Masterclass session 2

On Friday 12 August, Gilbert + Tobin hosted the second session of its clean energy masterclass series. The session was conducted by a panel consisting of Justin Mannolini (Corporate Advisory Partner, Gilbert + Tobin), James Mecca (Head of Energy and Decarbonisation, Mainsheet Capital) and Bill Beament (Managing Director, Develop Global Limited), and moderated by Simon Rear (Corporate Advisory Partner, Gilbert + Tobin).

The panel considered how directors of Australian companies can best balance the conflicting opportunities and risks presented by the global trend towards decarbonisation of industrial production, and in particular, how to navigate their duty to consider climate risks while simultaneously maximising shareholder returns and operating within the evolving boundaries of regulation in this area.

Speakers:

• Bill Beament, Managing Director of DEVELOP Global Limited
• James Mecca, Head of Energy and Decarbonisation at Mainsheet Capital
• Justin Mannolini, Corporate Advisory Partner at Gilbert + Tobin

Moderator:

• Simon Rear, Corporate Advisory Partner at Gilbert + Tobin

The global momentum towards the clean energy and decarbonisation transition is moving at a staggering speed. Public and private sectors have pivoted to align with a transformation like an industrial revolution. There has been a significant shift in expectations regarding net zero and other decarbonisation commitments, and Australia’s own transition remains under the spotlight with measurable action and government intervention at the centre of the debate. 

It’s for this reason that this year, Gilbert + Tobin presented the Clean Energy + Decarbonisation Masterclass series, a multi-part series featuring leading industry experts focusing on key topics relating to investments in the clean energy and decarbonisation sector. The Masterclass series provided a rare and unique opportunity to hear from professionals at the forefront of industry, clean energy developments, and decarbonising opportunities. The sessions also included a panel discussion facilitated by Gilbert + Tobin and involving industry experts. 

The six-part series explored the crucial considerations for business and community including, the practicalities of decarbonisation, governance and risk, financing challenges, land acquisition and assembly, stakeholder engagement and environmental issues.

Key takeaways

Key takeaways arising from the session are:

1. While once little more than a ‘corporate social responsibility’ consideration, climate change and decarbonisation are increasingly becoming core considerations for Boards when considering the strategic direction of the company.
2. Directors are unlikely to discharge their duties simply by adopting a ‘risk disclosure’ mindset towards climate change and decarbonisation. What is required is a balance of both risks and opportunities.
3. A decade of policy inaction has led to a ‘regulatory deficit’ in Australia in relation to climate change and decarbonisation, creating a challenging environment for directors. However, there are steps that Boards can take now to ensure their climate governance processes and structures are robust and able to respond to a rapidly evolving environment.
4. Net zero commitments are a potent source of risks for directors in Australia compared to other countries, given the reversed onus of proof in relation to forward-looking statements and the absence of a ‘safe harbour’ defence.
5. There is an inherent  tension between capturing opportunities from the downstream processing of minerals in Australia, and achieving the country’s commitment to net zero emissions by 2050. 

Climate Change and decarbonisation – a key strategic consideration for Boards

While climate change was once little more than a ‘corporate social responsibility’ issue, it is now a key business driver, mobilising a fundamental shift towards the decarbonisation of industrial production.  This creates both opportunities and risks for Boards as they seek to navigate new social and regulatory expectations. 

Justin highlighted that Boards are confronted by two main forces: (1) stakeholders who are increasingly demanding that Boards commit to a decarbonisation pathway, and (2) decisions made by regulators and courts which increase legal accountability for those commitments.  

The Regulatory Puzzle

The regulatory framework remains fragmented and uncertain in this space, while the expectations of consumers and investors on climate change issues are increasing.  This has left regulators scrambling to repurpose existing elements of the regulatory regime to address greenwashing, while Boards attempt to navigate through uncertain waters and the public watches closely and, it seems, unforgivingly.   

Justin noted that the Task Force on Climate-related Financial Disclosures (TCFD) Framework is emerging as a cornerstone document, helping bridge the gap between physical greenhouse gas emissions data and the demands of financial decision-makers. In the absence of more prescriptive rules in Australia, the TCFD’s recommendations are the most useful model for directors considering ‘climate governance’.  Boards should reflect on their policies and strategy and, where possible, align themselves with the TCFD framework to ensure they are prepared for the future.  

Justin also mentioned the International Sustainability Standards Board (ISSB) exposure draft sustainability standards, released earlier in 2022.  Consultation on the draft standards recently closed, with the ISSB receiving over 500 submissions.  Although responses were largely positive, several common concerns were raised by Australian commentators in relation to domestic implementation capability (who will prepare the information?), assurance issues (who will audit the information?) and exposure to legal risks on the part of the preparers and providers of financial statements.

Exposure to legal risks and net zero commitments

While net zero commitments, targets and strategies have emerged as a focal point for market participants in assessing board-level climate governance, commitments have often been vague and immeasurable, amplifying greenwashing risks. It is clear that Boards need to ensure that disclosures made are reflective of the true position of the company and provide sufficient information so as to allow stakeholders to make an accurate assessment of the achievability of the target.

