Climate Governance Forum 2023: Highlights from key panellists

Sunday, 01 October 2023

Denise Cullen, Rosanne Barrett & Narelle Hooper MAICD

    The Climate Governance Forum held in Sydney in August attracted close to 2000 in-person and online attendees. Here are some highlights from key panellists. 

    In conversation with Mike Cannon-Brookes

    Directors who drag their heels on the shift to renewable energy will face the wrath of shareholders and leave themselves exposed to risk once mandatory climate-related financial reporting comes into force, according to Mike Cannon-Brookes, who opened the 2023 Climate Governance Forum.

    “Decarbonisation will affect in some way every single company in Australia,” according to Mike Cannon-Brookes, co-founder and co-CEO of Atlassian and chair of Boundless. “Every director should therefore be broadly aware of what it means and the risks and opportunities for their company.”

    He told the Climate Governance Forum that directors’ climate obligations are likely to become more extensive over the next decade. “It’s a pretty safe bet that 10 years from now, you will have much, much stronger controls on pollution and much stronger reporting to your shareholders. That probably has similar risks to you as a director, and to your company, as financial risks.”

    Cannon-Brookes cautioned directors on the risks of organisational inaction and lack of early planning around climate change. “When changes are forced, they’re usually far more expensive,” he said.

    He also indicated there was the potential for “pretty strong penalties” for directors who remained unaware or uninformed of their climate-related responsibilities, urging directors to look towards the “green shoots” of opportunity that would emerge from the coming technology transformation.

    “Decarbonisation means that over the next 10 to 20 years, we will change the technology of every source of heat, light and motion to being electrified,” said Cannon-Brookes.

    “This is a huge economic opportunity because we’ve got the three ingredients every country is looking for. First, there are the physical resources, including rocks in the ground like silver, nickel, copper and lithium that happen to be really valuable for this transition, as well as sun and wind. Second, we have the fifth- largest capital pool in the world and a very sophisticated financial system. Third, we have a huge talent base and a highly educated workforce. As a country, we have the ultimate opportunity to be bigger than the world’s 20th-largest economy [goods exporter] and we should be embracing it.”

    As the largest shareholder in AGL, Cannon-Brookes said his view was that the energy giant had “amazing assets”, including millions of customers and “some of the best grid connections in the world”. However, he noted AGL had scored “very poorly” on ESG issues, which is why it had no major institutional shareholders — thus allowing him to buy about an 11 per cent stake through his investment vehicle, Grok Ventures, in mid-2022. He revealed how he subsequently organised for retail shareholders to vote down a proposed demerger.

    How to prepare for mandatory climate reporting

    David Thodey AO FAICD considers Australia’s looming mandatory climate reporting requirements to be the greatest change in his board career, the Climate Governance Forum heard.

    David Thodey AO FAICD, chair of Xero, Tyro and the Great Barrier Reef Foundation, and former chair of Telstra, told the forum that climate compliance and oversight was becoming more complex, but he urged directors to lean into the challenge. “This is probably the biggest change I’ve seen in my director career in terms of what we’re required to do,” he said, referring to the imminent mandatory reporting regime. “It’s becoming more complicated rather than less complicated. It can’t be delegated to the climate team — it has to be every director leaning in.”

    The federal Treasury is working on a mandatory climate reporting system that is expected to require boards to disclose decarbonisation targets and monitoring in line with International Sustainability Standards Board (ISSB) standards from 2024–25. The phased approach will require large emitters and reporting companies (about the level of the ASX 200) to report from 1 July 2024, with smaller companies (approximately equivalent to the ASX 300) to report from 1 July 2026. From 1 July 2027, disclosures will be expanded to about 20,000 companies that meet the criteria.

    Thodey told the forum there was “no magic answer” and that directors should start to ensure companies have the right skillsets, actions and oversight. “The need for the board to actively engage with management is really important,” he said. “I look at the climate report and the decarbonisation report with a lot of focus and start to ask questions about, ‘How do I know this is real?’ Reporting is about what actions you’re taking, so you better make sure you’re taking actions.”

    Julia Hoare, New Zealand-based chair of the Port of Tauranga, deputy chair of a2 Milk and a director of Auckland International Airport, acknowledged directors could be fearful of the changes, but pointed to the positive impacts of the NZ mandatory disclosure scheme, introduced from 1 January 2023.

    She noted directors had to take the first step and work progressively to identify their gaps, develop the skills and set strategies. “It can actually make a shift from this [being] a compliance issue to being quite strategic in the organisation,” she said. “Directors need to have a really good, detailed, robust discussion about what our objectives are and how we can evaluate risks and opportunities.”

    Hoare said some companies had started climate subcommittees, but boards had to determine how to integrate it. “It’s really going to be changing the way you think strategically about setting [the company] up for the longer term.”

