the mining services business. We became concerned about the ability to get capital from our lenders for those projects, for the bonds to acquire the necessary capital for those sorts of projects. And we increasingly became concerned about the reputational risks from a sustainability perspective for that business. Very high on the risk list were severe weather events. We do a lot of work outdoors — roads, electricity. We build things — Michael probably would have had similar discussions around risk — and have to think about the risk to our ability to deliver as services on time as per contractual arrangements. Do we need to change what's in our contracts to help mitigate these sorts of risks and how do we care for people in these circumstances? Some of them are called out in the middle of these severe weather events.
And we also consider increased energy costs over time. We have very long-term contracts— 30 to 40 years — and fairly finely priced. Although they may have some repricing opportunities, understanding the risks associated with increased energy costs and the effect on the profitability of those contracts and how you might manage that was important to us as well. But it was pretty obvious early on in the journey that the opportunities were going to far outweigh the risks that we were facing. And we do believe our intense focus on sustainability does differentiate us in our various marketplaces. So, the opportunities we saw, we lined up with existing lines of business. This wasn’t starting whole new businesses, but lining them up in with our existing businesses, our existing capabilities, just these new and adjacent markets. And, again, some fairly obvious ones are the construction, operation and maintenance of solar and wind farms; and, in the future, hydrogen energy facilities. We have a vast number of client customers, a whole range of industries, and we’re able to help them on the decarbonisation journey they're going through with the upgrading of their infrastructure and providing low-carbon solutions within their own assets. For some time now we’ve been engaging in the circular economy. With our roads business, some years ago, we made an investment in the capability to recycle waste products, such as recycled asphalt bottles, plastics. They’re turned into cartridges for our roads and this has been very successful and is very much a growing part of an area we are continuing to invest in.
At the other end of the spectrum, at PWR, which is quite a small company, we manufacture high end, premium automotive cooling components. Two or three years ago, in a risk workshop, we started to talk about the risks associated with the decline of the combustion engine and the rise of the electric vehicle in the context of our two major revenue segments — firstly motor sports all over the globe; secondly, our business providing high-end cooling components into automotive manufacturing for the supercar or the hypercar ‒ the very high end. At that stage, we didn't do any cooling for batteries or any form of electrics. So we committed to a R&D program and started investing in developing our capability with EVs and other electric componentry. We initially had in mind, again, the usual revenue segments of motor sports — there is now a Formula E — and in high-value electric vehicles.
As I said, it was probably about two or three years ago that we started this R&D program. And already we are seeing a commercial return from this investment. We’re actually incredibly surprised at the extent of it. Yes, it’s there in motor racing, it’s there in the supercar and the hypercar market, but we’re seeing it across a lot of applications, for example, defence and industrial applications. Buses are becoming electric, large transport vehicles are becoming electric and so we think opportunity is only going to grow as development in this area is clearly accelerating. The PWR example is important for boards and for their companies. You can’t wait until the demand is there. We certainly didn’t do that at PWR. We saw it coming. You can’t wait and then do the investment and then gear up for it and do all that R&D.
We did all of that in-house. This takes years and kept putting significant investment aside in multiple financial year budgets. You have to be ahead of the curve. Otherwise someone else is going see that opportunity and happily eat your lunch and leave you playing catch-up. So it is that long-term perspective, not waiting until it happens to you. Look at it out there, identify that opportunity and do the necessary investments. Both my companies are currently investing in their capability in the hydrogen space for the future.
I love what you said at the end there, because it really should be familiar to so many people that, like any market opportunity, you have to be looking at what you're doing, looking at what your competitors are doing and seeing where the market’s going. Michael, again, I'd love to hear your thoughts on this risk, the opportunity lens and the approach you take as a chair and as a director and that of your organisations.
