Corporate Governance Symposium 2019

Hothouse Earth: Climate change and the role of directors

How should directors respond to the urgent challenge of climate change was the question asked at MinterEllisonRuddWatts’ annual Corporate Governance Symposium.

Professor Will Steffen, Emeritus Professor at the Fenner School of Environment & Science at the Australian National University College of Science presented the latest research ahead of a panel debate featuring highly regarded governors Dame Therese Walsh, Justine Smyth, Rob Campbell and Cathy Quinn ONZM.

Setting the scene, Professor Will Steffen described climate change as the challenge of the 21st Century. There is no doubt that it is happening. Saying “the system is broken, the earth is not well, and we have to do something now”, he described the science of climate change as changing rapidly. Amid record-shattering weather extremes, dying reefs, biome destruction, melting ice, droughts and sea level rises attributed primarily to humans burning fossil fuels, he warned of nature’s dangerous decline as the Earth enters the sixth greatest extinction event in its history, but the first driven by one species: us.

“Hothouse Earth will not be hospitable to large animals like humans. This is why we talk of a climate emergency. We have run out of time – the time for talk is over, the time for action is here,” says Professor Steffen.

The discussion that followed confirmed that governance in the face of climate change is not for the timid. There was unanimous acknowledgement that we must all take greater action now.

The choice: short-term profit vs long-term planet

Action is needed now, but that will impact profits. To make a difference, changes to business models requires sacrifice to revenue in the short term. It is a tough choice but the only option available, considering the magnitude of the problem and the urgency required.

Think through scenarios

The question for governors is when and how do we move the focus to a longer timeline? Do we have the right mix of skills around the Board table? Are we thinking about the non-financial risks to our businesses and are we giving them enough attention? What are the really tough choices needed to respond to climate change that impact on profit? Are we prepared to make them, even discuss them?

Answer the BlackRock question of climate change fluency

BlackRock says: “For companies most directly impacted by climate change, BlackRock expects the whole Board to have demonstrable fluency in how climate change will affect their business.” How many directors truly meet that bar?

Become earth-competent Boards

This is true also for all Boards: they need to become multi-dimensional in their thinking, and consider the planet in Board decision-making. Boards should also ask if they have the skills, competencies and education to do the best job.

Directors have to keep looking in the mirror and constantly strive to be as earth-competent as possible.

Do more, more precisely and more promptly

We are living in a comfort zone about where we are heading with climate change. We must do more: we can’t fear scale. If we succeed it will be through making major changes, faster than ever before – and because we dared to do business differently. Directors must seize this enormous opportunity and act deliberately now.

Plan for adaptation

Many New Zealand companies are working to reduce their emissions. But both business and society need to adapt, and work together to take greater steps to reduce the risk and impact of climate change. Businesses need to involve their customers, investors and employees in finding solutions for the long term.

There was general consensus that legislation in respect of Health and Safety has resulted in Boards giving this topic proper attention. There was a call for Boards to do the same in respect of climate change and that failure to do so may expose Boards to liability.

Sustainability as your lifeblood

All Boards need to give proper attention to sustainability, investing in dedicated personnel and consider establishing focus groups to bring more expertise to the table. Sufficient Board time needs to be dedicated to this topic, whether through sub-committees or other mechanisms such as advisory panels. It’s a cultural issue for the whole business.

Everyone has a role to play

Responding to climate change is our joint problem, and we must all contribute. Business has a role to reduce emissions, and Governments, in addition to passing legislation in respect of climate change, need to support business adopting science-based solutions, including through changing regulation to permit the application of new ways of doing things. Investors are questioning business strategies. Boards that fail to address climate change risk breaching their standard of care and they must demand a clear strategy to reduce emissions from management.

Take investors on a journey

Communicating why a business is changing and investing to balance profits with the future is critical. How do we tell the story?

Doing nothing is the riskiest strategy

The way we conduct business will change. Boards and management will need to change too. The opportunity cost of not accepting the hurt now is extreme. Climate change must be a headline item for each of our Boards. Boards have to encourage management to take bold action and not just be “less bad”, while also accepting that not every initiative will succeed.

We need to act today, recalibrate our focus and priorities and the meaning of the word “value”.

MinterEllisonRuddWatts held its annual Corporate Governance Symposium for directors and executives on 7 August 2019.

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