The outcomes of COP26 reflect social attitudes towards climate change, which will influence political attitudes and they are likely to translate to legislation that profoundly alters how organisations operate. This introduces legal risk, which will emerge in accounting standards, ASX listing rules, state laws, increased regulator mandates and all sorts of new by-laws in local government.
The changes also produce internal risk, consumer risk, supply chain risk, regulator risk, strategic risk, development risk and shareholder risk. And, as we fundamentally change our economy, there are three major risks to organisations that stand out in particular: the risks of moving too fast, too slow or in the wrong direction.
Tackling these risks effectively requires a holistic approach informed by integrated strategic, technical and legal expertise. The Ashurst Aurecon Alliance team identified three key areas for business leaders to focus their attention to transform risk into opportunity along the pathway to net zero and beyond:
The Board must own a net zero policy. With the inevitability of mandated decarbonisation goals that stretch to 2050, the fiduciary duty of board members is amplified. They will be required to set the strategic direction of organisations and hold the C-suite to account for meeting climate goals, while still generating returns for shareholders.
This pressure to embrace new technologies and new business lines to achieve net zero, all whilst managing profits, will cascade downwards to C-suite, general managers and team/project leaders, and sideways across finance, legal, operations, marketing and technology.
To embed a meaningful strategy, organisations need to embrace two of the key pillars of effective and proactive Risk Management – the governance and accountability of those in charge. Establishing clear and actionable expectations is required to ensure collective accountability, individual accountability and joint accountability.
Policies should incorporate best practice principles enforced by regulatory bodies in evidencing appropriate governance practices. This could include Board oversight of climate-related risks and opportunities, management’s role in taking accountability for, assessing and managing these risks and opportunities, and demonstrating the principles of integrity, transparency, accountability and acting for a proper purpose.
The role of Chief Sustainability Officer was initially important in drawing focus on climate transition risk as an imperative worthy of attention from Board and senior management. But COP26’s legislative and regulatory impact will be felt on all layers of the organisation and by all leaders, and so a ‘sustainability’ silo is unlikely to be efficient. Instead, all layers of the organisation need to be pulling in the same direction.
This means a critical re-examination of the role and competency required of the Chief Sustainability Officer, and a cultural shift in the strategy and investment decision-making of the enterprise. The Chief Sustainability Officer is now being asked to take a seat at the top table and engage in the contest for enterprise investment capital.
Like never before, they must influence and engage practised C-suite peers who have the advantage of legacy enterprise performance mindsets, measures and investment processes, which remain predisposed to the traditional financial outcomes and capital investment prioritisations of the business. Navigating the people and cultural change in the C-suite is an essential element of bringing the requisite new direction to life.
Organisations operating in a net zero economy – especially those that are only now facing up to this challenge – will benefit from developing a strong Human Resources or People programme to carry themselves forward. Successful leading organisations in net zero operations have embraced specific attraction and retention policies that align individuals to their organisation’s net zero goals.
We use descriptions such as ‘they get it’, but what this really means is having people in your organisation who understand net zero as a way of doing business, rather than something that is bolted-on to what you ‘really’ do. The challenge will be to find these people, give them tools to succeed, and ensure remuneration is aligned with what they do – ‘value’ will have to include making tangible progress towards achieving net zero.
The most fruitful opportunities may be found in a ‘whole of value-chain’ approach. It signifies we should look at business lines and end-to-end operations – not the ‘silos’.
The actual end-to-end operations are not only where risk is generated and first identified, but it’s also where the organisation makes its money and where the ‘risk escalations’ will occur – those sudden outbreaks of risk caused by external factors.
For sectors and assets that are relatively easy to decarbonise, for example where emissions are largely the result of electricity consumption (Scope 2 emissions), expectations of change are rapidly accelerating, such as those cases where switching from grid electricity to 100 per cent renewable electricity can be enacted with the stroke of a pen. When it is easy to decarbonise, it will become harder not to.
For industries and assets that are hard to decarbonise, the picture is not so straightforward. In many cases, the technologies to switch to zero emissions do not exist today or are, for example, prohibitive in terms of operational impacts and cost. Complex industrial assets are particularly exposed, considering their processes are highly integrated, capital intensive, long-lived, and operating in very competitive markets.