    Deloitte’s managing partner of Audit and Assurance, Joanne Gorton MAICD, identified one of the key challenges as the availability and reliability of data, particularly around scope 3 emissions from the value chain. Acknowledging the skills challenge in assurance, Gorton noted that there was significant expertise available and auditors were upskilling on climate. “The talent transition is underway,” she said.

    Transition planning: the path to net zero

    The huge transformation inherent in shifting to a lower-carbon economy will only be realised when boards approach the establishment of climate targets as a core part of business, panel members told the Climate Governance Forum 2023.

    Facilitating difficult conversations and creating a “safe space” for senior leaders to engage with a sometimes-fraught topic was necessary, said Cate Harris, who is group head of Sustainability at Lendlease. She acknowledged that around 2018–19, it was hard to have a conversation across Lendlease because “people were afraid of mixing up their net zeros with their carbon neutrals with their carbon negatives... and what it all means”.

    However, Lendlease announced its industry-leading Mission Zero targets in August 2020, after extensive consultation with senior leaders across the globe. Using a new strategic framework from the Task Force on Climate-related Financial Disclosures (TCFD), the company has committed to reach net zero carbon by 2025 and absolute zero by 2040 — with “no offsets and no excuses”, said Harris. “They were not the targets set by the sustainability or the ESG team — they were the targets decided upon by our global leadership team and our board. They’re not sustainability targets. They are, in fact, the business targets.”

    Ewen Crouch AM FAICD, a non-executive director at BlueScope Steel, said directors of listed companies needed to understand that they were already being assessed through a sustainability lens. “When the capital markets can’t price carbon risk inside your [organisation] that has a major implication in terms of your dealings with investors. You have a look at your investor base — there will be a large number of industry super funds with well- researched, well-resourced ESG divisions, which provide a lot more feedback on where you’re going than possibly one would like to receive.”

    He also noted the importance of clear lines of accountability within the organisation. However, directors on the boards of not- for-profits and other non-listed entities needed to “create [their] own sense of urgency”.

    Dr Kerry Schott AO, a director at AGL, said the starting point for any organisation was a plan and a well-considered strategy on how to get there. “It is absolutely critical for every company that the electricity sector decarbonises, so that everybody else who’s using electricity, can decarbonise,” she said. “Almost all manufacturing is heavily reliant on energy of some kind and if we can get that greener, then it helps everybody else on their journey.”

    Schott spoke of the importance of reviewing plans and strategies regularly, noting AGL is addressing theirs in a detailed fashion every three years. “You need to have the agility to move as you’re going along — so don’t bake it and think you are never going to need to go back to it.”

    Evolving risk

    The next big climate challenge for directors is the need to respond to our evolving understanding of physical risk and adaptation in what is a critical decade for action, Assistant Minister for Climate Change and Energy Jenny McAllister told the forum.

    “Good climate governance is a shifting target in a complex and changing economic and environmental landscape,” said Assistant Minister for Climate Change and Energy Jenny McAllister. More complicated climate decisions are coming before boards as decision-makers analyse how climate risk manifests in supply chains, business operations and assets.

    McAllister said that while many countries have a net zero plan, an S&P assessment of 10,000 companies globally found that only one in five had a plan in place to adapt to the physical risks.

    In May, the federal government announced budget funding for a National Climate Risk Assessment, which will draw together key data. McAllister confirmed the significance of the initiative. “It will mean for the first time we’ll have a national picture of the risks that we are going to need to address together.”

    After legislating targets for net zero emissions by 2050 and 2030, and reforming the safeguard mechanism for large emitters in July, the government announced decarbonisation plans across six sectors including agriculture, the built environment, energy and electricity, industry and land, transport and resources.

    McAllister, who praised the AICD contribution to date, said it would take shared responsibility and re-creating the institutional capability to tackle such complex problems. Targets will not be set-and-forget. “What will matter in the long run are real efforts.”

    The risks of greenwashing

    During the race to net zero, boardrooms across Australia are learning that poorly executed transition plans can become a key source of greenwashing litigation risk, the risks of greenwashing panel heard.

    So far this year, the Australian Securities and Investments Commission (ASIC) has launched three greenwashing court proceedings and issued at least 20 infringement notices to companies making claims about their ESG credentials that the regulator considered “misleading”. One of the latest organisations to find itself in ASIC’s crosshairs is Active Super.

    ASIC alleges that the superannuation fund engaged in “misleading conduct and misrepresentations to the market relating to claims it was an ethical and responsible superannuation fund” despite shareholdings in gambling, tobacco, Russian entities, oil tar sands and coal mining.

    Such actions clearly signal that greenwashing is an escalating enforcement priority, according to ASIC deputy chair Sarah Court. “Right now, we don’t have any new laws, so the work that ASIC is doing in relation to greenwashing is under existing laws, plain old vanilla, misleading and deceptive conduct,” she said.

    But the bar is set to rise when mandatory climate disclosure commences for the first cohort of reporting entities from 2024– 25. The enforcement action comes against the backdrop of a parliamentary inquiry into greenwashing, particularly claims made by companies, the impact of these claims on consumers, regulatory examples, advertising standards and legislative options to protect consumers.

