strat

By Amber Rudd

Ahead of COP26 (UN Climate Change Conference) in Glasgow this November, the Intergovernmental Panel on Climate Change (IPCC) has again issued dire climate warnings. In nine years, the earth’s average surface temperature will hit 1.5 degrees above preindustrial levels — a decade earlier than it predicted three years ago. We have been warned that crossing this threshold risks inviting the most catastrophic and long-term effects of climate change — flooding, drought, extreme weather, extinction of species. Yet here we are, at the edge of the precipice, with the IPCC report claiming we humans are unequivocally to blame.

The feeling that we have been here before is inescapable — in large part because we have been. We are accustomed to dire warnings; the calls for greater ambition; and the proud commitments that carry discreet disclaimers. Why should COP26 be any different?

As a former UK Secretary of State for Energy and Climate Change, I have been deeply immersed in these issues for over a decade. Now, as an adviser to many of the world’s leading Fortune 100, FTSE 100 and ASX 100 companies, I am telling them that this time is different. Now is not the time for directors to be sitting on their hands.

Australia is in a challenging spot on climate change. Its long-term heavy reliance on emissions-intensive industries to support the wealth and prosperity of its people lays down a complex path to reform for any government, irrespective of political leaning. The risk for Australian business is that a failure to take clear reforms will mean increasing headwinds for them in a global framework that penalises lagging performance on climate change.

Key points

There are three key points I emphasise when speaking with CEOs and boards. Firstly, regulation may be slow, but it will come. All countries are moving at different paces with respect to their regulatory responses to climate change, but they are all moving in the same direction. More than 130 countries have set, or are in the late stages of considering, net-zero targets, with the vast majority choosing 2050 as a deadline. The pressure on Australia to do the same is not going to subside. We can see through the EU and US proposals for Carbon Border Adjustment Mechanisms that countries with carbon mitigation policies in place will seek to impose costs on those that do not. These types of mechanisms will gain broader acceptance as more countries adopt low-carbon positions.

The global interconnectedness of capital will force change if governments do not. Nowhere is this more evident than the move of capital to align with climate and broader ESG goals — a risk to Australia that its Reserve Bank has already identified. According to Bloomberg, global ESG assets are on track to exceed US$53 trillion by 2025 — more than one-third of total assets projected to be under management.

Leadership needs to come from the top. The replacement of Exxon Mobil board members this May was a clear sign for all company directors.

Investors are increasingly formally stating their views on climate, both individually and as part of investor groups. This includes the Net Zero Asset Managers Initiative, which has 128 signatories, US$43 trillion in assets under management, and includes the likes of BlackRock and Vanguard. Vanguard’s June submission to the SEC on proposed climate disclosures explicitly called for a disclosure framework which, at a minimum, provided for uniform reporting of Scope 1 and 2 greenhouse gas emissions supplemented by additional information for industries and public issuers with more acute climate risk. Its ESG funds already screened to “remove certain companies from the[ir] investment universe”.

Scrutiny will continue to grow — from investors, shareholders, broader stakeholders, and debt markets. Close attention is already paid to which companies are outperforming on climate-disclosure through monitors such as CDP, which ranks companies’ performance and highlights the reputational, competitive and regulatory advantages of disclosure. Over time, those that are noticeably absent will attract greater attention, too. In Australia, the ACCC is targeting false and misleading climate claims, even without an overarching national framework as a reference point.

Firms that want to attract and retain the best talent must meet expectations on ESG, including climate. The 2020 Peakon Employee Expectations Report — which analysed 14 million staff survey results globally — found that comments on environmental issues in employee surveys jumped 52 per cent. In the UK alone, 85 per cent of respondents raised environmental issues. Organisational positioning on social and environment issues is not just for consumers and investors — it is a yardstick used by the people who know your business best and are its most effective ambassadors.

Australia cannot escape these trends — no country can. Business in Australia must look beyond the political debate and press ahead. It has never been more important, from a business perspective, to have a global mindset. Businesses whose exports are constrained by regulatory developments overseas; whose access to capital is restricted; and which cannot attract and retain the best talent, cannot be competitive over the long haul.

In the current ESG environment, the companies that win will be those that have a clear sustainability framework and a credible pathway on emissions reduction. These companies will be led by directors who understand the significance of climate governance and are equipped to lead their organisations through this change in spite of its complexity.

There is now a host of ESG metrics used by both raters and broader stakeholders to measure a company’s performance on climate, with a shift from policies and commitments to delivery and performance against KPIs well underway. Increasingly, these metrics will be used to measure directors’ performances. A sustainable and well-governed company builds for the future and relies on its board directors to drive this process. This future, however — as the IPCC report highlights — is arriving faster than any of us could have imagined.

Amber Rudd is a trustee of The Climate Group. She was UK Secretary of State for Energy and Climate Change (May 2015–July 2016) leading the UK team at the completion of the Paris Climate Change Agreement; and a former UK Home Secretary (July 2016–April 2018); and Secretary of State for Work and Pensions (November 2018–September 2019).