BHP Billiton's stroll towards oblivion

I recently nominated to join the board of BHP Billiton, on the grounds that the company needs to take far more extensive and urgent action to address climate change and its potentially destructive impact on BHPB’s shareholder value.

In appealing directly to shareholders to support my appointment, discussions with company representatives, proxy advisers and investors have heightened my concern that corporate Australia’s risk management and governance systems are dangerously inadequate to handle strategic, potentially catastrophic, risks – that is risks which have the capacity to fundamentally change the direction of an organisation or country, or indeed to destroy it. When it comes to the real risks of climate change, the Australian political and corporate establishment remains in almost total denial.

The BHPB board, for example, has taken the view that its current policies adequately address the risks of climate change, and thus do not recommend my appointment.

It has long been clear that human carbon emissions are warming the planet, but the latest science indicates that both the extent and speed of warming has been badly underestimated. Current climate policies are leading to a world with an average temperature increase in excess of 4 degrees above pre-industrial levels – a world where population would fall from the current seven billion to below one billion, caused by a combination of heat stress, escalating extreme weather disasters, sea level rise, disease, food and water scarcity, and consequent social disorder and conflict. These impacts are being locked-in by our investment decisions and inaction today, while the full, catastrophic, effect will only evolve over time. Typhoon Haiyan sadly provides a foretaste of what is to come.

To have a reasonable chance of avoiding catastrophic outcomes we must take emergency action now, halting new fossil-fuel investment and rapidly weaning ourselves off established fossil-fuel use.

In short, climate change, even in the short term, is the greatest strategic risk, and opportunity, faced by business – but particularly by high-carbon resource companies such as BHPB.

The experience of the last 20 years demonstrates that conventional politics in Western democracies is incapable of addressing this issue. In the absence of political leadership, business in its own self-interest to survive must act, for business as we know it is not possible in a 4 degree world.

The response from Australian business has been underwhelming. The rhetoric on the websites of leading companies proclaims that climate change is a serious issue that requires urgent action. Those same companies fund the attack-dogs of the Business Council and the Minerals Council to disrupt and delay any sensible carbon reform, and then complain about the ineffectiveness of the emasculated policies that result.

Even companies which are more genuinely concerned, such as BHPB, still regard climate change as an issue which can be addressed by incremental change, rather than requiring emergency action. They have access to the best scientific advice, yet ignore its implications. Most corporations have taken the view that they have to work within the confines of policy set out by government, rather than lead by bypassing dysfunctional government, drawing their own conclusions from the science and acting accordingly.

Institutional investors rely heavily on the recommendations of proxy advisers in voting their shares at company annual general meetings. While the proxy advisers are conscious of climate change risk, within their narrow terms of reference climate change per se is still erroneously regarded as a secondary ESG (environment, social, governance) issue, not of primary concern for shareholder value. Major investors themselves, with some notable exceptions, are not taking the time to understand the science and its damaging implications for their investments even in the short term.

Investors are also reluctant to vote against the recommendations of boards of directors (for example, in supporting my appointment to BHPB) unless a company is in serious trouble, to avoid suggesting a lack of confidence in the existing boards.

Both corporate and investor attitudes are compromised by the destructive influence of so-called “pay-for-performance” remuneration. Despite protestations to the contrary, short-term performance dominates remuneration and long-term considerations are very much secondary. The net effect, with human-induced climate change rapidly accelerating, is that short-termism is incentivising executives to destroy the biophysical systems upon which our survival, and shareholder value, depend.

Peer pressure within the corporate and investment community to downplay climate change is another formidable barrier. There has been virtually no chairman, chief executive or senior director in Australian business for years now prepared to speak out publicly about the real climate risks and the need for rapid action. Elder 'statesmen', such as David Murray, Hugh Morgan, Maurice Newman and Dick Warburton, are united in their total denial that human-induced climate change even exists; it seems that no amount of science or hard-nosed evidence will convince them otherwise. These risk management experts apparently think that even if there might be a problem, we should wait for catastrophe to happen before acting, by which time it will be too late to act; it is precisely this scenario that sensible risk management is designed to avoid.

Senior directors often sit on multiple boards, where attitudes to climate change differ widely. The net result of the collegiate modus operandi of boards, while admirable in many respects, is that lowest common denominator responses prevail.

The upshot is that Australian business and financial markets are dominated by a dangerous 'groupthink' in regards to climate change, such that the most critical issue confronting this country does not get seriously discussed, let alone acted upon. No top level leader even now is prepared to rock the boat by speaking out honestly about the real risks, and opportunities, we face.

'Knowledge is responsibility' and in ignoring the science, boards of directors of corporates and investors alike are abrogating their fiduciary responsibility to objectively assess and manage these risks.

Climate change must be taken out of the ESG box and seen for what it is; namely a risk, and opportunity, unlike anything the corporate world has had to deal with previously, requiring fundamentally different strategic thinking and risk management. It will permeate every aspect of corporate activity from strategic direction to operational detail, and must be elevated to top priority.

Breaking this groupthink will require greater diversity and far broader strategic perspectives on the boards of our major corporations. My appointment to the board of BHP Billiton would be a small step in that direction. 

Ian Dunlop is a former an international oil, gas and coal industry executive. He chaired the Australian Coal Association in 1987-88, chaired the Australian Greenhouse Office Experts Group on Emissions Trading from 1998-2000 and was CEO of the Australian Institute of Company Directors from 1997-2001 (www.iandunlop.net).

*Climate activist losing BHP race, October 14.

*CONVERSATION: Why BHP needs a single issue director, October 31.

*CRIKEY: The climate candidate who has BHP sweating, September 26.