Building on what Sarah and Teresa have just gone through for a company like Lendlease. This whole area of sustainability is really part of our DNA. And indeed our founder, Dick [Dusseldorp], said over 50 years ago that it was important for companies to be considering their environmental and social impact, just as much as the financial bottom line they were driving. So let me just give a couple of examples — one around a risk amount around an opportunity. Lendlease has a pipeline of developments around the world of over $100b, and that is around 50 projects. We target 20-odd gateway cities around the world and every single investment case now within Lendlease for an urban read development, must go through a climate change assessment as part of that business case. We’ve developed four scenarios as to how climate change may play out.
If you go to our integrated annual report, we set out those scenarios and the investment cases must consider the most severe of those scenarios, which is a four degree warming. That is quite severe. And that considers the sort of physical impacts that Sarah was talking about, whether that's weather events or rising sea levels. As an example, we have a development that happened about a year ago in Boston called Clipper Ship, on the waterfront. As part of that investment case, when it was being conceived three years ago, we identified risks around rising sea levels. When you look at that development from the harbour, you observe it’s 1.5–2m above the surrounding developments. That was the assessment as to how much the sea level could rise in a severe scenario.
So that multibillion-dollar development has been designed to accommodate the effect of a four-degree rise in sea level, both in rising the ground plane and also in having basements designed to accommodate flooding — a whole range of things like that. Why would we do that? Firstly, we’re building for the long term. Secondly, it gives a greater security to residential tenants and people buy into that development for that element. It gives greater security to investors that their investment is going to be there for the long term. This is increasingly what people are expecting from forward-looking companies like Lendlease, but they’re also opportunities.
Those of you who live in Sydney will be familiar with the development of Barangaroo, which Lendlease finished recently. When we bid for that in 2009 with the NSW government, we were tendering for the right to develop Barangaroo South. We bid on the basis ‒ this was in our tender document ‒ that it would be a carbon-neutral project when it was finally built. And 10–12 years later, Barangaroo is one of the first precincts in the world, not just a building, but precinct, assessed as carbon-neutral. There are many instances now where our major tenders, like the government or authorities, are not looking just for a financial outcome. They are looking for an environmental and a social outcome, as well. Looking back to 2009, I’m absolutely convinced that being so ambitious was one of the elements that got us to the front of the queue and won that development. When we bid equivalent developments in London, it is absolutely a defined part of the bidding process about the environmental aspects that you’re going to be bringing to that development.
The final observation I would make is around the increased incidence of severe weather. We are noticing, just as Teresa mentioned, that the increasingly significant safety incidents that occur around the world are being driven by severe weather events. Nine of them were directly attributable to a severe weather. We’re finding doing a study around the world to say, OK, so what does that mean in terms of our operating procedures? What does that mean in terms of our design procedures? Because this is becoming far more prevalent and we have to assume it’s going to happen. So again, directors have obligations around safety, creating a safe environment for your workers and for anyone else who’s on the site — and indeed, for the public after these developments are completed. This means you have to have an eye on what climate change is doing to weather.
Sarah, can you just talk us through briefly what are the director's duties, what are the legal obligations on directors and how do they interact with roles around climate governance?
As directors, we have a core obligation to act in the best interests of our organisation, of our company, when we’re exercising our functions in relation to strategy, in relation to risk oversight, in relation to disclosure. Our obligation is to exercise due care and diligence when we do so, so we’re held to the standard of care of a reasonable director. What would a reasonable director do in these circumstances? And it’s important to note that “reasonable” doesn’t mean “average”. It’s not what would an average director do. It’s quite a proactive obligation. It’s not about applying the information you know it’s about. What would a reasonable director do? What interrogation would a reasonable director give to a particular issue?
So when we think about climate change, there is an obligation to have a working understanding of this issue. It’s a very high-profile issue. You can’t open a newspaper without some discussion of it. You don’t need to be an expert, but you need to have a degree of alarm-bell knowledge that allows you to interrogate the issue and to ask questions of management and of independent experts in the area. Often when we talk to directors, they say, “Oh, climate change isn’t a material issue for us. So we don't need to think about it.” And it’s really quite important to hear from a legal point of view, to understand that the obligation on a director is not to consider material issues. The obligation is to consider foreseeable risk issues and to interrogate those issues, because how do you know if an issue is going to be material in its impact on your business, on your organisation, unless you’ve actually thought about it?
