Australasian Centre for Corporate Responsibility (ACCR)

Setu Pelz, our Climate and Energy Analyst, presented in the plenary on integrated assessment of equity and climate action at the Integrated Assessment Modelling Consortium (IAMC) Annual Meeting in Seoul this week. We'd like to thank the organisers for such impressive talks, our new connections and these continuing discussions.  

Who should a board listen to? The rusted-on core supporters, which in Mineral Resources Limited case is a group of a dozen or so institutional investors – none of whom wanted an immediate cleanout – or the other potential capital providers slinging mud from the sidelines and watching on in disgust? But when that core group of shareholders is so out of line with the prevailing view in wider equity and debt capital markets, you have to question whether listening to shareholders is a long-term own goal. Woodside Energy chairman Richard Goyder faced a similar situation in April as he put the oil and gas group’s ill-fated climate transition action plan to shareholders. Some wanted Woodside’s green credentials to move faster, which requires investment – others wanted Woodside to return its fossil fuel cash flows to shareholders and focus on making money next year and the year after. He went with a climate plan he thought would appeal to the highest common denominator – the most players in both equity and debt capital markets, knowing Woodside would need investors and lenders’ support for decades to come. He thought the more capital providers Woodside appealed to, the better. The climate plan copped a 58.4 per cent vote against it. Once again, no one was happy. Outspoken climate-minded investors thought the plan was too vague or didn’t go far enough, while the hardline profiteers thought it all a waste of time and money. That debate still weighs on Woodside’s share price. It is down 24 per cent this year – more than double the fall of the ASX’s second-biggest energy company Santos Ltd. via The Australian Financial Review https://lnkd.in/gt3tiHQ5

Woodside has organised a site visit to Pluto, apparently to show case progress on Scarborough. (https://lnkd.in/grYdyRAt) I recommend that any investor who attends this, reflect on a few issues prior to the visit to contextualise the information that Woodside will share. Firstly, Woodside has underperformed the MSCI World Energy sector on a 3, 5, 10 and 15 year period. The Energy Sector, has in turn, underperformed the broader market. Secondly, Pluto 1 was late and over budget, with our analysis suggesting that it eroded $2.8 billion (Real 2007) (https://lnkd.in/gehdCjAB, p 13). This more than offsets any value created by Scarborough, meaning that the Pluto/Scarborough precinct has, overall, eroded shareholder value. Thirdly, Woodside has a poor track record with greenfields project development: - Pluto 1 was delivered 80% over budget and 2 years late (https://lnkd.in/gbJwTi3j pp 9, 10) - The recently commissioned Sangomar was 18% over budget and a year late (https://lnkd.in/gehdCjAB p 13) - Despite Woodside’s CEO saying the lessons from Sangomar had been learned and applied to Scarborough, Scarborough is currently 4% over budget. Whilst we support Woodside’s “commitment to shareholder returns” (https://lnkd.in/grYdyRAt p6) we encourage investors to query how the recent acquisitions of Louisiana LNG and the Beaumont ammonia project are consistent with this commitment.

Our Chief Scientist, Dimitri Lafleur, presented at the Integrated Assessment Modelling Consortium (IAMC) Annual Meeting in Seoul this week. Dimitri outlined some preliminary research by our climate science team into the misuse of scenarios produced by the IAMC community. Findings show that a majority of investor-owned fossil fuel companies do not use scenarios appropriately to claim Paris-aligned strategies.

Given the scale of the structural change required — and the threat runaway climate change poses to the stability of financial systems — climate governance sits at the core of good governance. Boards need to be doing three things: One, is staying on top of and genuinely reckoning with the latest climate science. Too often we see some company climate plans built on interpretations of science that appear crafted to “fit” a view of the world where limited changes to company strategy are required. A board that understands the science — both the required pace of change, likely policy responses and the current and projected impacts — will be better placed to anticipate changes. Two, is being aware of the risks of groupthink and developing muscle in asking tough questions of management. Businesses will need to change in line with climate science and market direction, and this will involve major decisions. Executives may need to be challenged to break away from styles of thinking and doing to which they are accustomed. As the recent governance review at Qantas revealed, the robust challenge of management is a critical role for boards. Three, is an openness to board renewal. It is vital boards possess the requisite skill sets to navigate the challenges and opportunities of the energy transition. As seen recently, even contested board renewal, while it may appear controversial at the time, can be a prudent move. Every shareholder has an opportunity to nominate and vote on directors, who have legal obligations to act in the best interests of the company, not any individual shareholder. Aspiring directors should also step forward. When the same challenges keep reappearing, shareholders can and should play a role in nominating candidates they think are better placed to position for change. Board renewal is an effective way for shareholders to deliver a fresh injection of skills.

