Climate transitions complicated by stakeholders pulling in different directions: Study

Wednesday, 13 March 2024


    The latest AICD climate sentiment study finds organisations face challenges justifying their investments in transition.

    The Climate Governance Study 2024 finds organisations, particularly listed companies, are finding it challenging to execute climate strategies partly due to diverging stakeholder interests. Boards are increasingly faced with tension between short-term financial pressures and building long term sustainable value, according to the study published by AICD, in partnership with Pollination.

    The study builds on a survey of 1057 AICD members and interviews with 24 senior non-executive directors, mostly from ASX 200 companies. It finds 24 per cent of directors cite investor and shareholder demands as their biggest barrier to climate governance, second only to policy uncertainty.

    For listed directors, 35 per cent found a focus on near-term business issues a barrier, and in a sub-set of survey respondents from highly exposed ASX-listed companies (such as mining, manufacturing and energy industries) this figure lifts to 37 per cent.

    Investor expectations vary

    In interviews, directors noted that boards sometimes prioritised short-term financial outcomes over longer term sustainability due to shareholder expectations. In some cases, sustainability was seen as a second-order issue by investors – only of interest once financial goals were already being met.

    “If the company is unable to meet the financial targets shareholders are not interested in non-financial issues,” according to one ASX non-executive director consulted for the study.

    High variation in investor expectations was found in the study, with directors reporting some investors prioritised immediate returns, while others placed more emphasis on the long term and building sustainable value.

    “We are actually ideally placed to fund the transition because the sort of companies that we are really interested in are those which have a coherent transition strategy and a long-term outlook,” said AustralianSuper Chair Dr Don Russell in a study interview.

    Directors encourage investors to engage more on the climate transition

    Prominent among director concerns include the challenge of justifying investment in transition, alongside the allocation of costs.

    Directors stressed the importance of striking a balance between meeting short-term expectations and aligning with a more sustainable long-term vision. In industries with material investment needs, directors raised conflicting messages from investors calling for strong transition targets at the same time as highly optimised short-term returns.

    The report suggests investors need to continue to engage actively with companies, contribute their perspective and support ambitious transition action plans.

    This is especially as companies in some industries have experienced pressure from government and employees to extend the life of carbon-intensive facilities, such as electricity generation assets, at the same time as some investors and civil society actors push for clear transition plans, and in some cases, rapid decarbonisation.

    Who bears the cost of the transition is unresolved

    In the study, many directors noted insufficient mechanisms in the market to help navigate cost allocation, or to ensure reasonable distribution of costs which has created significant hesitancy to invest in transition.

    A number of directors noted that across their relevant supply chains, negotiations regarding who would bear the additional cost of low carbon products could sometimes be circular. The end result was a lack of investment in such products, hindering decarbonisation across entire supply chains and sectors. There were also competition law constraints holding back key players in a sector from collaborating.

    “There is an open question in some industries whether the end user is willing or able to pay a premium for a product to facilitate the transition. Government has a role to pay in incentivising end-user take-up of green products,” said another ASX non-executive director consulted for the study.

    In the study, directors said a broader environmental, social and governance (ESG) pullback among some investors (especially from the US) was a significant challenge that was exacerbating uncertainty.

    “Companies are in a difficult position because investors want you to do something, but not too much if it doesn’t have a reasonable payoff,” Kathleen Conlon FAICD told the study. “We have a duty to the shareholders in perpetuity, but the current shareholders are the loudest voice. We explicitly have a capital management policy that says we will be investing in climate reduction capital that may not get a return, but we are clear how much that is. So far, investors have been happy to be supportive.”

    The study finds the need for real commitment and discipline from boards, management and importantly investors to support the allocation of funds to transition initiatives, even where this investment affects short-term financial results.

    The study recommends directors:

    • Build a strong and codified business case for transition, which is well understood by the full executive team.
    • Embed climate in standard company investment decision-making processes across the business. Clear communication of transition costs and investment is required.
    • Have clear and consistent messages to stakeholders on short term versus long term trade-offs;
    • Seek key investor and stakeholder support for plans.

    The study urges investors to:

    • Consider the full cost profile of transition and accept the impact on short-term returns.
    • Longer term investors should publicly support genuine corporate efforts to decarbonise, and the level of investment required.
    • Engage deeply with companies, especially those with embedded climate transition plans and longer investment horizons.
    • Scrutinise and understand companies’ short and long-term climate transition plans and their climate and nature risk profile.
    • Act as market exemplars around managing climate risk and opportunity themselves.

    Access the four-page snapshot, which highlight key findings, better board practice and recommendations for directors.

    For those looking for a deeper dive and recommendations for policy makers and investors, the full report features analysis of how the market has moved since our 2021 study, case-studies and director insights from senior non-executive directors.

    This is of of your complimentary pieces of content

    This is exclusive content.

    You have reached your limit for guest contents. The content you are trying to access is exclusive for AICD members. Please become a member for unlimited access.