AGL has earned the support of its long term investors

Alison George, Head of Policy

28 September 2017

Company leaders regularly tell us that, notwithstanding occasional disagreement, they welcome long term investor support for sustainable business strategy, well-controlled execution, and meaningful reporting.

In their telling, this broader, enriched investment conversation can often provide them with the confidence to continue to focus on long term value creation and also provides a counterbalance to pressures to the contrary. Pressures not dissimilar to those now faced by AGL Energy.

Long term investors such as superannuation and endowment funds have a very real interest in their assets producing profits decades into the future. This long term perspective means that they must look well beyond the short term news cycle, the quarterly results, the three-year electoral cycles and the five-year tenure of the average corporate CEO.

Climate change risk and the resulting need to transform our energy markets is one of the issues increasingly preoccupying the minds of these long term investors because existing market practices do not serve their interests well on this subject.

We have seen a growth of investor initiatives to encourage companies to supply the necessary information about the risks (and opportunities) a volatile and changing climate can present, and to provide details of how they are managing this. Investors representing some $100 trillion have supported the CDP (formerly the Carbon Disclosure Project). More recently, the Financial Stability Board (FSB) created a taskforce to promote the more consistent disclosure of financially relevant climate information for the financial community at large.

For many listed companies, climate change risk and energy market disruption present clear and increasingly urgent risks. Yet during a decade of meeting with them, many leaders have been reluctant to acknowledge the link between climate change and the unprecedented weather-related costs their businesses have had to swallow, unpredicted shifts in demand for their products, and unexpected pressure from stakeholders; or the impact of the dominance of politics over sound bipartisan climate and energy policy.

The delays in acknowledging and acting on these risks impose costs on communities, companies and their investors. This is especially problematic for companies that are less nimble, heavily regulated or highly exposed to disruption. It also impacts those actively making investments in plant, property, infrastructure, or other initiatives (such as cultural change programs) requiring a payback over lengthy periods. For these, it is the policy settings over the duration of the payback period that will matter, not those that prevail in a given political environment today.

Against this backdrop, in our view, AGL stands out as one of a handful of companies that have demonstrated a clear, rational and well-thought through approach to climate change risk. They have done the analysis, integrated the analysis into strategy, commenced executing against that strategy, and clearly communicated these developments to investors along the way.

Since 2015, AGL has been observed to realign itself with strategic realities. It developed a number of potential climate change scenarios, and disclosed these even before the FSB’s taskforce released its disclosure recommendations. It accepted the need for decarbonisation, confronted the disruption this was likely to impose and reviewed its strategy in light of these probabilities. It demonstrated clear links between this analysis and its strategic decisions, enabling investors to scrutinise the premises on which its new strategy was being built.

AGL has made decisive moves in implementation of this strategy. It set aside its conflict-ridden plans for coal seam gas in the Hunter Valley; consolidated a fresh approach to stakeholder relations; and began to reposition for customer value and engagement in order to protect its retail margins. Planned changes to its asset mix were calculated to balance energy affordability and security of supply, and in the case of Liddell, the company provided government and other stakeholders with more than twice the notice recommended by the Finkel Review, enabling transition planning for communities affected by plant closure. AGL has even recognised the importance of strategic human capital management in delivering a successful transition, going so far as to articulate how this needed to be supported internally via attention to the management of skills, talent and people.

In short, AGL evidenced precisely the type of transparent, thorough, stakeholder-aware strategic process that long term institutional investors increasingly seek from the companies in which they invest.

AGL’s commercial decision about what assets to upgrade, sell or close, is grounded in a thorough analysis of its future operating environment. Through clear communication to investors of a sound strategy, demonstrably founded in realistic analysis, AGL has earned the support of its long term investors to continue with its strategy, unhindered by short term political irrationality.

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