Spanning our AGM activities, company engagements and research, and featuring testimonials from key collaborators, ACCR's Annual Review for FY23/24 shows how we use shareholder rights to protect long-term value and deliver real-world emissions reductions.

As global mean temperature moves towards and beyond 1.5°C, physical impacts will become more extreme and frequent with every increment of warming. Investors must consider whether their risk assessment models appropriately capture cascading physical impacts and near-term nonlinear risk channels, as well as the uncertainties in adaptive capacity to deal with these. A common misperception of the Paris Agreement is that the 1.5°C goal represents a “safe” threshold. In fact, the impacts of global mean temperature rise, currently at around 1.2°C, are already felt worldwide. Examples of extreme weather events which are empirically linked to anthropogenic temperature rise are abundant; from floods in Pakistan[1] and Central Europe[2], to heatwaves in India[3] and the Philippines[4], and Hurricane Helene[5] that recently tore across the continental United States. The 1.5°C goal therefore does not represent the point at which we begin to feel the impacts of climate change. Rather, it represents a collective political agreement to limit the increasingly severe impacts felt around the world - intended to mitigate the worst of climate change. We expect to breach this at some point in the next decade.[6] With every 10th of a degree of warming, the frequency and magnitude of extremes increases. This is governed by a series of cascading processes that have corresponding nonlinear consequences for physical infrastructure investment risk[7]. An example of what this would look like - which has already occurred - is that damage to property and infrastructure from a series of tropical cyclones would be exacerbated by the consecutive nature of the storms, along with the depleted response ability of emergency management, owing to a preceding hurricane. These impacts have already been observed and robustly linked to global mean temperatures[8], and may be reversible to some degree, with net-negative emissions following net-zero.[9] However, these physical risks are distinct from the risks of tipping points, which have the potential to irreversibly shift the climate into another state. As we navigate the implications of 1.5°C overshoot, the investment community must be alive to the reality that global temperature rise induced physical risks to infrastructure investments will not regress to the mean, but steadily worsen over time. The World Meteorological Organization estimates climate change-related events over the past five decades have resulted in US$4.3 trillion in reported economic losses. While adaptation measures, such as investing in floodproofing infrastructure, may attenuate these effects to some degree[10], the most effective lever remains a concerted effort to limit overshoot and return to below 1.5°C as quickly as possible. Diversification and patience are not sufficient to deal with this type of risk.

"Over more than a decade oil companies have consistently invested in a manner that does not earn the cost of capital and the market has noticed." "Investor return comes in two parts, earnings paid out in dividends and growth that comes about by reinvesting the earnings that have not been paid as dividends. Oil company reinvestment appears to have reduced shareholder value, not enhanced it. If you take the view that oil companies are in business to enhance the value of their shares by exploiting a natural resource as opposed to simply exploiting a natural resource, then something is wrong with this picture. If we were shareholders, we would advise managements not to drill and frack with abandon, because, if past is prologue, they will just destroy more value." via OilPrice.com https://lnkd.in/gZnCHaxc

New bp briefing by Institute for Energy Economics and Financial Analysis (IEEFA) bp is now reportedly abandoning key planks of its 2050 net-zero pledge, and it’s part of a much broader sector trend. The company and its peers are failing to demonstrate a cohesive plan for managing shareholder value amidst a changing economy. In its current strategy, BP seems content to chase short-term profits at the expense of substantive long-term planning. "For the investors who have previously taken these companies at their word and bet on their seriousness about the transition, recent retreats are a wake-up call. Corporate executives may be hoping that these decisions will help them satisfy short-term targets. But long-term investors and other systemically-minded financial actors should ask whether the visions underpinning such companies’ strategies truly align with their own — and whether such companies can be good-faith partners in achieving their goals." https://lnkd.in/ggh98YpT

For those interested in following the hearing for NSD858/2021 - AUSTRALASIAN CENTRE FOR CORPORATE RESPONSIBILITY v SANTOS LIMITED, the #livestream link will change daily. Please search the above case number and check the Federal Court of Australia account on YouTube each day. https://lnkd.in/gufmmnbD