So there is a clearly, almost undeniably, foreseeable risk and opportunity associated with climate change across the vast majority of sectors in the Australian economy. Actually, in the most part, they will be material. There is a study by the Sustainability Accounting Standards Board that chopped the economy into 79 different sectors and concluded that in 72 out of 79 of those sectors, climate change is a material risk or opportunity. So you’ve got a proactive obligation to understand where climate change is from a contemporary point of view. You need to interrogate and ask questions of management and independent experts and actively apply your independent judgment. Make sure that you’re presenting a true and fair view of the issue, disclosing a true and fair view on how it impacts on your financial position and prospects. And don’t presume that it won’t be material for you.
I do want to just delve into it a little bit more in the context of the points you raised about material risks in the context of NFPs. I know we’ve got a number of directors of NFPs, charities and the like watching us to tonight. Michael, I’ve talked about your role you’ve just surrendered in the Melbourne Symphony Orchestra. Can you talk through how that not-for-profit organisation approached climate risk, particularly in the context of what I’m sure would be the existential risk of COVID-19 for that organisation. How do you deal with other risks — like climate risks — at the same time? How do you balance all those risks in your consideration?
Like performing arts organisations all around the globe, COVID has had a massive impact on players and audiences — particularly on the players. They like nothing more than getting up on stage, making music and giving great amount of joy to everyone. So we really have to feel for the arts community generally. But setting that to one side, in areas like climate change, that may seem like a curious thing to be thinking about as a NFP board. But when you think about your stakeholders, when you think about what donors’ expectations may be, what corporate sponsors’ expectations may be, increasingly — if you’re fortunate enough as the MSO to have strong government support from state and federal authorities — what their expectations may be about what you’re doing around climate change.
Then you think about your own employees, whether it’s the buyers, the back-of-house staff, the administration, who all could well have passion in this space. They expect to see their organisations doing something about this. So what is it that could happen in such an orchestra? Well, you can think about the way you run your affairs. The extent to which you can do things electronically, rather than using paper may sound an odd thing, but getting the musicians to use iPads for their scores, instead of having a hundred sets of scores run off by paper — and what that’s doing in terms of consuming natural resources. Very often, it’s the younger players who adapt to that very quickly. But it’s a really important thing to do because scores get marked up. But if you’re doing it by paper, everyone’s got to make changes themselves. Then we had a passionate MSO supporter, who was also passionate about the environment and who commissioned us to write an environmental symphony, which had its world premiere on UN Environment Day. So there’s a whole range of things that it may seem like a long bow, but to the point Sarah was making, this impacts every organisation and every director. Whether it’s a large company or a small company, this is coming down the pike. It’s already here in my view and has been for a while. And it’s important to get your mind across it and how it impacts your particular organisation.
Hopefully food for thought there for some of the NFP charity directors who are watching. I want to switch to another issue — the role of directors and the supervision of management. I ask you to respond to this Theresa. How do you incorporate that into your role supervising management oversight in the organisation? How do you incorporate your views on climate governance? How does it affect relationships with management and what, if any, is the role of metrics and targets?
It probably varies from company to company. There’s no one size fits all as with a lot of things directors do. It really depends on the company, its size, its operations, its level of sophistication and maturity. I've heard Michael talk before about the tremendous amount of work that the Lendlease management bring to the board. As he says, it’s part of their DNA and probably for us also. Whilst we’re probably more reactive to what was happening in the marketplace and seeing we had to come to grips with this, it was largely management-driven. Having said that, the board played a really important role, particularly early on, in encouraging the management approach to this task, to be positive about it and to really encourage this lens of risk and opportunity rather than it being something that was another job, another report ‒ another thing we have to do. So that sort of encouragement and engagement in that area helped to get the ball rolling. Once it was rolling, it was met with high levels of enthusiasm, so that was helpful. PWR? Is very different. It’s only been listed for a handful of years. And is a small, fast-growing company.
