Global Summit 2022 [Session 2]: What gets measured - how investors approach climate and metrics

On 12 October 2022, Climate Governance Initiative (CGI) hosted the Global Summit 2022: Ambition to Action, a 24-hour virtual conference spanning the globe and bringingtogether highly motivated board members and other eminent speakers who champion effective climate governance.

Climate Governance Malaysia is the secretariat for the ASEAN Climate Governance Network (ACGN) – which is supported by all institutes of directors in the region curated a series of 4 sessions for this 24-hour global summit.

The second session of the series was "What gets measured: how investors approach climate disclosure and metrics."

Climate standards for listed companies are beginning to converge. Most investors see the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD) and the guidelines of the International Sustainability Standards Board (ISSB) as the gold standard for disclosure and accounting. What other metrics are investors using to understand companies’ alignment with climate goals? How quickly do capital providers expect to see ASEAN firms adopt these standards? What are likely implications for companies that move fast – and those that don’t?

The session featured the following distinguished speakers and panellists:

• Hendrik Rosenthal, Director, Group Sustainability, CLP Holdings Limited (Keynote speaker)

• Terence Quek, CEO, Singapore Institute of Directors (Moderator)

• Blake Goud, CEO, RFI Foundation (Panellist)

• Anshari Rahman, Vice President, Strategy & Development, GenZero (Panellist)

• Dr William Yu, Founder & CEO, World Green Organisation (WGO) (Panellist)

• Miranda Carr, Executive Director, Global Head of Applied ESG & Climate Research, MSCI (Panellist)

Keynote address by Hendrik Rosenthal

"Given the evolving landscape of reporting standards and interest from investors, corporations should highlight the key risks, and opportunities to the operations of an organisation and how to derive financial value from the information as well as minimize or optimize the impacts." Hendrik Rosenthal

CLP is one of the largest investor-owned power businesses in Asia-Pacific with investments in Hong Kong, Mainland China, Australia, India, Southeast Asia and Taiwan. CLP’s business spans every major segment of the electricity value chain including retail, transmission and distribution, along with a diversified portfolio of generation assets. CLP takes a long-term view of their business and is committed to building a sustainable business fit for the future.

CLP’s vision is to be the leading responsible energy provider in the Asia-Pacific region, from one generation to the next. In order to help them deliver on this vision, they operate under a set of corporate values and have developed frameworks, strategies and commitments that contribute to the sustainable development of the communities in which they operate.

As an electric utility company, there is a big focus on climate change given that traditionally electricity is generated very much from fossil fuels and the transition away from fossil fuels particularly away from coal is a sort of the crux of the matter for all the electric utility companies. CLP has been working on a climate vision and on an action plan since 2007 when it initially launched the climate vision 2050. Climate Vision 2050 is about target setting and establishing the right governance to make sure that the vision is not a PR activity but a business strategy in terms of how the transition unfolds to 2050.

In order to achieve Climate Vision 2050, an interim target is set. The targets were divided into three phases. Phase one target is by 2030, to meet the science-based GHG emissions intensity target. Phase two is by 2040, to phase out coal-based assets and finally by 2050 to achieve Net-Zero GHG emission across CLP’s value chain.

ESG is no longer optional. It is about communicating how corporations meet their targets and meet the investors’ expectations. The landscape of reporting standards particularly the International Sustainability Standard Board (ISSB) has been very helpful in proposing the initial framework that corporates could follow both from a broader ESG disclosure perspective and sustainability-related disclosure. Task Force Climate-related Financial Disclosure (TCFD) is a big influencer and many of these climate-related disclosures are moving into the space of mandatory disclosures. However, corporations need to be able to identify how ESG risk will influence their Enterprise value and specifically how climate risk influences their ability to generate revenue and meet investor expectations. The frameworks have helped to crystallize the thinking.

CLP published a Climate-related Disclosures Report in 2021 which is based on TCFD. The disclosure leads corporations to engage with their senior management, board members, and directors in a discussion to develop business strategy and execute a business strategy that is very much focused on having sustainability embedded within the business. It allows informed decisions to be made and the target market then gets the information that they need and expect. Given the evolving landscape of reporting standards and interest from investors, corporations should highlight the key risks, and opportunities to the operations of an organisation and how to derive financial value from the information as well as minimize or optimize the impacts.

