Directors and Climate Change – Time for Leadership

Ian Dunlop FAICD presents a call to action for Australian directors.

1. A brief history

The 1992 Rio Declaration, the 1994 establishment of the United Nations Framework Convention on Climate Change (UNFCCC) and the 1997 Kyoto Protocol have as their key objective the "stabilisation of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system". Australia was a party to the Rio Declaration, to the establishment of the UNFCCC, and signed the Kyoto Protocol in 1997, but did not ratify it until 2007.

Australian directors' attitudes toward climate change have always been somewhat ambivalent. In the 1990s, given the initial focus on climate change, there was a great deal of progressive support for developing market mechanisms to reduce emissions. To the point that in 1999, virtually every major business organisation had agreed to the first emissions trading system framework developed under the auspices of the Australian Greenhouse Office as part of our obligations under the Kyoto Protocol. That enlightened step proved short-lived when the Howard government rejected the concept as George W Bush, shortly after his election as US President, announced his intention of withdrawing from the Kyoto Protocol.

Director attitudes in the 2000s have been far less progressive. Some companies and their boards have shown leadership in advocating sensible climate policy, but as short-termism took hold with the spread of "pay-for-performance" remuneration, interest in supposedly longer term issues such as climate change faded. The dominant impression given by Australian directors for some years now, particularly at senior level, is one of denial. Climate change has not been regarded as an important issue, in contrast to attitudes internationally. The World Economic Forum, for example, has consistently rated climate change for years now as one of the top global risks to business.

To the extent that these risks and opportunities have been considered during the last decade, they are typically regarded as ESG issues, not the fundamental drivers of economic performance and shareholder value which they have become. With a few notable exceptions, business organisations barely mention climate change in their advocacy and have shown little leadership in attempting to counter increasingly dysfunctional government climate policies. In large part this has been due to the influence Australia's fossil-fuel producers as they attempt to maintain the high-carbon status quo.

Which is unfortunate as Australia's inaction over the last decade in failing to upgrade its infrastructure on to a low-carbon footing is already proving to be extremely costly, and we now face risks from climate change far beyond anything acknowledged officially here or overseas.

2. Science and evidence

Any balanced assessment of the climate science and evidence accepts that climate change is driven primarily by human carbon emissions from fossil fuel combustion, agriculture and land clearing, superimposed on natural climate variability, and that it is happening faster and more extensively than previously anticipated.

In this context, scientists have long been concerned about the extreme "tipping point" risks of the climate system; non-linear positive feedbacks which trigger rapid, irreversible and catastrophic change.

These feedbacks are now kicking in. For example, Arctic weather conditions are becoming increasingly unstable as jetstream fluctuations warm the region 20°C or more above normal levels; sea ice is at an all-time low with increasing evidence of methane emissions from melting permafrosti. Greenland and Antarctic ice sheets are melting at worst-case ratesii, with the potential for several metre sea level rise this centuryiii. The Antarctic Larsen ice sheet and Pine Island glacier are showing signs of major breakup as a result of warming Southern Ocean waters, a process which is probably now irreversibleiv. Coral reefs around the world, not least the Great Barrier Reef, are dying off as a result of record high sea temperaturesv. Major terrestrial carbon sinks are showing signs of becoming carbon emittersvi. And much more.

The social disruption and economic consequences are already devastating, leading to extensive forced migration and economic collapse in some countries. The refugee crisis engulfing Europe, emanating from Syria and North Africa, is fundamentally climate change drivenvii and a precursor of greater conflict ahead.

3. Implications

The Paris Agreement, the successor to the Kyoto Protocol, came into force on 4th November 2016. It requires the 195 countries participating to hold global average temperature to "well below 2°C above pre-industrial levels and to pursue efforts to limit the increase to 1.5°Cviii". Regional temperature variations would be far greater than these global averages, rendering many parts of the world uninhabitable even at 2°C, beyond the capacity of human physiology to function effectively.

Recent argument used by Federal Government and Opposition alike is that "Coal is part of the national and international energy mix and will be so for decades to come"ix, echoing coal industry leaders and lobbyists. Strictly true, but it is a rapidly declining part if we are to meet the requirements of the Paris Agreement, which Australia ratified on 10th November 2016. The International Energy Agency's latest analysis indicates global coal demand falling 50% by 2040x. But this argument is used to justify rapid expansion of our own coal production, to maintain "energy security" domestically for example in South Australia, and to "alleviate poverty" with international exports by developing numerous new coal mines in Queensland and NSW, including Adani's megamine in the Queensland Galilee Basin.

Without rapid carbon emission reductions far greater than Paris commitments, the planet will become ungovernable. Dangerous climate change, which the Paris Agreement and its forerunners seek to avoid, is happening at the 1.2°C increase already experienced as extreme weather events, and their economic costs, escalate. The negative impact on human health is already substantial.

It is now impossible to stay below the 1.5°C Paris aspiration. To have a realistic chance, say 90%, of staying below even 2°C, means that no new fossil fuel projects can be built globally, that existing operations, particularly coal, have to be rapidly replaced with low carbon alternatives, and that carbon sequestration technologies which do not currently exist have to be rapidly deployed at scalexi. Most dangerously, the climate impact of investments made today do not manifest themselves for decades to come. If we wait for catastrophe to happen, as we are doing, it will be too late to act.

This transition is unprecedented. We have the technology, the expertise and wealth to make it happen. What we lack is the maturity to set aside political ideologies and corporate vested interests to cooperate in the national interest.

And most importantly, time. Any realistic chance of avoiding catastrophic outcomes, requires emergency action to force the pace of change, starting with a serious price on carbon to remove the massive subsidy propping up fossil fuels. The last thing the world needs is a new coal province as Adani proposes in Queensland. Or any other new coal mines, CSG or oil and gas expansion. Massive poverty would be created not alleviated.

The irony is that this transition is the greatest investment opportunity the world has ever seen, from which Australia is better placed to benefit than virtually any other country.

4. Governance issues

The implications for Boards and Directors are profound. This is a risk, and opportunity, which the world has never before experienced, requiring fundamentally different management techniques to those of even the largest companies. Climate change will be the most important issue of the next few decades for large and small companies alike and, if handled sensibly, the real source of growth. Lack of knowledge of its real risks and opportunities on the part of directors represents a major governance failure and breach of fiduciary responsibility.

It will require the economy to be restructured on an emergency war-footing basis, which will determine policy across the spectrum. Many of the hallowed concepts of free-market capitalism will change.

In the absence of real leadership from the business community, particularly at Board level where much climate denialism still exists, current pressure for fossil fuel divestment will evolve into far broader social activism as the community begins to understand the real implications of the climate challenge. This can already be seen in the spate of resolutions being put to AGMs around the world, which has barely started in Australia, and increasing regulatory pressure to address climate risk.

Australian directors have been notable by their absence from this debate. They need to take leadership before events move beyond their influence.

Note: This article is an opinion piece commissioned by the Governance Leadership Centre. Copyright vests in the author. The opinions expressed do not necessarily represent the views of the Australian Institute of Company Directors, nor its members, directors or employees.

About the author

Ian Dunlop was formerly an international oil, gas and coal industry executive and chair of the Australian Coal Association. He was CEO of the Australian Institute of Company Directors from 1997 to 2001, during which time he chaired the Experts Group which developed the first emissions trading framework for Australia, under the Howard government. He was a candidate to join the Board of BHP Billiton in 2013 and 2014 on a climate and energy platform. He is a Member of the Club of Rome.