For these smaller companies, for the NFPs, for unlisted companies, the board can play probably a more useful, hands-on role in bringing some of their experience from other places to help the management team. Guiding them through this process in a sensible, measured, step-by-step way. I always believe in starting with the risk and opportunity assessment. That really engages everybody, but it’s very different at Downer, for example, where we have a zero harm team as Mark will have at Lendlease. We look after safety, environmental sustainability and we have a committee of the board dedicated to zero harm. So there’s a lot of arms and legs looking at this issue as there will be in a company that has such diverse operations and 40 odd thousand people. You do need that sort of attention. But at PWR, we’ve got a very small group of people who have big jobs — and this is added onto them — so it’s very different for companies at very different stages. You don’t have to go from starting this process to being a leader in your processes, or a leader in your reporting, in one giant leap forward. That’s unrealistic, this is going to be a journey for everyone. Some of us have been on it for longer, but it is a journey of the organisation as a whole developing its knowledge, developing its frameworks and processes, developing how it reports on it down to a site sustainability report that’s as big as the annual report. PWR recently has added a section in its annual report that talks about these issues.
We all know that you’d have to think about what’s suitable for that company. The important thing is to start the journey with this risk and opportunity assessment and then continue to gain knowledge and improve and keep progressing year after year. That’s what’s required. Keep up to date, keep enhancing your knowledge and keep going back and looking at things. At Downer, we did our very first risk and opportunity assessment in 2018, which seems like yesterday. And in the financial 2022 year, we’re going to do a complete bottom-up assessment of the issue. We are very focused on this topic.
You mentioned metrics. Downer definitely has KPIs that relate to sustainability and the environment just as we do with health and safety. And just as we do with a whole range of financial metrics, at Downer the zero-harm committee does all the work on the safety environment and sustainability metrics and makes a recommendation to the remuneration committee as to what they should be in any particular year. We've had environmental metrics for many years, but they do include science-based emission-reduction targets and these are continuously reset. The bar is continuously getting higher or perhaps lower. In this case, I mentioned one other area that may be of interest with KPIs and metrics. Last year, I did a major refinancing of its debt platform. And in this we entered into a $1.4b syndicated, sustainability-linked debt facility. Now, it has a whole range of KPIs around sustainability safety, mental health, looking after Indigenous employees, both in Australia and in New Zealand. And it has a range of environmental KPIs as well, including science-based emission-reduction targets. If we meet some or all of those KPIs, then the borrowing cost to Downer is reduced. So this topic is everywhere, in every aspect of your business, including your debt platform
Another issue is insurers and lenders. It’s another issue boards are going to have to confront. Sarah, I want to get your views on disclosure. Before I do, Michael, is there anything else you wanted to say on metrics and targets and how you might report on that?
Lendlease announced last year that we were committed to net-zero carbon emissions for scope one and two, which is fuel that we burn and energy that we use by 2025 — so, in five years’ time, and to absolute zero on scopes, one, two and three by 2040. In leading up to these very ambitious targets, the board was concerned to understand what is behind this and what are we committing ourselves to because we’re not about putting out the aspirational targets. If we have no idea, how are we going to get there? We have a clear pathway through to 2025 for net zero. To get to absolute zero by 2040 is going to require a whole lot of development scenarios that we are working on. But if I go to 2025, what we then went through with management through our sustainability committee — which is a committee of the board that oversights this area, along with safety — was a series of eight workshops by management that went through every component of climate change, carbon emissions, every aspect of our business, and then assessed what would be the opportunities to reduce our carbon footprint. And how would you measure or track that? What was the action plan to get to net zero scope one and two by 2025? And for those that are interested, again, if you go to our integrated report, we set this out. What impressed me was the disciplined way management took us through the thought process and brought the board along, and the input we were allowed to have. But, then, they are very tangible actions. For example, phasing out the use of fossil fuel diesel and moving to green diesel, which has been developed in the UK. And any new development we do having no gas connections. That may sound interesting given that, in some quarters, gas is held out as the transition fuel, but in any new apartments we build, we are looking to have that completely driven by electricity — for heating, cooking or whatever — because ultimately that electricity will be delivered by renewable sources. We’re committed to 100 per cent renewable by 2030. It’s looking at things like cranes. We will now only buy electric-driven cranes. When we’ve established a pathway to 2025 to a net zero, then that is measured and monitored quarterly through the sustainability committee on each one of the elements that builds up to us delivering on those outcomes.
