CLIMATE CHANGE : A New Challenge for Governance

Not only is our Government on the move in reacting toclimate change issues, but capital markets around the world are on the move and in fact are moving faster than governments. Climate change is challenge for governance. How corporates apply an appropriate governance response to the challenge of climate change policy and environmental regulatory intervention will have major impact on shareholder value.
The New Zealand Emissions Trading Scheme will be established once the Climate Change (Emissions Trading and Renewable Preference) Bill is enacted. It will be the prize environmental regulatory intervention by the Government in its climate change policy. It will be important to have strategy at the governance level, not only in relation to climate change but also for managing regulatory intervention of every kind.
Emissions trading is an example of the importance of corporate strategic thinking in relation to regulatory intervention. It is not that emission trading is prime example of regulatory intervention – the Government’s price control regime for electricity lines businesses is better example – but it is key to the Government’s climate change policy.
Clearly, Government is intent on lowering New Zealand’s carbon footprint and regulatory intervention is on its way. It is fair to say that both the Labour and National Parties policies in this regard are broadly the same. For example, National supports the Government’s regulatory emissions trading scheme.
In September 2007 the Government released the framework of New Zealand’s Emissions Trading Scheme. In December 2007 the Government introduced The Climate Change (Emissions Trading and Renewable Preference) Bill, vehicle for the implementation of the Scheme. We will have an emissions trading scheme to reduce all greenhouse gas emissions across all sectors of the economy by 2013. While the Government is by no means leader internationally in emission trading schemes, it is promoting world first in that the scheme encompasses all greenhouse gases and all major sectors of the economy.
The Government also released New Zealand’s Energy Strategy which champions renewable energy. This contained the following spectacular announcement:
“The Government expects all generators including State Owned Enterprises to take its views into account [that is the Government’s clear preference is that all new electricity generation be renewable]. When considering new generation investments, the Government will advise State Owned Enterprises that it expects them to follow this guidance. Currently, there are no powers to regulate or restrict new fossil fuelled generation. The Government will consider regulatory options to reinforce the Government’s objectives for limiting new fossil fuelled generation.”
The Government is now considering regulatory options to limit new base load fossil fuelled generation over the next few years. The Climate Change Bill will implement 10-year moratorium on new thermal generation plant unless the Minister of Energy grants an exemption, eg where generation is required for security of supply.
There is no doubt some corporates regard climate change as an opportunity for commercial advantage, as they invest in new business models, capital equipment and brands that are less emission intensive than their competitors. Equally, there is the risk of damage to corporate brands and of change to consumer preferences, making geographical isolation more challenging and posing risks to our primary sector and tourism sectors.
According to recent McKinsey report, significant proportion of worldwide executives believe the risks and opportunities provided by climate change are equally balanced.
Retailers have already responded. Tesco plans to spend US$1 billion to reduce the company’s carbon footprint and Marks & Spencer is to spend £200 million to become carbon neutral. In the United States, Wal-Mart, the world’s largest retailer, has required its 68,000 suppliers to reduce their carbon footprints.
Major manufacturers and producers are also taking action. For example, the US Climate Change Action Partnership, comprising companies like Dow Chemical, General Motors, Shell and General Electric, is urging US policy makers to enact mandatory reductions in greenhouse gas emissions. This partnership represents US$2 trillion in revenue. Major US corporates have established the Chicago Climate Exchange, the world’s first and largest voluntary emissions trading scheme in order to create market for, and earn credits from, their investment in emission reduction projects. AGL of Australia was the first non-US corporate to join the scheme. In New Zealand, corporates such as Air New Zealand, Meridian and Contact Energy are making moves to protect their brands.
Climate change is challenge for governance. How corporates manage climate change will impact on shareholder value and adding value in corporate governance environment will involve:
• applying capital to the company’s fundamental purpose;
• systematically managing climate change as one of many business risks and opportunities to the achievement of that purpose;
• proactively engaging with all stakeholders on the impact of climate change as one of the matters that vitally affects those stakeholders and that influences the company’s existence, purpose and brand;
• foregoing claims on capital that do not promote the company’s preservation and growth in value; and
• putting in place transparent and effective structures, pro­cesses and culture to effect the foregoing, in particular, strategy for regulatory intervention and managing the relationship with the regulator.
These principles guide governance thinking as to where the risks and opportunities arising from climate change lie. In terms of the primary regulatory intervention in response to climate change, much of the detail has yet to be finalised, but the Framework document, the Climate Change Bill and its explanatory notes provide some clear guidelines. Consequently, depending on how one is exposed to the price of carbon emissions there is still an opportunity to influence the final shape of the regulated market as the Government moves through its consultation process.
The principles of good governance to promote value are applicable to the risks and opportunities of climate change, including the management of risk arising from the proposed emission trading scheme, just like any other form of regulatory intervention. Accordingly, there are some fundamentals when it comes to managing regulatory intervention.
It is important to observe the key ‘do’s’:
• understand the impact of the proposed regulatory intervention;
• understand the relevant agendas, namely, the agenda of the regulator and the agenda of the other stakeholders, businesses, shareholders, customers, employees, creditors and the like. Here, the Government or any other regulator is key stake­holder and understanding its legitimate interests is important;
• identify real achievable outcomes by trading off profit maximisation against the factors that drive regulatory intervention, change in consumer preferences, and investor attitudes as may be driven by climate change;
• define and implement clear communication strategy;
• define and implement relationship strategy to promote proactive and constructive relationship with the regulator; and
• organise your regulatory management to maximise the positive impact of the regulatory intervention and minimise the negative impact, in this case, of the regulated emissions trading market.
Do not:
• react in an ad-hoc way;
• adopt confrontational approach. One has to be careful not to direct one’s approach just to confront the Government as regulator, but rather as means to inform the Government, opposition parties, officials, the wider commercial community and the public generally.
• fail to understand th