Robert Allender, Managing Director of EnergyUse Strategy Advisors, gives some advice for Hong Kong companies about the significance of their company’s energy affairs to board obligations and company secretary responsibilities.
A company’s energy affairs consist of all matters related to energy that affect the company’s present and future success.
In the past it would have been perfectly understandable for the named company secretary of a company listed on The Stock Exchange of Hong Kong Ltd to pay little if any attention to their company’s energy affairs. However, three mega-transitions have changed all that:
- the energy transition is the change from a world where burning coal, oil and gas provided energy to a world where less and less energy is derived from those fossil fuels
- the climate transition is the change from a planet with a climate humans have long considered to be human-friendly to one where climate is unpredictable and much less human friendly, and
- the environmental, social and governance (ESG) transition is the change from a time when there was no requirement to disclose business impact to a time where a business is required to fully disclose its impacts on the rest of the world, and the actual and potential impacts of the rest of the world on the business.
Combined, these three mega-transitions are bringing about a new reality that will leave no company unaffected. Companies’ boards will have a constant stream of megatrend decisions to make to guide the enterprise forward. Boards and company secretaries will need to become more and more conversant with the length and breadth of their company’s energy affairs because a company’s energy affairs are deeply entwined with not only the energy transition (not as obvious as it appears), but also the climate transition (energy use is the number one cause of climate change) and the ESG transition (reporting current greenhouse gas emissions and energy consumption is present in every ESG rating system).
The term ‘energy affairs’ is not difficult to grasp, even if it is not all that commonly used. Similar in some ways to government affairs or consumer affairs, the term is intended to cast a sufficiently wide net around all matters related to energy that affect the company’s ongoing fortunes. Besides the two core pieces, procurement of energy and the putting of that energy to good use, today a company’s energy affairs also entail dealing with the two major waste products of a company’s use of energy. These are greenhouse gases (energy use is by far the dominant portion of the global total, see Figure 1: Global greenhouse gas root causes) and air pollutants (sulfur oxides, nitrogen oxides, colloquially SOx and NOx, particulate matter, as in PM 2.5, and, often, mercury). Moreover, these days a company’s energy affairs do not stop at its own energy use, but extend to the energy use of its supply chain and its customer chain as well. Wrapped around every part are business continuity dimensions (always the first priority) financial dimensions, legal and regulatory dimensions and, perhaps above all, reputational dimensions.
For a company secretary intent on keeping board directors well informed about the company’s energy affairs, and to prevent any blind spots, three areas of responsibility – governance, risk, and board updating – will need to be brought to bear. Good examples can be seen by looking at three documents most named company secretaries are familiar with: Hong Kong Exchanges and Clearing Ltd’s (HKEX) ESG Reporting Guide, Hong Kong’s Companies Ordinance (Cap 622) and the recommendations from the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD).
HKEX’s ESG Reporting Guide
Some companies have treated their energy affairs as a board issue for a very long time because, for a very long time, governments have been making commitments that were going to require massive changes on the part of companies doing business within their borders – in 1992 at the Rio Earth Summit; in 1997 with the Kyoto Protocol and then in 2004 with the Protocol’s ratification; and in 2015 with the Paris Agreement.
But it was the most recent upgrading of HKEX’s ESG Reporting Guide which specifically made board participation obligatory for Hong Kong listed companies.
Making the ESG report a board responsibility concurrently made energy affairs a board responsibility, even if energy affairs had never been a board agenda item before, because that document requires more disclosure about a company’s energy affairs than about anything else. Consider this: a full 42% of the 48 aspects (including General Disclosures) are wholly or partly requiring disclosure about energy use or about energy-use waste products. Additional serious board obligations are imposed by doing a strict ‘energy affairs’ reading of the Overall Approach and the Mandatory Disclosure Requirements sections.
Company secretaries, in their roles as providers of governance and risk updates, analysis and advice, have much more to contribute than might have been the case under the two earlier versions of the ESG Reporting Guide, so this further raises the bar for their corporate energy affairs literacy.
The Hong Kong Companies Ordinance
Similar to the ESG Reporting Guide, the Hong Kong Companies Ordinance contains some heady language when read from the perspective of a company determined to master its energy affairs. For instance, the mandated business review (Schedule 5) has to include information relating to environmental matters that have a significant impact on the company. Consider the situation of a company doing business in a country where the government has declared a climate emergency, as the UK government has. Can that company’s board maintain that climate change has no significant impact on their company? Moreover, that is just one dimension of corporate energy affairs governance – to be proactive in advising the board, a company secretary will need to keep abreast of all 12 (see Figure 2: The 12 dimensions of corporate energy affairs governance).
The same thinking can be applied to the Ordinance’s requirement that directors have a duty to exercise care, skill and diligence. At what point in an energy transition, a climate transition or an ESG transition does that requirement translate into an obligation on a director to upgrade their understanding of the company’s energy affairs, or of the subject of corporate energy affairs in general? Some might say as soon as the transition has been identified. Others might say when it has become a common topic of conversation. There will always be those who prefer to wait until the policies to deal with any one of these mega-transitions have been written into law. Hong Kong’s Corporate Governance Code (Appendix 14 of the Listing Rules) is not prescriptive about the exact type of training the company secretary should help arrange for directors to achieve and maintain the skills they need, but could energy affairs training be a suitable inclusion?
The recommendations of the TCFD
The only completely new Aspect in the ESG Reporting Guide with the July 2020 effective date is Aspect 4, Climate Risk. As HKEX has explained, the wording of this Aspect is intentionally aligned with the TCFD Recommendations. The significance of this should not be underestimated. TCFD is so far the only globally applied climate risk ‘statement of work’, and already its recommendations have been made the basis for mandatory disclosure by the UK government for all companies above a certain size and by the New Zealand Stock Exchange for all listed companies. So there is little chance the company secretary of a Hong Kong listed company will not at some point be called upon to advise on the governance implications of this set of recommendations, especially when bearing in mind that it is not only governance that is required; it is also perception of governance.
Preparing a climate disclosure report to implement the TCFD recommendations requires an even deeper understanding of the company’s energy affairs than the previously discussed documents, because the double materiality perspective gets even more complicated. Preparing a range of possible future scenarios for one’s own company is a challenge. Layering in a range of scenarios for one’s current and prospective future suppliers and customers requires a serious command of the subject.
The significance of the company secretary’s role as board adviser
Where a named company secretary is responsible for any aspects of the function that could be called ‘board updating’, looking at the company through an energy affairs lens will produce quite a long list of items that command regular reconsideration. Something as simple as recommending a board training seminar may suffice for some companies. But for others that might require producing a constant supply of intelligence about market, regulatory and industry developments. It is no small task to map a company’s energy affairs against such high-priority work as reputation management, stakeholder management, risk management and improving the company’s ESG rating. Hardly less demanding is the extensive work needed to incorporate energy affairs impact questions into the company’s ongoing decisions about matters as diverse as the United Nations Sustainable Development Goals (the SDGs), renewable energy, net zero, the circular economy, actual and shadow carbon pricing, green finance and its rising replacement, transition finance and the question of stranded assets if the company owns fossil fuel-powered generator sets, boilers, or other similar high capital cost long-lived assets. Navigating dynamic business influences like these will require the company secretary (and other advisers) to possess a high level of energy affairs literacy.
Twenty years ago it may have been safe to assume that any changes in a company’s energy affairs (whether or not they went by that name) would have happened slowly and methodically. That had held true for decades. It would no longer be safe to make that assumption.
Robert Allender, Managing Director
EnergyUse Strategy Advisors