Overview

The Australian Institute of Directors, together with Pollination, have released a new report tracking the evolution of directors' perceptions of climate risk and trends in climate governance practices since 2021. Our key takeaways are below.

There is a high level of concern about climate risk

The report highlights that despite the many competing challenges facing boards – eg inflation, economic and geopolitical uncertainty – the vast majority of Australian directors view climate risk as a strategic priority for their organisations. For example:

• 80% of directors surveyed are concerned about the impact of climate change as a material risk to their organisation.
• 60% of directors surveyed would like to see their board pay more attention to the issue

Directors are increasingly seeing the opportunity (as well as the risk)

Notably, the report highlights that directors across all sectors are also alive to the potential opportunities:

• 80% of directors that see climate change as a material risk.
• Of those, most (70%) see opportunity from transition. Directors of listed and unlisted companies (60% and 59% respectively) are the most likely to see opportunity as well as risk, while government (52%) and NFP (40%) directors are less likely to do so.
• The most often cited opportunities identified were brand recognition/reputation (33%) and separately, new products and/or services (also 33%).

Nature-related risk is emerging as a priority (but boards consider they lack the bandwidth to give it the focus required)

• The report found that half (50%) of the directors surveyed view nature-related risks/biodiversity loss as a material risk to their organisation.
• The level of concern was significantly higher among government sector/public service directors (70%) vs directors of listed companies (48%) and directors of unlisted companies (45%).
• Perhaps unsurprisingly, directors from industries with extensive environmental management requirements (eg mining companies) were 'more advanced in their thinking' around nature reporting/impact than directors in other industries.
• Directors consider that implementation/adoption of the Taskforce for Nature-related Financial Disclosures (TFND) framework will be challenging even for organisations with advanced environmental management experience because of the level of detail required
• In terms of preparedness, at this stage, most organisations have not yet considered the integration of nature-related risks/opportunities with climate within their business and many directors consider that their boards are not yet prepared for nature reporting. According to the report, this is not due to lack of awareness of the issue, but to a lack of 'bandwidth' – most organisations are still primarily focused on climate.
• The report highlights that despite the challenges involved in implementation, directors expect reporting expectations to extend from climate to nature and biodiversity (especially in light of the finalisation of the TNFD framework) sooner rather than later. On this, the report quotes Geoff Summerhayes as commenting:

'Nature will follow the climate playbook, but on fast forward'.

High levels of concern/awareness of climate-related risk is not necessarily translating into increased climate action

The report suggests that since 2021, organisations seem to have narrowed their focus when it comes to climate action with an increase in activity in certain areas, and a drop off/no increase others. For example, the report found that boards seem to be focused on upskilling and information flows:

• receiving reports on climate and sustainability records (36% up 3% on 2021
• undertaking director training (26%, up 8%)
• conducting assessments of board climate competence (16% up from 4%)

In contrast there is less activity in other areas. For example:

• just 34% of directors reported that climate change is embedded into their organisation's risk management framework (down 11% on 2021)
• only 20% of boards have climate-risk metrics in place (down from 26% in 2021).

Drilling down, the report also highlights a divide between the level of activity in listed companies vs other entities. For example, the report highlights that:

• while, as flagged, just 34% of directors overall reported that climate change is embedded into their risk management frameworks, 50% of directors of listed companies reported that this was the case
• when it comes to climate transition plans and targets, listed companies are more likely than unlisted companies to have transition plans and climate targets in place – 43% of listed companies vs 25% of unlisted companies.

The report highlights that a number of directors in larger organisations indicated that they are focused on implementation/execution of climate plans and embedding climate commitments across their business – they are 'grappling' with the scale/complexity of operationalising their existing commitments rather than engaged on making new ones.

Key barriers to action

• Perceived lack of 'settled climate change policy' was identified by 42% of directors surveyed as the greatest barrier to action on the issue – making this the top barrier identified. Directors highlighted 'discordant or misaligned policies with contradictory incentives, along with shifting goalposts, as factors imposing an unreasonable burden on companies'. The report underlines the necessity for alignment between policymakers, investors and companies in order to enable (and accelerate) progress in line with Australia's climate goals.
• 24% of directors overall (and 35% of listed directors) also nominated pressure to meet the short-term financial demands of some investors as a key challenge (for example, where funding climate initiatives impacts short term returns). For listed directors, 35%
• Resourcing/time constraints emerged as a particular issue for not-for-profit directors and to a lesser extent for government directors with 31% of NFP directors and 25% of government directors nominating this as a barrier to action
  Regulation is perceived as both a 'driver and a drag' on action
• The expected introduction of mandatory climate reporting requirements is identified as a 'driving focus' for directors with most (72%) reporting that they are well or somewhat prepared for the new requirements.
• However, the report also highlights that increased regulatory pressure and concern over being accused of greenwashing combined with a lack of assurance capability is also leading to companies to exercise caution when it comes to setting ambitious climate goals.

Emerging 'better' climate governance practices

The report found that board approaches to climate continue to evolve with better practices emerging. A separate document - Australian Market Snapshot - outlines emerging better governance practices around strategy, execution, stakeholders, regulation and governance together with recommendations/guidance for directors.

[Sources: AICD media release 05/03/2024; Full text report: Climate Governance Study 2024: Moving from vision to action]

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