For the longest time, the corporate sector has had a reputation as the most conservative part of our economy, highly resistant to change. But attitudes are finally shifting, under pressure from investors, regulators and various inquiries.
In an early wave of corporate social responsibility, many companies claimed to recognise their duties beyond just maximising shareholder value but, unfortunately, this often fell well short of the needed cultural reset, from the factory floor to the board. One way of ticking the “social responsibility” box was to support a charity, and conspicuously advertise that support via branding. Take for example Westpac’s purchase of the naming rights to the helicopter rescue service. Some such efforts were merely advertising gimmickry rather than a genuine attempt to be socially responsible, either in terms of impact or values. Moreover, this sort of strategy was a way of endorsing the remuneration and bonuses of the senior management team that delivered it.
The Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry did an excellent job of showcasing some bad behaviour, including knowingly lending more than borrowers could afford and charging fees to deceased people. It demonstrated what Kenneth Hayne identified as a “culture of greed” that focused on profitability and maximising shareholder value, usually at the expense of other stakeholder interests including customers, employees and the broader communities in which these organisations operate.
The banks declared an intention to shift their culture and to cease certain transactions but without a proper enforcement process built on significant penalties, any cultural shift was likely to be minimal. A parliamentary committee review of the Australian Securities and Investments Commission (ASIC) is under way to investigate its performance in enforcement, where it has been slow, if not negligent, in pursuing and prosecuting bad corporate behaviour. ASIC was also criticised by the Hayne royal commission for preferring to negotiate rather than prosecute. There has been chatter in parliament about appropriate penalties. I am told that the Greens have wanted to legislate for criminal penalties, but the government isn’t supportive and neither are the opposition’s Peter Dutton and Angus Taylor – no surprises there.
Another significant factor shifting corporate attitudes has been the environmental, social and governance strategies that are increasingly driving the investment community, that is, more people are considering the impacts of companies when deciding whether or not to invest in them. In some cases this has resulted in motions at AGMs on specific aspects of the business, or on the performance of its directors.
It should be clear that a director bears an important fiduciary duty to have digested all the relevant risks in their company’s management and to ensure it is effective.
About a dozen years ago, a few colleagues at the then Climate Institute of Australia, and I as its chairman, launched a global project focusing on the investment community’s understanding and management of climate risk. We believed that the transition to low carbon would be driven by the investors. We launched the Asset Owners Disclosure Project, which circulated a detailed survey to the top 500 identified asset owners – consisting of the world’s largest investors, pension and super funds, sovereign wealth funds and some endowment funds – and rated and ranked them from AAA down to laggard. The initial results were disturbing, revealing a low recognition of the significance of climate risk.
The survey highlighted that the fiduciary responsibility of a director of a pension or super fund was to manage their members’ money so as to maximise their return over their working life. The focus was on the sustainability of returns, which would be at serious risk if their investment strategy ignored the climate risk of heavy investment in fossil fuels, for example, as this sort of strategy would be less resilient to the transition to a lower-carbon economy and its investors would likely experience lower returns. We were not prescriptive about what these institutions should invest in or how they should manage climate risk, but we wanted to reveal the extent to which they captured climate risk in their investment activity. Over the course of this project, I was impressed at the strength of peer-group pressure across the global investment community to comply, and how some attitudes shifted. To cite one example, at one stage the global fund giant BlackRock sent a senior manager from Hong Kong to discourage our project – today BlackRock is a market leader and benchmark for responsible investing.
I am told that our survey results were cited by Mark Carney, then head of the Bank of England, in launching the Bloomberg Taskforce which, under the auspices of the Financial Stability Board, became known as the Task Force on Climate-related Financial Disclosures. The TCFD calls for more effective, clear and consistent climate-related disclosures – initially, at least, on a voluntary basis. It is inevitable that disclosure becomes compulsory. Standards are being developed by several bodies globally, and the number of companies expressing support for TCFD has grown significantly, spanning 78 countries. Financial institutions responsible for assets of more than $178 trillion, including the largest asset owners and managers, support TCFD.