    Timothy Stutt, a partner and Australian lead for ESG at Herbert Smith Freehills, said boards needed to view disclosures from “top- down and bottom-up perspectives”. This meant communicating clearly about any targets or claims, but also having “a fairly fleshed-out plan and real substantiation behind what you’ve said”. He urged against “green hushing” — staying silent about climate strategies for fear of being called out.

    Alinta Energy director Kathleen Bailey-Lord FAICD agreed that “doing nothing” still posed a risk. “Shushing means you’re not talking to the stakeholders, including your own employees,” she said, noting organisations that found their disclosures on shaky ground due to a rapidly changing environment should “pull back and verify” with the same rigour that would be applied to financial disclosures.

    “But I would encourage you not to swing the pendulum so far the other way, that you literally shush on everything, because that is not going to help. Capital markets won’t like it either, because they’re trying to price the risk of your company.”

    Court reassured the panel that companies would not be penalised for statements made to the market based on a set of assumptions that were reasonably held at the time.

    Biodiversity and nature: what can boards do?

    There was an “urgent” need for directors to consider nature (such as the biosphere, marine ecosystems and atmosphere) in their decision-making, given the reputational damage, regulatory risk and supply chain disruption arising from biodiversity loss, Climate Governance Forum attendees heard.

    “There are going to be far more catastrophic events than we perhaps could have ever imagined a few years ago, because climate change is happening,” Fortescue Metals Group director Penny Bingham-Hall FAICD told the biodiversity and nature panel. “When you’re thinking about scenario planning properly, don’t just think about a bad event — think about a really catastrophic one and how you deal with it.”

    Carolin Leeshaa, Natural Capital and Biodiversity lead for KPMG Australia and a member of the Taskforce on Nature-related Financial Disclosures (TNFD), also urged a radical rethink of how nature was viewed in boardrooms. “The fundamental challenge we have as a society is that nature is still largely treated as an externality — meaning that it’s systematically undervalued — or unvalued — in all levels of society and therefore we’re increasingly at risk of over-exploiting it.”

    The ultimate objective of the forthcoming framework of the TNFD was to redirect the global flow of funding from activities that harm nature towards activities that benefit nature, she added, noting that the latest global risk report from the World Economic Forum (WEF) ranked biodiversity loss and ecosystem collapse as one of the top five global risks humanity faces over the next decade. For that reason, future-thinking boards need to prepare to integrate and value nature in a much more holistic manner on balance sheets — and ultimately to disclose it in sustainability reports alongside climate.

    Moderator Sarah Barker MAICD, a partner and head of Climate Change and Sustainability Risk Governance at MinterEllison, said there was minimal regulation governing business behaviours around nature and biodiversity. “But directors would be ill- advised to wait until we have hard law that prescribes what has to be done, because market, investor and stakeholder expectations are running a long way ahead. This is not a compliance issue, it’s a risk issue.”

    Ian Hamm MAICD, chair of the Indigenous Land and Sea Corporation, said the weight of the issues could appear “overwhelming” to directors of smaller boards. “Small organisations are not going to resolve the problems of the world, but we can all make a contribution in what we do. If you’re a not- for-profit, the government has said [reporting] is not required of us, but that doesn’t mean we shouldn’t do it. That doesn’t mean we shouldn’t set the benchmark for our own conscience.”

    Act now: understanding stakeholder expectations

    Shareholders want immediate action on carbon emissions reduction, the forum heard.

    Brynn O’Brien GAICD executive director of the Australasian Centre for Corporate Responsibility (ACCR) noted there was a message for boards as the growing use of shareholder proposals, campaigns against individual directors and divestment garnered intense discussion. “The message for oil and gas company boards or the boards of major emitters is, it’s time to start setting company strategy like your jobs depend on it, because they do,” she said. At Woodside Energy, the ACCR put forward member statements objecting to the re-election of board members, which received a 35 per cent vote against one director. “That’s really the direction this is going to go,” she said.

    Debby Blakey GAICD, CEO of industry super fund HESTA, said with a 20, 30 or 40-year investment horizon for its one million members, it needed to consider shareholder proposals on their merits. “We have a preference for resolutions that are clear about boards, demonstrating their strategies, how they’re managing risks, opportunities and giving us the information we need to give shareholders, rather than being overly prescriptive.”

    On board composition, Blakey said she looked for a future mindset. “This is probably the biggest transition any of us will ever be involved in and there is so much urgency to it. It is a board that is leaning in with capability, capacity and mindset. We like to see a board that can articulate that.”

    Australian Conservation Foundation CEO Kelly O’Shanassy, stressed the harsh reality. “Nature is in as much trouble as climate, and we shouldn’t get mesmerised by the complexity,” she said. “We talk about how hard it is. What is harder is living on a planet with runaway climate change. It is, in fact, impossible to do.”

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