This content has been funded by an advertiser and written by the Nine commercial editorial team.
Environmental, social and governance (ESG) risks, requirements and expectations from investors and the public continue to evolve for Australian organisations, and fast.
With sustainability now central to an organisation’s ongoing success, the ESG revolution is well and truly felt at board level. Organisational boards are under intensifying pressure from stakeholders to have strategic oversight of a broadening array of ESG issues and opportunities. If any board felt that it was getting comfortable with sustainability requirements, the ground is shifting quickly.
Boards are under pressure to prioritise ESG issues and opportunities. iStock
More than ever, this increased pressure from stakeholders means boards require multiple types of expertise to manage the risks while taking advantage of the widening range of ESG opportunities.
Stephanie Daveson, corporate, M&A and capital markets lead partner at Clayton Utz, says the burgeoning sustainability requirement on boards is not the first time they have been faced with a significant transformational circumstance.
“If you think back to the online revolution, ecommerce, social media, COVID-19, and we’ve got AI and cyber security now coming through, significant change is pretty much a constant,” says Daveson.
“Dealing with change is something that is, or should be, a core skillset of boards.”
The boards that survived these changes, and positioned their organisations well, will likely be the boards that handle the sustainability-reporting intensification best too, says Daveson.
Stephanie Daveson, corporate, M&A and capital markets lead partner at Clayton Utz.
“They’re likely to be the boards with the best strategic thinkers, that can ‘gameplay’ their way through what’s going on.
“We have a lot of strategic lateral thinkers on boards in Australia, but it’s crucial that you give those people access to the best available technical experts,” says Daveson.
“It may require boards to pivot towards people that are used to dealing with rapid regulatory transitional change.
“Boards will be getting assistance from their lawyers, their accountants, and consultants who can help them. Even the larger organisation’s boards will be using a combination of internal and external support to help with sustainability, because the reality is there are a limited number of people with technical expertise in this area globally.”
Since the financial services royal commission reported in February 2019, directors have been aware that when acting in a company’s best interests, they need to balance acting in its best interests over a long period of time, with focusing on the short term, she says.
They have also understood that acting in the company’s best interests includes considering the interests of non-member stakeholders such as employees, customers, suppliers, contractors, the community, governments and the environment and the reputational risk that can occur to the company if they get this piece wrong.
But exactly what regulators mean by long-term sustainability is being rapidly filled-out for boards.
In June, a watershed moment occurred in the evolution of corporate reporting globally, with the issue by the International Sustainability Standards Board (ISSB) of international financial reporting standards (IFRS) S1, General Requirements for Disclosure of Sustainability-related Financial Information, and IFRS S2, Climate-Related Disclosures.
This followed on the creation in 2015 of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations on climate-related financial disclosures, to improve and increase reporting of climate-related financial information. In September, after two years of development, the Taskforce on Nature-related Financial Disclosures (TNFD), a risk management and disclosure framework was released, which aligns with TCFD and ISSB, and allows companies to assess and report on their nature-related dependencies, impacts, risks and opportunities alongside financial, operational and climate risks.
Tying this all together will be Australia’s proposed mandatory climate-related reporting obligations for the country’s largest companies and financial institutions, proposed to take effect from 1 July 2024 which will initially require climate disclosures but could be extended to nature and other sustainability disclosures in the future.
Claire Smith, environment and sustainable development lead partner at Clayton Utz says Australia’s regime is ultimately expected to pick up privately listed companies as well as publicly listed companies, adding further pressure on Australia’s directors.
Claire Smith, environment and sustainable development lead partner at Clayton Utz.
“The requirements and the bandwidth needed for a director to get across sustainability-related matters has exploded in recent years,” says Smith.
“If you take TCFD, there’s been an awful lot of education that’s already been done on that, although there is still a significant degree of variation between corporations and financial institutions how they report on their climate-related impacts as well as their climate scenario planning.”
“Carbon impacts are homogenous and not location specific. The measurement is is 1 tonne of carbon dioxide equivalent being released into the atmosphere, which can be accounted for and verified, and there are already good resources to which directors of organisations can access.
“In contrast, TNFD is much more complicated. Nature encompasses all living organisms including people and their interactions with each other and their environment whether that is land, ocean, freshwater or the atmosphere”.
“The complexity that surrounds nature risk identification, quantification of direct and indirect impacts, scenario planning and reporting could involve ecologists, engineers and environmental consultants but also lawyers, remote sensing and AI specialists as well as meaningful engagement with indigenous communities.”
Accounting for nature-related dependencies, impacts, risks and opportunities will bring with it a very wide skills gap for boards. The challenge ESG reporting poses for boards is moving from reputational to legal quickly.
The upshot, she says, is that to manage the risks and take advantage of the opportunities, Australian organisations are “going to need a much more diverse range of skills on boards than traditionally it has had”.
Daveson is worried that all of this could reduce the cohort of people willing to serve on a board, because of the perception of the onerous requirements.
“On the one hand, the intensifying sustainability requirements tends to support the argument for increasing diversity on boards, and boards – chairs and nomination committees – are looking far more widely, and that’s great,” says Daveson.
“But against that, I think we have to be careful. There are many people that would be terrific on boards, but say that the risk-reward isn’t there anymore.
“They’re concerned because even with the best will and the best advice, people can still get things wrong and there’s increased risk of reputational damage, class actions, and liability. We have to be careful because everyone needs to weigh up whether they’re prepared to take on those risks, and whether they will have adequate support. Education and support are the key considerations.”
Louise Petschler, general manager, governance and policy leadership at the Australian Institute of Company Directors (AICD), says the institute is well aware of the risks, and is beefing-up the education it provides to the nation’s directors and aspiring directors.
“We’ve been very conscious of the challenge of how do we equip directors from all different sectors and walks of life to have more comfort and understanding around what is a pretty fast-moving area, and to give them appropriate frameworks,” says Petschler.
ESG, and the broader concept of sustainability has “much more prominence” in the AICD’s company directors course than it did “even five years ago”, she says.
“Various royal commissions and inquiries have made it very clear that directors’ education and support had to move from the existing focus on black-and-white financial metrics to incorporate the importance of the so-called non-financial metrics. It’s not only sustainability – that’s a given, now – but the frameworks that boards should put in place around issues like their governance of organisational culture, and their diversity.”
But with so much change, particularly with the introduction of mandatory climate reporting in Australia, the AICD has been ready to build-in the educational component required, she says.
“We have been trying to get ahead of that discussion around how directors’ duties are interpreted, particularly the duty to act in good faith in the best interest of the corporation, and ask the question, ‘How broad is that?’ How much does that enable you to take stakeholder views into and impacts into consideration, for example?
“We think ESG very much belongs in the risk and strategy module, for example. And we are developing a course around climate governance because that is now so important; we see it as similar to cyber risk, which also demands its own standalone course.
“We’re very aware that as the responsibilities on directors broaden, so must the educational scope that we provide broaden with that.”
To learn more, visit www.claytonutz.com.
This content has been funded by an advertiser and written by the Nine commercial editorial team.
Follow the topics, people and companies that matter to you.
Fetching latest articles
The Daily Habit of Successful People