The following questions were discussed at the panel discussion:

1. The whole concept of metrics is still developing very progressively and people are talking about the convergence of the different types of metrics reporting. What is the latest development in climate disclosure and metrics?

There is a lot more pressure to make sure corporations are tracking their climate performance and carbon emissions. Corporations are expected to disclose the right set of data.

In 2021, there were more than 400 extreme weather incidents throughout the world. These climate disasters accounted for a few billion dollars of economic loss. The incidents have drawn the attention of both regulators and local governments on climate issues. This will put a lot of pressure on the corporate’s boards of directors as regulators and local governments will expect the corporate to take responsibility for the climate disaster. Thus, corporations must take climate risks for both physical risks as well as transition risks into account when they develop the company’s strategy.

Quoting Mr Mark Carney, Governor of the Bank of England and Chairman of the Financial Stability Board in 2015 who uses the term “tragedy of the horizon” said the Short-term outlook of the financial sector will prevent sector players to see the price of the risk of climate change. The current challenge faced by the corporate includes the lack of data in the social and environmental dimensions to do further analysis for measurement and the requirements to conduct a full and effective impact assessment methodology.

Another challenge is the lack of knowledge and confidence among financial specialists to make an informed capital allocation decision. Board members need to think about how the short-term outlook can drive the company’s capital towards a long-term sustainable outcome. Corporates need to understand the interlinked between all of the things and the challenges that come with it from a data, management, and board-level perspective. Boards may not have all the necessary information, knowledge or skills at the beginning but the board must start doing it and then continually improve on that.

There are three factors that hinder the alignment of the financial systems with the requirements for transition to a lower carbon economy:

1. Price vs cost. How to quantify?

2. The disconnection between the long-term impact and the short-term decisions.

3. Instability of the financial system.

In ASEAN countries, the financial institution is the driving force to ensure corporate compliance with the reduction of carbon emissions. Banks for example require the carbon-intensive company to bring in energy efficiency equipment through their green loan to further reduce carbon emissions.

There is definitely a rise in regulations and standards in companies across the ASEAN region. Regulators in countries like Hong Kong, Malaysia, Thailand and Singapore have been very keen to ramp up economic disclosure. There is a lot more pressure to make sure corporations are tracking their climate performance and carbon emissions. Corporations are expected to disclose the right set of data.

Corporations must also think about it at the company level. Things like metrics, it’s not just about the carbon emissions but about how seriously the company is taking that internally. For example, is the CEO’s pay tied to cutting carbon emissions? Should there be external assurance? Everyone has to pay attention to the disclosures and the data at the top level and think about how these metrics are translated at a company level. It’s all part of TCFD, governance and strategy around climate which is really crucial to start integrating and that’s what investors are looking for.

At the moment, there are many standards in the markets on how corporations can measure Scope 1, Scope 2, & Scope 3 and initiatives like ISSB that try to harmonize standards are very much welcome. Investment companies like GenZero are looking to invest in decarbonization solutions and measure the risks through the climate impact of their investments.

At the UN Level, there are also many initiatives that were initiated on Net Zero. For example, Net Zero Asset Managers, Net Zero Alliance for Assets owners and now there is a UN high-level expert looking at how corporates can essentially set forward a credited Net Zero target.

There are 3 items that corporate can potentially look at when it comes to measurements:

1. Disclosure

2. Net Zero – How do you set a Net Zero target that is science-based and that’s credible

3. How do you go beyond your direct abatement within your value chain?

There is emerging guidance around how best corporations can use to offset or leverage the carbon market in a way that isn't seen as greenwashing. The target setting in Net Zero is tipped down and the implications downstream are significant. National-level regulations and also private-sector corporate leadership is worth monitoring.

2. To help with the metric, how can we understand measurement better?

The important thing with measurement is to make sure that companies are measuring the right things. Companies have to understand what their counterparties and stakeholders care about the most. The investors and banks will look at whether the companies’ measurement is consistent with their own commitments and how well or poorly the companies’ activities are in the current state as well as the companies’ trajectory in the future.