On the corporate side, support has grown to include companies representing more than $20 trillion in market capitalisation. Moreover, more than 110 regulators and government entities across the world are TCFD supporters, along with 75 central banks and supervisors, and through the Network for Greening the Financial System they have encouraged companies issuing public debt or equity to disclose in line with TCFD recommendations.
This disclosure has become so important as the impacts of climate change worsen, with clear and significant effects on the global economy and on people’s lives. And the effort to repair economies in the wake of the coronavirus pandemic has provided a “unique opportunity to set a foundation for a more sustainable and resilient future”, making the task force’s work even more important and urgent than ever.
A notable downside of this increased corporate focus on sustainability, and the greater pressure to be accountable for the risks they run and to detail their responses, is that some companies have sought to mislead and misrepresent, or “greenwash”. One example in Australia is Black Mountain Energy, which was planning controversial fracking to export gas from the Kimberley in Western Australia. The corporate regulator fined the company for making false and misleading claims that it would achieve net-zero emissions. Many others have acquired some form of emissions reduction certificate in relation to the activity of another, to claim an “offset” without actually reducing their own emissions. Bloomberg Green has suggested that emphasis will shift this year towards the quality rather than quantity of offsets. An important issue is the permanence of an offset’s value, since, for example, forestry-related offsets can return captured carbon back to the atmosphere during a wildfire.
It was most unfortunate that the Morrison government encouraged this type of thinking with its strategy to claim our national emissions reductions by carrying forward credits earned under the Kyoto Protocol simply for not having cleared certain lands – a practice not accepted globally. That’s a cynical variation on the charity branding strategy mentioned above.
Another factor behind the shift in corporate attitudes has been litigation. During my time with Asset Owners Disclosure Project, there were several global cases against boards alleging breaches of fiduciary duty in relation to climate. A recent example of litigation is the personal suing of 11 directors of Shell in the High Court in England over their climate strategy, which the claimant, ClientEarth, asserts is inadequate to meet climate targets and puts the company at risk as the world switches to clean energy.
ClientEarth is an environmental charity supported by a group of large pension funds and other institutional investors, whose case rests on the inevitability of the global transition to low-carbon energy – which indeed is already happening. Shell’s failure to move fast enough threatens the company’s success, they argue, and would waste its investors’ money on unneeded fossil fuel projects.
For Shell, this case comes on top of a Dutch court order to cut its emissions from oil and gas by 45 per cent by 2030, and accusations that the company is investing less in green energy than it has claimed. Shell recently announced a record profit of $40 billion driven by high energy prices resulting from Russia’s war in Ukraine. ClientEarth lawyer Paul Benson said in an interview with The Guardian that while Shell may be raking in profits now, “the writing is on the wall for fossil fuels long term”.
“Long term, it is in the interests of the company, its employees and its shareholders – as well as the planet – for Shell to reduce its emissions harder and faster than the board is currently planning,” he said.
Moreover, the International Energy Agency said in 2021 that no new oil and gas projects were compatible with net zero emissions by 2050.
The issues of sustainability and the environmental and social impacts of their activities are certainly now on the agendas of most businesses, and corporate boards are having to lift their game to recognise these longer-term responsibilities. But too many officials and regulators remain off the pace, as are many in the media. I found two recent examples of coverage from The Australian Financial Review – which aims to be the business bible, looking after its corporate mates – of particular concern in recent days. AFR journalist Jennifer Hewett was on the ABC’s Insiders some weeks ago, rejecting good governance at the Reserve Bank of Australia by opposing transparency on the RBA board’s voting. And last week the paper published an outrageous piece under the headline “Boards sound alarm on Labor spending, intervention”, extensively quoting a range of the usual big-business suspects compounding myths around Treasurer Jim Chalmers’ recent essay in The Monthly, and calling his stated objectives a “warning sign of interference”. Rather than focus on the substance of the essay and its challenges to businesses to think more about their practices and sustainability, the interviewees simply dispensed with the treasurer’s points as if they represented some crazy left-wing agenda.
Conservatives to a fault; prejudicial to their own interests.
This article was first published in the print edition of The Saturday Paper on February 18, 2023 as "Winds of corporate change".
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