Zero emissions heavy machinery, green metals, green concrete and green hydrogen and other energy carriers are all promising, although still in an emergent phase. Leaders face very difficult strategic challenges, but also opportunities.
Decarbonising at a ‘value-chain’ level gives leaders the best chance of exceeding stakeholder expectations and complying with net zero regulation, while maintaining healthy operations, buffered to external events.
This is particularly the case with resources and energy companies which clearly have customers that want reliable energy, such as that provided by oil, coal and gas, while the markets they operate in also want more copper, lithium, aluminium, nickel and cobalt, albeit produced by reliable energy with zero emissions.
In Australia, legislation is slow moving, but companies are having to move fast in response to massive investor activism and the threat of climate litigation. Although companies will eventually have new legislation to operate under, they still have markets to answer to. Banks, insurers and fund managers also have big emitters in their portfolios and the associated risks have to be managed.
To support this, an organisation’s risk management framework must be agile and robust enough to the extent that any regulatory reform, or scope change in the company's activities, is anticipated and monitored proactively and changes in the framework are implemented where and when required to reduce the risk of potential breaches.
Many leaders are already overwhelmed by the ramifications of net zero, even before Australia signs-on or passes legislation. That’s because there is so much to think about. Taking the time to set a strategy, identify priorities and work through the complex challenges associated with operationalising net zero targets, and then navigate building them into the business is no easy task.
Many technologies are unproven and major asset transformation is required along with the upheaval of established business models. There will be increased regulatory obligations in relation to project approvals and engaging with large communities that are based around an existing way of life.
The challenges do not stop there. Companies face reputation risk in respect of their green credentials, particularly where entities use ’greenwashing’ to convey a false or misleading impression that its products, objectives or policies are environmentally friendly. Corporate greenwashing is firmly in the sights of the Australian Competition & Consumer Commission (ACCC) and is a recent target of climate change litigation.
Directors, particularly of listed companies, also have duties to disclose climate-related risks. Shareholders and regulators alike are calling for increased disclosure and greater accountability in relation to climate change, and directors risk being personally liable for misleading and deceptive conduct if they make representations around net zero without reasonable grounds.
Corporations that do not meet the required standards may fall foul of the corporations law, consumer law or the listing rules.
The main risk with net zero and the challenges outlined above, is that organisations do not start to manage their risks early and then are subsequently not prepared to capitalise on the opportunities presented.
The most effective way forward is to take a holistic and well-informed approach to operationalising net zero into business strategy and operations. It necessitates a whole ‘value-chain’ approach, which requires all leaders to be aligned. And alignment of leaders starts with the Board.
This paper was written by the following members of the Ashurst Aurecon Alliance, an industry first alliance offering integrated strategic, technical and legal expertise for business leaders facing a range of complex challenges, including the transition to net zero:
Elena Lambros leads Ashurst Risk Advisory's Sustainability and Climate Change practice and works with clients to implement sustainable, agile and effective risk management that supports the achievement of business strategies and commitments in relation to sustainability, net zero and climate positive targets, while ensuring regulatory and compliance obligations are met.
Ben McGarry is Aurecon’s Future Energy Capability leader and one of Engineers Australia’s Most Innovative Engineers. He is passionate about developing strategies, policies and projects to embrace the opportunities and navigate the risks of decarbonisation in the global transition.
Andre Dauwalder is an energy regulatory lawyer specialising in energy markets and renewables. He is a Senior Associate at Ashurst.
Michael Tafe leads Aurecon’s Risk and Assurance Strategy team. A strategic leader for complex environments, he specialises in enterprise performance in the face of volatility, ambiguity and uncertainty.
In an industry first alliance with global law firm Ashurst, we seamlessly combine engineering, technical and legal advisory where asset and legal risk exposures and opportunities intersect.
We provide game-changing eminence and deep expertise from multiple perspectives, delivered cohesively to drive progress and achieve results. Together, we bring new thinking, to turn climate transition risk challenges into opportunities.
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