Whether the commitments that they’ve made are aligned with the market where the company is based and if there is divergence in the metrics that are being used as the international standards or the national level standards. The ASEAN countries are still developing a standard taxonomy within the region. So, it is really focusing on what matters most to your company and your company’s stakeholders.

3. From an investor’s point of view what is important for them?

The thing that people overlook is how much pressure the investors have in terms of their climate change requirements, climate change journey and Net Zero commitments. The key focus has been on the companies and how TCFD requirements and the reporting requirements. But from financing & investors’ points of view, they’re either committing to Net Zero or they are launching sustainable funds because that’s what clients want. Clients want ESG funds or climate change funds which are not investing in high carbon emission companies or greenwashing. So, there’s a huge amount of pressure at the investor level from their client in order to address climate change and get out of the heavy carbon emitters.

However, with all the Net Zero commitments it’s almost impossible for an investor to get to Net Zero with a diversified portfolio unless they are going into a very specialised sector. It is not just an investment choice. Investors need to work with and engage with the companies that they are investing in to actually decarbonise. That is where a lot of the pressure is going to come from because investors want to see.

External assurance has almost everything you could possibly wish for in a company’s disclosures i.e. external insurance, credible transition pitching, decarbonizing plan, business plan etc. where companies can give investors credibility about the plans.

Corporations must look at:

1. What investor do you have?

2. What metric do you have in terms of their commitments that might jeopardise their investment or financing of your business?

3. What is your own relative balance between direct emissions that are directly related to your operations whether that’s direct from your production or the electricity you’re using?

4. How much is built into the value chain? Prioritization is very important because the ISSB standards will require all emissions across the value chain to be disclosed and it is quite substantial in terms of a company’s own internal value chain.

Companies must present absolute emissions numbers. It is about setting up that phased approach for how companies are going to collect the right data and making sure that its’ really driven by where the emissions are. That is what the investors and banks are looking at and stakeholders are concerned about.

4. Can you explain the complexity of regulations?

Companies must decide and identify a pathway to convince investors, and regulators.

There are top-level standards, and taxonomy being introduced. companies are going to face disclosure but it’s also about how to get from high carbon emission to medium carbon emitting state down to green activity. For some companies that involves a complete change in the business model. So, companies are debating whether they should be using cash flows from the old business to fund a completely new one. This is because to meet the regulations, companies must transition.

Companies must decide and identify a pathway to convince investors, and regulators. A company may get those in terms of criterion under which it assesses whether it's a sort of interaction peer group and whether its national or international standards. There will be a debate on which criteria to use, which are the valid metrics to use and how you can make that transition. This is all something that no one got a perfect answer to yet but that’s what the boards must consider because if they don’t then there’s a risk of not meeting those standards and those regulations further down the line.

5. How to help the board?

1. Building awareness to board members. Involved third-party experts to give some objective comments on the current situation, the level of impact in the future, and the possible indication in their future performance.

2. Get sensible data for basic analysis to evaluate the impact and opportunities for the board to make informed decisions.

3. Set the pathway. Lay down the roadmap of carbon reduction in terms of ESG Management, related integration into the existing enterprise risk management, and the ERM system for boards to evaluate. The board needs to know their level of commitment in terms of financial investment.

4. Board needs to know the company’s carbon footprint

A transition takes time but companies must leverage some of the options currently available i.e. buying offsets - there is a mitigation hierarchy that should be presented to the board on what are the low-hanging fruits in terms of immediate actions that companies can do, what are some of the hinder to the actions, and whether it is impossible because of supply chain/value chain or value chain issue that company can leverage on, how do you smoothen your pathways by looking at additional revenue from carbon markets to adopt decarbonisation solutions?

6. What are the questions the board may want to bring up at the next board meeting as a way to take action?

1. What is the price of inaction?

2. Who has ultimate responsibility for putting their target into action?

3. How is accountability enforced through the process to make sure that the person with the accountability and the boards know where they stand?

4. What is the future composition of the board members and the sustainability committee under the board?

Please find the recording here.