Key topics:
Impact of political uncertainties on corporate strategic planning in energy transition
Australian banks' controversial continuing investments in fossil fuels versus renewable energy
The dominance of financial considerations in companies' environmental engagements and the role of internal conflicts in governance
Sharing her insights on the energy transition and governance, Helen Bird from Swinburne University asserts that political uncertainties, such as potential withdrawal from climate targets, pose a strategic challenge for sectors like energy and finance. Helen insinuates these uncertainties hinder vital corporate planning, resource allocation and investment decisions. She maintains that the anticipated abandonment of targets would discourage investment and inevitably affect corporate governance.
Discussing Australian banks' purported continues investing in fossil fuels, Helen highlights the implications for ESG governance, encouraging investment in renewable energy. She questions the discrepancy between bank's public declarations and the steady flow of funds towards fossil fuel projects. Helen underscores that strategic transition is necessary but elevated by the financial sector's support.
Addressing company responses to environmental engagements, Helen refers to Fortescue's (ASX: FMG) decision to reduce its green hydrogen projects. Despite advocating environmental causes, Helen asserts that financial considerations still dominate corporate decisions. Furthermore, she comments on the induced tensions within companies like Fortescue, suggesting that these internal conflicts might impact their governance and environmental initiatives.
In relation to ESG-focused shareholder activism in the US, Helen observes a decline, attributing the reduction partially to large asset investors like Blackrock and Vanguard scaling back their involvement.
Full unedited transcript below:
0:00
Let's just switch gears. I look forward to these chats and put the focus on governance now. My next guest says that the energy and financial sectors are experiencing significant shifts, highlighting the need for certainty and strategic governance when it comes to the energy transition. Helen Baird from Swinburne University is here with me now. Hi, Helen. Nice to see you. So we've got the federal opposition saying that they would like to ditch the climate targets for 2030. Now, we've had a sort of a unified voice coming from a lot of lobby groups, from a lot of energy groups saying, you know, this is bad, a bad idea. What do you make of it through that governance lens?
0:45
Well, as you rightly suggested, it can sound like a political issue, and I'm sure it is. But what companies are saying is effectively they need to plan, they need to resource allocate and they need to respect it. And they're not things you can do easily if you haven't got a certain stable environment in which you're working. Of course, there are always uncertainties, but you seek to reduce those as far as possible. So in order to do that, knowing that there is a target climate admissions target, that that's on board and that you're working towards helps you to make decisions and invest money, which is critical to making the transition. So the decision by the opposition to abandon those targets is it's being suggested to be very shortsighted. It's going to discourage people from investing, and it's going to make bad, poor decision making by companies. And all of that ends up at the board level. And we see poor governance where we can't have certain environments. I want not saying 100%
1:45
certain, but where we know certain basic frameworks within which we're operating. So it's a message from, uh, essentially the big industries, the energy sector, that we need to have certainty and governance depends upon that confidence. Yeah. When the rules of the game change, it makes it very difficult for everybody to continue to make these key investment decisions. And and I mean, but to your point about, you know, still investing in, uh, certain areas, certain sectors, you know, we've still got the big banks still very heavily investing in fossil fuels. So clearly that hasn't changed even with these emissions targets.
2:24
No, I mean, there was a lot of representations made by the Australian banks that they would not encourage new development in fossil fuel production or gas productions, um, or coal mining. But what's been suggested by market forces and studies they've looked at is the general way they're giving money to companies is still continuing. And while it's not specifically being connected up to, um, uh, fossil fuel projects, the fact of the matter is, it's significant amounts of money, $3.6 billion in 2023 alone, indicating that the money is going somewhere. And the suspicion is it's a sort of backdoor way of giving them the finance that the company, the banks, declared they weren't going to do. Okay. So what does that mean from an ESG governance perspective at the board level? Helen?
3:09
Well, I'm sure that from a bank point of view, they would deny that is the case. But the short answer is that we if we want to make a transition, one of the things that has been argued is we need to be encouraging investment into, uh, renewable resources. And we're not doing that if we're giving money away to fossil fuel production. Um, the banks, it's a please explain the companies. It's a reminder that they need to come up with strategies to make that transition. And if they're getting money from banks, they're not being encouraged to do that. But, Helen, some of those companies that have made a commitment to helping and facilitating that transition have had to walk their rhetoric back a little bit, haven't they? In the past week, we heard that Fortescue would be cutting jobs. It would be still sticking with its green hydrogen ambition, but very much de de prioritizing them. What do you make of it?
3:59
Well, I think it reminds you that governance is a variety of issues that come together. And certainly what that one showed to me was that the financial bottom line is still a major consideration. There might be environmental drivers, but the fact of the matter is, if you can't make money doing it, then you're not going to do it or you're going to certainly reduce down your involvement. And what Tookey said is at the moment, there's a business case for being involved in solar and wind energy, but not necessarily a sufficient business case for his business to be involved in green energy, or at least in some of the projects he was anticipating getting underway with. So even though there are climate initiatives and climate drivers, the bottom line drives even people like him. Yeah, well. But what does it say? Um, because I suppose there would be some investors. I'm thinking about it from an investment lens, you know. Good. You know, they're not going to continue to pursue something if it doesn't make sense from a numbers perspective. But there have been some criticisms of the fact that there's been a lot of changes at the C-suite, at Fortescue
4:59
that perhaps, you know, within the company, not everybody was on board with this green push regardless. So what does it say about from a governance perspective, again, and about the board and its interaction with Andrew Forrest? Oh, look, I think there's always been a talk of a tension within Fortescue between management and the board and the founder very much is Andrew Forrest, and that continues to be evident in much of what they do that's currently calmed down. Um, but he clearly is the driver of what they do. He clearly is the person with the vision. Um, and that hasn't really changed. But if you haven't wanted to be on board with what he's doing, you've resigned and got out. And we've seen that in numerous people. Having left the company in the last year and a half. Um, I guess that will continue. But, um, maybe he too has finally realised that some of his aspirations were realistic. Um, and he's in fact become more moderate in the way they were advocating and he didn't agree with in the past. Okay.
6:00
Just to stick with the climate, um, theme. Is it true that in the United States we've seen, I suppose, less support for ESG focused actions, um, when it comes to activism from shareholders? Um, yes. If we take 2020 as of essentially the high point of SG activations inside companies in the United States, we've definitely seen a walk back since then. I mentioned 2020 because that was the year in which, um, famously three directors were, um, appointed by a company called engine number 3 or 1, um, who had a very tiny shareholding in ExxonMobil and managed to get three climate activist directors onto the company board. But despite all of that, and subsequently, the number of initiatives that people have sought to put up as resolutions has dropped off. And really, only two successful environmental resolutions got through this year in the major 3000 companies in the United States and very, very much almost nothing in relation to social initiatives. So
6:59
diversity, social, um, equality and inclusion type concerns have just simply not been on the radar. One thing that has been pointed out that I find very interesting is it's the big asset investors like Blackrock and Vanguard, who have been walking back their representations and being less actively involved than they had suggested in the past. And of course, there's lots of assertions about why that might be the case, including threatened loss of customers in the government sector from various states who said if they continued with those policies, they wouldn't put their money there to be managed. I'm not saying that is in fact the truth of it, but the facts presented to do demonstrate these companies are stepping back from being so active as they previously were.