Net zero commitments are, by nature, forward-looking statements as they are based on numerous levels of assumptions, predictions and ‘if’s’. Under Australian law, such statements are deemed to be misleading unless the maker can point to ‘reasonable grounds’ for the statement.  Justin reflected on the fact that compared to their counterparts in certain other jurisdictions, reporting entities and officers in Australia are particularly exposed to legal risk. This is because Australia has no ‘safe harbour’ exemption which allows for the exclusion of liability by identifying a statement as a forward-looking statement and including a proximate cautionary statement.  In this respect, James noted that directors should have extra regard to their obligations and risks in light of the legal position and conduct comprehensive due diligence both to minimise risk and ensure that commitments are tangible and credible.

James also discussed the risks inherent in making commitments to decarbonisation goals.  In James’ view, a net zero commitment is not a licence to ‘burn now, pay later’, but should include two components: (1) an appropriate absolute reduction component and a downward trajectory of a company’s absolute emissions, and (2) an accelerated downward trajectory towards the same target or a net reduction in global emissions. That is, a credible commitment requires a defined reduction in emissions with a clear roadmap to achieve and validate outcomes.  

Further, to ensure that net zero commitments are ‘future proof’, Boards should have regard to the practical reality of the commitment and its implementation including considering:

• long term partner selection;
• offset procurement strategy;
• capacity, capability and compatibility in relation to implementing proposed initiatives; and
• quantity and quality of offsets required in a measurable way.

Key Opportunities

Bill made clear the scale of the opportunity provided by the global trend towards decarbonisation for those involved in the extraction of the minerals required to enable that process.  In this context, it was noted that the Commonwealth Bank of Australia has projected that between $2.5 trillion and $3 trillion of investment will be required in Australia for the national target of net zero by 2050 to be met. 

Bill reflected on Australia’s current reliance on fossil fuels for power generation: in Western Australia, 75% of the power grid is fuelled by gas, and in the Eastern States, 75% of the power grid is fuelled by coal.  The staggering amount of investment needed reflects the amount of work required to reduce reliance on non-renewable power sources.  Bill emphasised that stronger actions will be necessary to counter the upward pressure on emissions from mineral production, but the climate advantages of clean energy technologies remain clear. Further, mineral demand for clean energy technologies is projected to rise by at least four times by 2040 to meet climate goals, particularly in relation to EV-related minerals, representing significant opportunity – copper, nickel, chromium and aluminium for example, are major components of clean energy technologies.

James also highlighted that Boards could reap significant benefits if they remain at the forefront of the decarbonisation movement and should look beyond the net profit value of initiatives.  Instead, Boards should balance costs against the opportunity loss suffered as a result of delay in action.

Bill noted that if initiatives are focussed in the right areas to target meaningful and significant emissions reductions, and are realistic and practical in their design, national emissions targets will become more achievable.  Decarbonisation of the economy will require a fundamental shift in mindset, but once that occurs, there will be no limiting the possibilities of where the clean energy movement will go – and companies definitely do not want to be left behind.

Key Challenges

Of course, there remain important physical constraints to decarbonisation which directors need to consider.  As an example, James presented an overview of renewable energy and mobile fleet transition economics in mining, which demonstrated that the cost increase and savings from decarbonisation is not linear. For example, although global investment in solar and wind has delivered a 70% to 90% cost decrease over the past 10 years, there is still only limited data regarding productivity impacts in the case of mobile fleet decarbonisation (compounded by high capital premiums).

James also noted that there is a growing trend amongst large market players to consider the onshore processing of minerals instead of exporting raw materials for processing offshore (as Australia has traditionally done).  While this presents the opportunity to reap additional supply chain value, it is potentially inconsistent with Australia’s domestic emission reduction goals.  Effectively, downstream processing involves exchanging ‘Scope 3’ emissions for ‘Scope 2’ emissions, and this may have greater regulatory implications in the future.  On this point, Bill highlighted the share of the top three producing countries in the production certain minerals and fossil fuels.  China, for example, is the largest producer of copper, nickel, cobalt, lithium and rare earths in terms of mineral processing.  In this respect, we must remember that climate change is a global issue and will require a global response.  So, although keeping mineral processing offshore may help Australia to achieve its net zero goals, emissions are not reduced from a global perspective, which is an outcome we want to avoid.

Conclusion

The global trend towards decarbonisation of industrial production is just beginning, but is expected to grow exponentially.  While Australia suffers from a regulatory deficit at the moment, regulators are expected to begin taking enforcement action in the near future. This, coupled with the outcome of private litigation, will begin to produce more tangible guidance to Boards.

Until then, there are steps that Boards can take to mitigate legal risks. These include conducting a review of their processes and policies for disclosing the risks and opportunities arising from climate change to investors to align their disclosure processes with accepted frameworks (such as the TCFD's recommendations), and revisiting the robustness of their net zero commitments.