Transparency, transition and opportunity were the strongest messages from the Climate Governance Forum 2024.
A set-and-forget approach will not suffice, said AICD CEO and managing director Mark Rigotti, and boards must work hand-in-glove with management to develop successful climate governance approaches, guided by the long-term interests of the organisations they serve.
Rigotti noted that 80 per cent of respondents to a recent AICD/Pollination survey said they were concerned about climate change as a material risk.
“Climate is intrinsic to core business strategy and risk management for many organisations,” said Rigotti. “The days of climate change being parked in the sustainability committee is a thing of the past.”
The mandatory climate reporting bill — Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (Cth) — was passed by Parliament in September. The landmark legislation will require certain organisations to make detailed disclosures about their climate-related risks and opportunities, commencing with the largest emitters and corporations from 1 January 2025.
AICD chair Naomi Edwards FAICD said recent recalibrations of targets by some organisations was more of an ESG “squeeze” than a “backlash”. “As reporting becomes normalised, maybe we will all be tweaking our targets,” said Edwards. “It’s a shift, not an abandonment.”
Non-executive director Ming Long AM GAICD suggested there was a lack of understanding in the community that change is required. “Change is hard for people, but where things are worth doing, there will always be pushback,” she said.
“Climate change is the most disruptive thing impacting the planet, pervasive in everything that we do. Directors need to understand that people are scared. We need to listen to their concerns, communicate and be transparent about the journey we are on and take them with us.”
Non-executive director Ken Dean FAICD noted that when it comes to climate, “there is real value in starting” an organisation’s journey.
Mandatory reporting “ups the temperature, particularly for boards”, said Dean, and organisations need to be sure, more than ever, about their ability to deliver.
“Make sure there is meaningful disclosure,” he said. “There’s an order of magnitude that makes it more difficult for some industries compared with others. Don’t be surprised if that causes management and boards to be more conservative.”
Pru Bennett GAICD, a partner at Brunswick Group, emphasised the need for companies to look at ESG issues through a corporate value rather than a values lens. This would help companies avoid getting into debates that might not be material to their business.
In the panel discussing mandatory climate reporting, Stockland Group sustainability committee chair Andrew Stevens highlighted the importance of transparency and how reporting would evolve over time.
“Don’t make outlandish claims and say what you don’t know. The moral of the story is you can only disclose what you have done. There is work to be done, but realise that the opportunities outweigh the risks. Learn along the way.”
ASIC Commissioner Kate O’Rourke said, “We recognise the scope of this change,” adding that ASIC chair Joseph Longo has previously described it as “the biggest in a generation”.
ASIC understands the transition required, said O’Rourke. The corporate regulator would be “pragmatic and proportionate” in its enforcement approach and take action on “really egregious breaches” it sees in relation to climate change reporting. “This is not about nit-picking everything that people say,” she said. “We see this as kind of an ecosystem — we’re all in it together.”
On the day of the Climate Governance Forum, ASIC released a report outlining its regulatory interventions made between 1 April 2023 and 30 June 2024 in relation to greenwashing claims. The report summarises the high-level findings, key recommendations and good practice examples identified by ASIC’s greenwashing surveillance during FY24.
Timothy Stutt, a partner at Herbert Smith Freehills, highlighted the uplift in reporting that the new regime would require and said companies need to have reasonable grounds for their future- looking claims and be able to substantiate them. Unpeeling some of the layers and putting assumptions in context would help organisations to show where there were areas of key uncertainty.
Climate governance in practice
Organisations needed to engage with stakeholders to meet their expectations on climate actions as reporting is set to become mandatory, said CGF2024 keynote speaker James Graham AM FAICD, chair of Coles Group.
Customers are interested in the company’s progress, said Graham. “We are on the journey. A clear climate action road map is essential, along with a desire for innovation. Everything we do must build trust among all stakeholders.”
On target setting, Graham noted “there has to be ambition” along with an understanding of what commitment really means. “Coles has a lot of resources and people engaged in the market to help us with understanding the risks and the opportunities,” he said.
“Data is key, because it can’t be a matter of hope. The business strategy must be reasonable, but ambitious. We’re broadly on track, but we monitor quarterly and see where we are and what we need to do, and this leads to the board feeling we are well-informed.”
Transition plans should not be seen as “scary” said Dr Ben Caldecott, director of the Oxford Sustainable Finance Group and co-head of the Secretariat for the UK’s Transition Plan Taskforce. A good plan could ultimately help an organisation secure better access to transition finance and his advice was to “crack on with the transition plan”.