I'd love to talk about how you sit down and work through those targets and monitor them. It’s an important part role for the board, how that they oversight it, especially when that made those targets public. Sarah, if you can talk a little bit about the legal considerations people should think about when they’re disclosing or reporting. And if you could touch not only on the listed companies perspective, but on that of the NFP or unlisted company that might be making statements, or a NFP charity might make to a donor, or an unlisted company might in advertising. What considerations should directors and boards take into account?
Well, we can think of that at a very first principles level. This is a financial risk and opportunity. It is an issue that you’re interested in. They want to understand how you are considering the relevant risks and opportunities, how you’re managing them, how you’re structuring and strategising so that the business can continue to thrive in the transition to a low-carbon economy. Now, whether you’re providing information to a donor, whether you’re providing information in an RFP or whether you are a reporting entity that has a specific legal obligations to disclose information in an operating and financial review, or in audited financial reports, that same key principle applies. This is decision-useful information for investors and for stakeholders. And it has the potential to have a material impact on financial position and financial prospects, in which case, it needs to be disclosed.
There are two specific formal bits of guidance that are useful here in terms of narrative disclosures on the risks and opportunities associated with climate change. We talk about in the guide, the recommendations of the task force on climate related financial disclosures, the TCFD, and that’s the gold standard for assessment and disclosure of climate-related financial risks. Although for listed companies, even though it’s voluntary, investors are going to punish you very quickly. The second is to look at the joint guidance that’s been issued by the AASB here in Australia, where the board clearly says, if you consider climate changes and material financial risk, you also need to consider the impact that it does have on items in your balance sheet. What does that mean for asset useful lives, for fair value of assets, their impairment provision for onerous contracts, et cetera. It’s financial, treated in the same way as you would any other issue.
Theresa, did you want to say something?
Certainly, at Downer, we found using the TCFD as a guide incredibly useful. We moved to using that guide very soon after we did the initial risk and opportunity assessment. It was very early in the piece and the people who lead the team probably couldn't recommend it highly enough to help you on this journey. So, I commend it to those who aren’t familiar with it along with, of course, Sarah’s.
The most popular question is that from Jeff: “Given the high degree of scepticism around the impact of climate change among many Australian policymakers, what lobbying efforts does the AICD have planned to support policy changes?”
Thanks, Jeff, and for all the people that like that question. Again, I’d echo Angus' words to open. He announced there that the AICD would publicly support a net zero by 2050 policy for the Australian government. We join in doing that with a number of other organisations who have also made that statement. And that is not current government policy. So that is a positive statement we're making tonight. We readily accept we are not climate experts. We are here to talk about climate governance. We will work with those other groups and support them, and the more expert groups who are lobbying government — and we’ll be bringing that particular perspective of what we’ve discussed tonight — the corporate governance perspective to that question.
That probably answers the next question from Tom about the government's position on climate change. I might just pick up another question here from Dominique about First Nations representatives in the working group that Angus announced tonight. That is only a very initial phase. The working group is bringing together a very small group of subject matter experts. Part of the role of that working group is then to determine what a more permanent structure might look like, how it would be representative at the moment. It doesn’t have any individuals on it at all. Just these subject matter experts, PwC, Deloitte, the law firms, MinterEllison, Herbert Smith Freehills and the pollination groups. So they’re just institutions, it’s only a short-term measure. We will look at making sure it’s representative and represents groups like First Nations peoples.
