The success of Engine No.1 in spilling one quarter of the Exxon Mobil Board should set every ASX Board on notice. Shareholders are increasingly demonstrating that they have lost patience with boards who drag their corporate feet in leading their organisations to adopt sustainable operations and to provide transparent and accurate reports on environmental and social impact.
Boards who do not embrace this shift in sentiment will be left behind; passed over by shareholders and customers as their enterprise value decreases.
The annual World Economic Forum Global Risks 2021 Report1 ranked the three highest likelihood risks over the next ten years as:
- extreme weather events;
- climate action failure; and
- human-led environmental damage.
These risks are all inextricably linked and whilst many organisations already include climate change related financial disclosures in annual reports, many more reason that as they don’t emit greenhouse gases (GHG), they don’t need to report. The markets are telling us otherwise and the time for sidestepping the inclusion of environmental and social impacts in annual reports is at an end.
Recent actions by institutional shareholders illustrate the point. Engine No. 1 is a new activist fund, holding just a 0.02% interest in Exxon Mobil. They successfully lobbied larger shareholders, including BlackRock, to support the election of three fund-supported directors onto the Exxon board.
In June 2021, AGL announced a demerger of its clean retail electricity business from its dirty coal assets (AGL is Australia’s heaviest GHG emitter), no doubt reflecting the mood of up to 20% of its investors who had called for an accelerated exit from coal.
In 2020, BHP faced a shareholder vote, supported by almost one quarter of voters, to suspend membership with trade associations whose goals did not align with the 2015 Paris Agreement.
Whilst shareholder focus is on the ASX200 companies, it will move and do so swiftly. Companies not already positioning their operations to support annual Sustainability or ESG (Environmental, Social and Governance) reports will be judged harshly by shareholders, customers and even suppliers.
The good news is that developing structures to support accurate, transparent and trustworthy ESG reports is not as overwhelming as it may seem. With the right approach, Boards can act to incorporate sustainability into the corporate DNA and those that do this in a genuine and transparent way will streak ahead of the box tickers.
The international dialogue has been firmly on COP 26 efforts to agree to targets and the financing of poorer nations to transition to clean economies and it does dominate the sustainability conversation. However, at a micro level, every business can monitor its impacts on environmental and social matters and select priority areas to focus on.
This will involve a clear commitment and leadership from the board. That is where the governance part of ESG comes in, to support processes and structures which facilitate collaboration across the business to monitor, manage and report on impacts.
It will also involve access to the right experts to guide the sustainability conversation to ensure that:
- Impacts across the whole of operations are accurately identified;
- GHG emission reduction forms only part of the internal sustainability policy; and
- Useful metrics are adopted to produce useful data which is then reported transparently and consistently to enable year on year comparisons.
Boards not sure where to start their ESG journey can start with impacts. Every business has an impact on environmental and social matters whether in production, professional services, sports or retail. Boards should start by asking the right questions to understand these impacts.
If you are interested in heading in the right direction, contact us.
1 WEF Global Risks Report 2021 https://www3.weforum.org/docs/WEF_The_Global_Risks_Report_2021.pdf pp 7, 12.