“It’s about companies achieving net zero as quickly as they reasonably can, and making a start and progressing,” he said. “Don’t be put off and get started.”
Holly Kramer MAICD, a director at ANZ, Fonterra and Woolworths Group, stressed that the opportunity side of the equation is really important. The purpose and focus should not only be risk mitigation. Directors need to bring shareholders along for the journey and should be asking whether the organisation has the skills to achieve what needs to be achieved. She advised sourcing skills early to fill the gaps and bringing in external help if necessary because boards and management are all upskilling together and some are coming to the issue for the first time.
“Do not let the perfect be the enemy of the good,” said Dr Fiona Wild MAICD, group climate and sustainability officer at BHP and deputy chair of the Global Carbon Capture and Storage Institute.
Wild recommended putting standards in place to provide a measurement of progress — and bringing people along with you by finding areas of common interest.
“Work out what drives decision-making and insert yourself into it. Help people to understand why it is important to them and encourage people to look at the upside.”
Consultation and collaboration
On the day CGF2024 was held, Minister for the Environment and Water Tanya Plibersek and Treasurer Jim Chalmers announced that the federal government had tasked the Productivity Commission to lead an inquiry into opportunities to boost circularity across the Australian economy. It was a key recommendation of the Circular Economy Ministerial Advisory Group, which advises the government on ways to realise opportunities associated with a circular economy.
In a circular economy, materials and products are kept in use longer, including by designing longer-lasting and recyclable products, and by boosting waste and recycling infrastructure.
The inquiry will explore sustainable solutions that are good for the environment and for business — helping to cut waste going to landfill, while also encouraging more efficient use of raw materials.
Plibersek joined the Climate Governance Conference via a video link and emphasised the need to pursue a “nature-positive economy”.
“We can’t say we’ll never cut down another tree and we have to balance the economy with what’s needed... but if we can more than compensate for that nature loss, that is what we want to aim to do,” she said.
Noting that this was sometimes difficult to convince businesses to do, Plibersek added that while the government had no immediate plans to mandate biodiversity and nature reporting by corporates, it was clear that this is an area in which there is increasing global and domestic focus.
Smoothing the transition
Directors must move from climate ambition towards execution, said Rigotti. The key message for directors is that climate change is intrinsic to strategy and risk management. Directors must work with management on ensuring that the “hard skills” such as finance, legal and audit are brought together on the issue. Companies will need to make a “step change” and provide more granular detail on climate disclosure.
For private companies it will be a big step up, said Stutt.
“For those starting from a zero base, they should start now to be ready for the ‘must’. I’m not sure ‘should’ really exists in practice. Doing the dry run and just getting started is important. For private companies, which might not have established working groups and processes around this, the information is quite complex in that it picks up the financial aspects of risk, external engagement and stakeholder engagement.
“That doesn’t live in one place in companies. That is a whole bunch of people across the organisation. Bringing that together is a challenge in and of itself.”
Graham said the supermarket giant is working closely with its 8000 suppliers to cut emissions by 75 per cent by 2030, and to net zero by 2050. It has already achieved a 34 per cent reduction in emissions. It has installed solar power at 100 stores and distribution centres and has set a target to achieve 100 per cent renewable energy usage by the end of this financial year.
“This is just the beginning,” Graham told the forum. Coles is now turning its attention to the emissions in its value chain generated by forest land and agriculture. Scope 3 emissions represent 90 per cent of its total emissions profile and 82 per cent of this is generated by the purchases of goods and services. “There are a range of challenges in Scope 3 emissions,” he said.
Coles is asking 75 per cent of its suppliers to set science-based emissions reduction targets by the end of the 2027 financial year. However, this target relies on supply partners to provide relevant information.
Coles has a clear climate action road map to be more engaged with suppliers as part of its whole value chain integrated solution. The Coles Nurture Fund supports suppliers committed to sustainability and last year the company supported nine suppliers with grants.
Stevens stressed the need to start now on reporting. “Start with purpose... engage your team and stakeholders in the journey,” he said.
“Our whole approach to the integration of the climate transition action plan, the sustainability strategy and the corporate strategy are one thing, and that brings us into the realm that our sustainability efforts have total shareholder return at the end point.
“We find ways to assess materiality of potential options and consider those. I chair the sustainability committee and I’m not aware of a sustainability action we have taken that has not generated a commercial return.”
Stevens added that some changes in how the business operates might never have been pursued without a sustainability objective. Reporting helps sharpen the strategy and demonstrate delivery.
“Reporting brings the edge. It’s not the burden some might see it as. When you think about it, you’d probably be doing it anyway. You want to stress test the system, your assets, your business and your business model, at a level above what is normal. That is what we do as directors. It’s a reinforcement of what we already do.”