I will put this question to the panel and see who wants to pick it up. This is a common one that we’ve explored in a survey we put out a couple of months ago, of which we’ll be publishing the results shortly. Comment on the tension between short-term shareholder return and value generation in the longer term posed by climate risk. Are you able to leave profitable business on the table because of climate concerns?
From a technical legal perspective, there is no obligation on directors to be maximising short-term financial wealth. That is not what the best interests of the corporation are. The corporation is a perpetual entity, or its own entity with perpetual succession. You do need to also consider the longer term outlook for the company. That being said, it is a common question where we’re grappling with things like COVID; we’re grappling with things like remaining solvent. We also have to think about climate change. As a director, you need to be able to walk and chew gum at the same time. Our role as a director is not just to deal with the easy issues. It’s not just to deal with the one most pressing issue on the agenda. We’re expected to be able to tackle multiple issues at the one time.
That doesn’t mean that climate change has to be given priority to any other issue. But as any with other financial risk and opportunity – it should be considered on its merits by reference to the magnitude for the particular organisation and put it into the mix when you’re balancing the different competing pressures on strategy and on risk. But the overlay to that short- and long-term pressure is that climate change is now and climate change is accelerating in magnitude. As long as you’re taking that into account when you’re balancing other short-term pressures.
Michael, can I get your answer to address this? If you talked about the buildings at Barangaroo and in Boston, I’m sure that there was greater cost in that. But Lendlease is not a charity. What about the effect on your customers and your clients? Do you see that that’s driving value there, including long term shareholder?
I’ll give you two quick observations. One is I draw a parallel, first of all, with safety. So you’ll get people who say, “I can’t afford to have a safe work environment because of everything you have to do.” And yet when you get a tragedy, or a serious illness, accident, or heaven forbid, a fatality, the consequences of that in terms of shutting down a site, of counselling team members, of working with families and everything that comes from that, is far more than the cost of doing it properly. So, I first start thinking about safety and climate change in a similar light. But to the point you’ve just raised there, people will throw up that, “Oh, yes, it’s going to cost more to build,” but we’ve actually done the business case for sustainability. You’ll find that if you build an office block to high-sustainability standards, as we do, then they’re actually more attractive to tenants because employees would rather work in a healthy building than in one that’s not healthy. That means it’s easier to attract employees. They are more productive because they have less time off through illness. This has been proven, Macquarie Bank is a wonderful building in Martin Place in Sydney. I’ve done the study on this. Absenteeism is lower, so therefore it’s more attractive to tenants. Tenants are actually prepared to pay a premium. If it lets up quicker, they’re prepared to pay a premium. Then investors will buy into that building at a lower cap rate, making more money for the organisation. And this is how I deal with climate change sceptics, I say, “Forget about all that sort of stuff. Let’s just prove to you how it works from a financial point of view. I happen to think you’re wrong on the climate change point, because it is reality, it is happening. But let me just show you the business case.” And it's amazing the number of people who sort of step back from that. And say, “Yes, OK, I can see why it makes sense.”
Teresa, what do you say to that question?
I agree with everything Sarah and Michael have said, but I'll make a couple of quick points. One is that directors deal with the balance between short term and long term every time they go into a board meeting on a wide range of subjects. When I talked about PWR investing two or three years ago, it was a significant R&D investment into our capability around cooling electric vehicles. That is balancing your short and long term because the money that was invested in that R&D program, the time of our engineers, and all the things we did around that, with absolutely no commercial return until recently, is balancing the short and the long term. We are rewarded in doing that, abut the results of that and the opportunities we see are far exceeding our expectations —and our expectations were reasonably robust to start with.
So that’s the first point. This is our bread and butter. Balancing the short and long term and getting that right. That question also assumes all shareholders are the same and think the same. They don’t. Sure, there are some shareholders who are really looking at companies— marking the market quarterly and looking at what their fund is worth quarterly, or whatever. Equally, there are the funds like Sarah is on the board of, and there’s a wide range of them now that are increasingly concerned about what the value of their assets and the value of their investments are going to be in 20, 30, 50 years’ time. They’re starting to get pressure from superannuation funds from their members who say, “Are your investments in sustainable companies that are going to be around in 20, 30, 40 years time?” Because they’re taking this issue seriously. “I'm only 25 and I don’t want to be claiming my superannuation in the short term, I want to be claiming on that in decades. So I want to understand what you’re doing about this sustainability issue and the companies that you're investing in.”
