Kick-starting the transition in New Zealand – the role of corporate governance in the transition to a low-carbon economy
The Corporate Governance subcommittee of Lawyers for Climate Action NZ convened a panel of multidisciplinary experts to discuss the barriers, opportunities and levers business may have to transition New Zealand to a low-carbon economy. The discussion began with an outline of the current policy settings in New Zealand (noting they are deemed highly insufficient by international bodies) and framing the topic as a discussion on what industry can do in the absence of adequate policy settings simply because it is the right thing to do.
A summary of key takeaways from the panellists are set out below.
Profit maximisation
Simon Jensen noted that a profit maximising duty for directors does not exist at law. Up until the 1980s, a director’s role was largely understood as one of stewardship – to grow the assets and leave the company in a better place than before. This was a view that better supported long-term thinking in the role of directorship, rather than a more economist-driven view that sees a director’s role as maximising shareholder profit.
Taking the idea of stewardship as the core role of a director and the idea that companies are people at law, Simon noted that directors do, legally, have scope to make decisions based on moral, ethical and environmental reasons, not just financial ones. Simon highlighted that this stewardship view has clear parallels with te ao Māori.
How are directors thinking about climate change
Jonathan Mason illustrated through his own experience and current Board appointments that boards can view climate change as an opportunity. While there may be a short-term cost, climate change action must be seen as being in the long-term interests of the shareholders. If directors only seek to maximise short-term profits and ignore the need to transition, long-term shareholder value will erode.
Jonathan separated companies into three categories regarding the impact of climate:
Climate change and the transition to a low-carbon economy creates significant opportunities for their current business model (e.g. Vector and energy companies).
There may be short term costs to the business in transitioning to a low-carbon economy, but it doesn’t pose a huge threat to the business model itself (e.g. building companies and banks).
The transition poses a genuine threat to the entire business model of the company. In the absence of existing technological solutions to this, the company needs to carefully consider and plan its transition strategy (e.g. Fonterra, Air New Zealand).
Jonathan noted that all three categories of companies need to acknowledge that they need to protect and enhance long-term shareholder value. In this context, if corporates do not make a meaningful contribution to climate action, the capitalist model they operate in will increasingly come into question.
Te ao Māori and governance
Te Aroha Grace illustrated that a cultural shift within boards (and corporates more generally) to understand how to create, see and give value to taonga (precious things or artefacts) can stimulate intergenerational thinking that drives effective climate action. This means moving away from a purely capitalist, financial view or perception of “value”.
Te Aroha noted that te ao Māori (and people thinking with this outlook) do this by being engaged at an emotional level. The emotional strength provided through tikanga, te ao and te reo Māori is now perceived as valuable in a western governance setting, but more needs to be done for people to learn and be able to apply this thinking themselves (rather than outsourcing it). Te Aroha prompted that this shift would help people create stronger emotional engagement and connection in the governance issues at hand, enabling decision makers to convene time and space beyond the moment and location they are in and allow intergenerational thinking to take centre stage.
An alternative approach at the operational level
Julia Jackson gave a brief introduction to the B Corp movement and Kiwibank’s certification process. She reflected on how Kiwibank has passed a constitutional amendment to embed, at a governance level, that Kiwibank is a purpose-driven (and not purely profit generating) entity and the strength of this kind of statement.
In Julia’s experience at Kiwibank, B Corp is a framework that fosters increased transparency, accountability and performance measurement. This helps people within the organisation to have more regular conversations around how they balance short-term profit and long-term impact on a day-to-day basis. Julia suggested that the increased accountability B Corp creates by requiring the business to articulate its policies (with sustainability in mind) and then demonstrate how the company brings that policy to life creates more resilient organisations.
An investor perspective
Laura Hillis noted that climate governance pressures so far have been from investors, customers and civil society rather than from governments themselves. She described how key catalysts for investors driving climate action within their portfolio are (a) scenario planning - returns for companies are dire in a 3 degrees warming scenario and so action is required; and (b) the “inevitable policy response” - the idea that once the social impacts of climate change become overwhelming, there will be sharp policy response that will have a large impact on business, so it is best to be ready now rather than adapt later.
Laura discussed that many investors view companies who are front footing climate action as those who are best poised to take opportunities arising from climate change. In an Australian context she compared mining companies (generally advanced on their transition thinking) with certain energy companies. For Laura, ultimately, a credible science-based and end-to-end transition strategy, that doesn’t rely heavily on offsetting, will be important for all companies when seeking investment. There is already and will continue to be growing scrutiny of the quality of these transition plans.
So how do we kick off the transition?
Simon suggested that lifting responsibility for action to shareholders (as ultimate appointers of directors) and regulation as key drivers of a faster transition to directors having a stewardship, rather than short-term financial focus. In this context, Laura noted that shareholder actions (which are becoming more prominent), including voting at shareholder AGMs is a way to materialise this. Shareholder pressure may also include putting pressure on directors’ transition actions and forcing companies to improve climate performance on their existing models and assets, rather than just seeking investment in new technology or companies.
Jonathan countered by noting that whilst shareholder pressure is important, it’s current impact can be overstated. In his experience, investors require boards to do both: (a) compete with a sound commercial strategy to generate returns and (b) take climate action (but not at the expense of the former). Jonathan also noted that litigation risk may also play a key role in promoting more effective climate action.
Te Aroha spoke about creating an attitude shift, where people make decisions that benefit a whole eco-society. This would require decision makers to reframe their “value” and ask “if I lose the ‘financial’ value, how do I retain still retain my mauri and mana?”
Julia importantly noted that business needs to get comfortable being brave. This means asking “how do we change” and acknowledging that business may not yet have all the answers. She suggested that being clear on the future that the company wants to create and the purpose of the organisation can help employees and directors to be brave with these difficult conversations. Bravery can change the nature of the conversation and promote action.
A recording of the panel can be found on our webinars page.
There were several questions asked during the webinar using the Q&A function, panellists have provided answers where they felt qualified to speak to them but we have left the other questions in any way so people can consider them.