Transition to Net Zero: Lessons from Western Canadian Boards

Companies in harder-to-abate industries – those that directly emit or sell products that produce significant greenhouse gases (GHGs) – must play a critical role in the journey to net zero if the world economy is to reduce emissions at the scale required to keep global warming to 1.5 C.

McKinsey estimates the net-zero transition will require as much as US$3.5 trillion of incremental annual investment over the next 30 years.

While it is hard to overstate the scope of the challenge, we can learn much from board directors of high-carbon-intensity companies that have made meaningful commitments to decarbonization. These directors have a front-row seat to the largest economic transformation ever, navigating the complexity of transitioning high-carbon-intensity businesses toward net zero while managing climate risks and opportunities.

In the spring of 2022, the ICD’s Western Chapters, led by the B.C. Vancouver Island Chapter, convened board directors of notable B.C.and Alberta-based companies to share expertise, lessons learned and practical suggestions with directors of organizations at earlier stages of the net-zero journey.

Barbara Zvan, President and CEO of University Pension Plan, moderated the panel featuring Miranda Hubbs, Director, Nutrien, PSP Investments and Imperial Oil, Pat Carlson, Founder and

CEO of Kiwetinohk Energy, Jane Peverett, Director, Capital Power, Canadian Pacific Railway and Northwest Natural Holdings and formerly Director of CIBC, and Marcia Smith, Director, Aritzia; former Senior Vice-President, Sustainability & External Affairs, Teck Resources. This panel collectively represented companies in sectors including agriculture, utilities, energy, mining, and financial services.

Whether event-driven or a gradual evolution, net zero has become part of strategy

The panelists observed that when climate was initially discussed, their boards were primarily concerned with costs and the physical, financial, and regulatory risks. Now their boards seek to understand how net-zero commitments inform: the company’s access to, and the cost of, capital; capital allocations including investments in innovation; product demand; the ability to attract talent; and engagement with shareholders.

Marcia Smith described how Teck Resources began defining sustainability and considering GHGs over a decade ago after the Province of British Columbia implemented North America’s first broad-based carbon tax in 2008 (Alberta introduced an output-based pricing system for large emitters in 2007). Initially more focused on the financial implications of carbon taxation and other regulatory issues, Teck’s sustainability strategy evolved to make decarbonization an intrinsic part of it, with the board and senior management discussing both the risks and opportunities of the journey to net zero. For example, while Teck set strategies to meaningfully reduce its Scope 1, 2, and 3 emissions, it also considered its positive impact on decarbonization given that it mines raw materials needed for electrification.

Kiwetinohk Energy’s journey to net zero was unusually deliberate for an energy company as its purpose was built around energy transition as a business in and of itself. Pat Carlson, Kiwetinohk’s Founder and CEO, described how the company’s strategy revolves around producing energy from solar, wind and natural gas with carbon capture, and eventually (depending on available infrastructure), green or blue hydrogen. Along the way, gas production is calibrated to match the company’s gas consumption to preclude Scope 3 emissions in the first place.

Whatever the path to decarbonization, making climate commitments to net zero in response to shareholder, regulatory and other stakeholder pressures is not enough: directors must ensure that net zero also makes its way into strategy discussions. As Jane Peverett stated, climate action sessions cannot be divorced from strategy sessions.

The pressure to engage on net zero is coming from investors

Peverett observed a distinct shift over the last few years whereby climate has moved from being a social pressure – a topic of interest to external stakeholders – to a key focus for shareholders.

Indeed, most of the panel’s boards met with investors in one-on-one meetings to discuss climate and other environmental, social and governance (ESG) issues. Others held annual engagements and met with groups such as Climate Action 100. Miranda Hubbs described the value of doing “ESG listening tours” in the summer when things were quieter. These tours allowed for focused meetings with investors to see where they were on climate transition or other ESG strategies.

Each panelist saw these engagements as helpful and constructive, as they provided an opportunity to get specific climate-related feedback from investors and learn how climate played into investment theses. It was also a chance to demonstrate how seriously climate is considered at the board level.

The importance of director climate education

A lack of climate literacy can hinder a board’s ability to think beyond the regulatory and financial risks of a net-zero commitment.

Citing a 2021 Deloitte survey in which half of global Audit Committee members said they felt they were not sufficiently literate about climate and over 60 per cent said they didn’t discuss it on a regular basis, Hubbs emphasized how important it was to start with the basics. It’s critical to ensure the board and management are aligned on definitions, general climate taxonomy and issues, including how climate informs a director’s role. She noted each of her boards had worked to establish a common understanding of “what we mean when we say ‘sustainability’,” and how helpful this foundation was. In addition to self-study and education sessions with ESG experts, the ICD’s Fundamentals of Climate Governance course was recommended.

Once the board and management share a common understanding of definitions and broader climate issues, the board is equipped to review the company’s material climate risks and opportunities on an asset-by-asset basis. As the board and management become more attuned to where climate-related risks and opportunities lie, more specific education from outside experts on emergent trends and technologies supporting decarbonization strategies may be appropriate.

Net-zero commitments should form part of the company’s performance narrative

Rather than setting reflexive, risk and compliance-driven commitments, net-zero goals should be based on, and align with, business strategy. Only then can potential opportunities of decarbonization surface and be realized.

Panelists suggested that a director’s role is to encourage management to think bigger around the net-zero transition. To illustrate this view, Hubbs described how Nutrien began investigating emissions reductions in marine logistics, a seemingly unrelated sector, thanks to a willingness to look beyond the status quo. Though Nutrien is an agricultural company, its board and management saw a potential use case for ammonia, a fertilizer, as a hydrogen carrier and energy vector. In this capacity, clean ammonia (to qualify as “clean ammonia,” over 90% of GHG emissions must be reduced) could help decarbonize the logistics network for marine fuel, leading to potential investments in tanker carriers and other areas for investment and innovation.

Setting “uncomfortably achievable” targets

The setting of net-zero targets has taken on new urgency at companies with operations in Western Canada, and in particular, British Columbia. As Carlson described, the recent and disastrous impact of fires, floods and heatwaves had been a “wake-up call to anyone sitting on the fence.” These events have galvanized many boards to set bold targets that are “uncomfortably achievable.”

Hubbs suggested that to test whether targets for inputs, outputs, processes, or markets were ambitious enough, directors could ask of management:

“To achieve this –

• do we need new skills within the company?”
• should we make any changes to how our leadership is organized?”
• do we need new relationships?”
• do we need to adapt any processes?”

If the answer is ‘no,’ that the status quo is fine, it’s probably a sign that targets are not ambitious enough.

Call to action for boardrooms

The risks of not transitioning go well beyond regulatory or compliance risks. A lack of meaningful action impacts talent recruitment, access to capital, supply chain and customers. Here is what directors should consider:

• The net-zero transition is an issue that belongs with the board’s oversight of strategy and in its assessment of performance: bring it into those discussions.
• Get educated. Climate-literate boards who understand carbon materiality generally and at the asset or business unit level are better equipped to guide management to set appropriately ambitious annual targets on the path to net zero that can also surface potentially impactful opportunities.
• The pressure to transition to net zero is coming from investors. Ensure proactive shareholder engagement around climate – it is a valuable opportunity to listen, learn and demonstrate how net zero forms part of the company’s performance narrative.
• Get “comfortably uncomfortable” and be bold when setting targets for improvement or where targets have not existed. Encourage management to consider the potential for broader ecosystem impact beyond obvious business lines.