There are some interesting insights in that the report that Angus mentioned that we’ll release on a topic. I might just address a question about how can the AICD support the boards of charity and NFPs to implement and improve climate governance, strategies, and policies. And then another question about how might the AICD and its members, graduates and fellows send a strong message in support of greater and more ambitious climate action in Australia. To take the first one, read the guide. But having said that, we recognise there are unique issues facing NFPs and charities. You might not have the option to exit a market in the way a private company does.
If you’re providing a service, a charitable service in particular or caring service, watch this space. It is something we are aware and will be working on. Tonight you’ve heard from our CEO a commitment from the AICD to do more in this space. One of our priorities is getting those resources, recognising there are unique issues facing NFP and charitable boards.
The second one, I’m not sure that we are in the position, for the reasons I said earlier, to coordinate members of the AICD in taking action. But again, referring back to that last point, there will be more coming from us, more to assist you with more resources and events like this coming your way.
There are questions coming from a lot of people about setting up a separate ESG committee. Can you talk us through the benefits and drawbacks of that? How do you still get full board oversight of what’s occurring?
Again, it’s not a one size fits all. You’ve got to work out what works for your board. And again, going back to my examples, because I think they're good examples because they are so different. Downer is a very big organisation working all across Australia and New Zealand, with over 40,000 employees and incredibly diverse businesses. And the zero harm committee worked very hard and spends a lot of time on this and reports up to the board, of course. I would say probably all directors would attend a number of the committee meetings throughout the year, just to keep up to date with it at that more detailed level. If I can attend, I always do. So, that's a start. On the other hand, we’re four directors, the CEO and three non-executive directors, and we spend a solid amount of time together. We never meet without talking about risk and strategy and all these sorts of things. Work out what you need, work out what you think will work for you. Clearly, the bigger the organisation, particularly when you combine the environmental and sustainability with your health and safety obligations, it is very useful to have that extra dedicated time committed to these subjects. In those sorts of organisations, there really is so much to talk about.
At Lendlease we've had a sustainability committee for many years, which covers, as I said, earlier, safety and of sustainability in terms of environment, climate change, social policy. And in Woolworths, we’ve had such a committee, for about the past five or six years. You’re seeing increasing expectations by investors — the whole environmental social movement among investors is massive and getting bigger every year. Indeed, in both of the companies I’m involved with, public companies, there are now road shows done by the sustainability team around to the investors. And the analysts, every year on the round, are sustainability reporting — just as there are road shows done by the head of investor relations, CEO and CFO on financial results. You’re going to find, even if you’re not a listed company, greater expectations from regulatory authorities, from governments and the like. Very much taking Teresa's guide, this is coming down the pike — there are more and more expectations. The board needs to set itself up in a way that it’s able to properly work with management to ensure they’re properly discharged and also that you’re taking the opportunities it presents.
I love that finishing about positivity and on opportunity, but noting those increasing pressures. We've covered a lot of ground tonight, but we could have been here for hours. We will have to come back and delve into some of these specialist topics, but can I thank the three of you for this amazing COVID-home-bound discussion. That’s very much appreciated by everyone who had the privilege of watching it. I'm going to give the guide one last plug. Hopefully you’ve got the link and have had a chance to look at it.
If there’s anything we didn’t cover tonight, hopefully it’s covered in the guide. A recording of this event will be available so you can view it again. Following today’s event, you’ll receive a brief survey from the AICD team. Please take the time to complete it as your feedback is important to us. It will help the AICD improve its service to members.
Thank you all for your attendance, your questions and your interest. This is the first of many events and we look forward to seeing you at a future one.
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