Jun Bei Liu GAICD, portfolio manager at Tribeca Investment Partners agreed the investor community is evolving.
“It’s very hard for us to sit here and say, ‘We’re going to invest in transition policies, but we will not see any return for a very long time’. That is very difficult to stack up for any investment.”
However, fortifying a business during the transition would make it stronger in the long run, and investors are increasingly recognising this. “We are getting better at understanding the change,” said Liu.
Not-for-profit considerations
The NFP session at the forum heard that ACNC-registered charities are currently exempt from the mandatory climate reporting legislation. By Shelley Dempsey
→ AICD senior policy adviser Anna Gudkov, who moderated the NFP session, said that in the AICD climate governance study released this year with Pollination, 80 per cent of NFP directors were concerned about climate change as a risk to their organisations, with 40 per cent seeing climate change as an opportunity.
However, all charities still need to understand their footprint with climate change, the risks and opportunities involved and to set a strategy and metrics accordingly, Jon Chadwick GAICD, global energy transition lead at PwC Australia told the forum.
“National governance of climate change is really about governing risk,” he said. “These risks may involve people risk for volunteers as well as staff, delivery risks, insurance and what harm may be experienced due to... severe weather events. You understand that climate is a material issue when you start to see it as a risk.”
Keith Rovers, who heads the social impact and sustainability finance team at MinterEllison and sits on the board of the Westpac Foundation, said some banks now require oversight of sustainability plans before funding organisations.
The Westpac Foundation looks at the ESG strategies of organisations to ensure they do no environmental harm. He added that NFPs must understand their supply chains and the environmental impact of suppliers and partners as part of their sustainability strategies and the impact of their climate change footprints.
What directors want to know
At CGF2024, directors were highly engaged in the conversations — both from the floor and virtually. Here are answers to some of the most pressing questions asked.
During the panel on investing in the future regarding boards, investors and climate change, directors asked, “Companies and investors appear to be underestimating the systemic risks of climate change. How do you go forward in a positive way?”
“Slowly and carefully,” said Philip Foo, vice president APAC research and engagement at CGI Glass Lewis. “Demonstrate your commitment and build a reputation.”
Jun Bei Liu GAICD, portfolio manager at Tribeca Investment Partners, said, “Set the plan, set the framework and engage with all the parties. Don’t get distracted by short-term changes.”
For the listed market, it was essential that companies “be transparent”, because “investors don’t like to be surprised”, she said, noting that investors might consider the benefits of encouraging businesses to improve rather than divest assets. Forcing the selling of assets in order to achieve targets was not solving the problem, but instead moving it into private hands where there might be less visibility.
Aware Super CIO Damian Graham GAICD said boards should show understanding of the issue and how they’re working through it when engaging with their investors. “We have the ability to affect change,” he said. “Whether they’re private or public, we look to ensure we understand their strategy around the transition and how they’re going to make sure their businesses are robust from a long-term perspective. As a bit of a counter... we’ve had much more effect on transition planning in the private market than we have in the public markets, where it’s been more complex.”
The panel on nature was asked whether boards are equipped for this next frontier, with WWF-Australia chair Judy Slatyer GAICD saying, “We have the right tools. It’s about how we embed a nature perspective. As boards, we need to be better at opening our eyes to the future in our horizon, scanning for a much broader perspective. Our job as the board is about setting the company up for good strategy for the future.”
Nature Finance Council chair Dr Ken Henry AC said parts of the world are well ahead of Australia and while nobody expected everyone to be “up to speed” overnight, boards should be asking management, “How can our business occupy a leadership position in nature positive? What are the dimensions of that opportunity and is it in our interests to occupy that leadership position or should we be a fast-follower?”
“We are eating into our planetary principle rather than living off our planetary interest,” said Sarah Barker MAICD, MD at Pollination Law. “That is... financially unsustainable. Nature is scarce, no longer unlimited and free — and that means it has a financial value. As directors, we have duties to our companies, and one of them is to consider foreseeable financial risks and opportunities. Nature is undeniably a foreseeable financial risk and opportunity to business. We have a positive obligation to consider it with due diligence when pursuing the best interests of our companies.”
Barker said directors should be using available resources to educate themselves on biodiversity and nature, and be asking management, “What are the top three nature-related impacts and dependencies for our business model?”
This is an edited version of the discussion at CGF2024, held in Sydney on 23 August 2024.
This article first appeared under the headline 'ESG Evolution’ in the October 2024 issue of Company Director magazine.
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