GSE Over ESG

[00:00:00] Today, join host Richard Conway as he interviews Catherine Livingstone, Chancellor of the University of Technology Sydney, Chair of Pacific National, and Director of the Australian Ballet, about the importance of taking a governance-led approach to ESG.

[00:00:17] Richard Conway: Welcome to Minutes by boardcycle. I'm your host, Richard Conway, and today on the podcast, I'm honoured to be interviewing Catherine Livingstone. I'm not sure Catherine needs any introduction, but she's currently the Chancellor of the UTS, Chair at Pacific National, and a director of the Australian Ballet. Previously, Catherine was the Chair of the Commonwealth Bank, Telstra, and the CSIRO, and in her executive career was CEO at Cochlear. Today, I'm talking to Catherine about the "G" in ESG. Welcome, Catherine.

[00:00:47] Catherine Livingstone: Thanks, Richard. Delighted to be here.

[00:00:49] Richard Conway: So, Catherine, at the 2024 Australian Governance Summit, you said, "Governance isn't everything, but it's almost everything." And so, I wanted to ask if you would mind explaining what you meant by that to start off with.

[00:01:03] Catherine Livingstone: So, I go back to the definition of governance, the OECD definition and that basically says governance is made up of two limbs: one is direction, one is control. And then I would add a third, which is actually people. Which in this context is really important.

[00:01:20] Catherine Livingstone: The direction part of governance is the strategic side. So to have fundamental governance, you have to understand what your strategy is. That strategy is then implemented, and that's where the control dimension comes in. So, in a state of control, which is not seeking to be perfection, but it's the engineering concept of not outside of tolerances.

[00:01:43] Catherine Livingstone: And then, of course, you can't do any of that without really capable people.

[00:01:46] Catherine Livingstone: So that's why, when it comes to ESG, and putting G at the end, it diminishes the significance of G when you go back to that fundamental definition of what you're trying to achieve through governance.

[00:01:59] Richard Conway: Absolutely. And so, I wanted to pick up on that idea, that it's diminishing the importance of G. What behaviours do you think it drives that are counterproductive, thinking about it as environment, social, and governance at the end?

[00:02:13] Catherine Livingstone: Well, then by putting it at the end, you're saying governance is not quite an afterthought, but it's smaller in scope. And in the worst instance, it's basically a compliance activity.

[00:02:24] Catherine Livingstone: But I would come back and say, how can you, as an organisation, discuss the E dimension or the S dimension for your business if you can't put it in the context of the overall strategy for your business?

[00:02:38] Catherine Livingstone: So there will be dimensions of the E and the S, which will be applicable to certain organisations and not to others because of what they do, because of their strategy.

[00:02:47] Catherine Livingstone: So if you don't put the G first, it's cart before horse. And not only does it diminish the G, but it also constrains the E and the S to a compliance view. It drags them down into that compliance framework.

[00:03:03] Catherine Livingstone: Whereas, if you start with a G, and you pull through the E and the S, you're pulling through in a strategic context and it's much more meaningful.

[00:03:10] Richard Conway: Are there examples where you have felt you've seen organisations take a too compliance-led approach? Or where you've seen much better outcomes because of taking a governance-led approach to those things?

[00:03:23] Catherine Livingstone: Well, I think, I mean, in a number of instances, particularly as the E and the S started coming in through a compliance frame and reporting, organisations were then jumping, and at least two with which I was associated jumped into, "okay, so what do we have to put in our annual report?"

[00:03:42] Catherine Livingstone: And we really had to pull back after a couple of cycles of that, saying, "Well, what are we actually trying to achieve here?" Because then there was so much noise in the disclosure that it didn't make sense. It was just a grab bag of everything you could think of.

[00:03:57] Catherine Livingstone: It's like many organisations follow the Sustainable Development Goals and report against those. Well, you can almost shoehorn everything you do as a business against those goals. And then you say, "Great, we're following the goals." But it hasn't changed what you do in your business.

[00:04:14] Catherine Livingstone: So, in those instances where I was involved, it was a case of standing back and saying, "All of this disclosure is not helping anyone. Not least it's not helping the business." So, can we just stand back and say, "What are we trying to achieve?" And that's then when it leads back into: what is our business, what's the strategy for business, and then what's relevant for that business and hence, for shareholders.

[00:04:36] Richard Conway: And do you think, Catherine, I guess when you see that sort of compliance-led approach, that's an indicator that, I guess, the organisation hasn't synthesised the idea that environment and social objectives can, and are, be part of their strategy?

[00:04:51] Catherine Livingstone: Well, I think that's right. And the strategy is not just around the E and around the S. So, there are so many dimensions depending on the business.

[00:05:00] Catherine Livingstone: Again, almost by exclusion then, stops people thinking about the intersect with other dimensions of their business. So everything just keeps forcing to a compliance mindset. Which is why I argue for putting the G first and then lifting the whole conversation not just for E and for S, but for other dimensions.

[00:05:20] Richard Conway: I think, Catherine, acknowledging that to some extent which order you put the acronym is, just an order, it's not that important. But do you think that the mental approach is the more important aspect of it. Do you think there's any risk for organisations if they make it clear that they're putting governance as their starting point for all of these things that they could be accused of deprioritising environmental and social outcomes, or subordinating them to commercial strategy?

[00:05:48] Catherine Livingstone: Not at all. Because if you do put the G in the context of, "This is really about strategy and forward thinking." It's not just the commercial side, by definition, you are having a broader strategy because you are embracing the concepts of E and S, but there'll be other aspects more broadly.

[00:06:09] Catherine Livingstone: But by starting with governance, but defining it as the strategic side of governance, not the control side, then you lift everything up, because you've indicated that you've put thought into it. What you talk about may or may not be what's required for disclosure under a compliance regime. You may talk about it more broadly and longer term.

[00:06:29] Catherine Livingstone: If you look at the compliance requirements for E and S, they're very narrow. They're backward-looking. You do get the opportunity to say, "Yes, we're doing this scenario analysis," or whatever under, for example, TCFD. But you want to drive more than that. And the TCFD does try to, under the E side, force you to say what your strategy is. Or you need to anchor that microcosm of strategy in your broader organisational strategy. Otherwise, how can you demonstrate that it's part of an integrated whole?

[00:07:00] Catherine Livingstone: You could say nice things about an E strategy - but your broader organisational strategy would drown out what you've just said about your E strategy.

[00:07:08] Richard Conway: Yep. And you would hope that anyone external would realise that if an organisation is just taking a compliance approach to those things, it's going to be much easier for them to just stop doing those things if they decide they want to stop them. Whereas if it's integrated into their strategy, it's much more long term and committed, I guess?

[00:07:28] Catherine Livingstone: Exactly. Because you can then interrogate the longer term either at an AGM, or when Chair and CEO make presentations to analysts, there's something to interrogate there, rather than just say, "Okay, so your emissions have gone up from X to Y this year, why is that?" And there'll be a very easy answer to it, but it doesn't lead anywhere.

[00:07:50] Richard Conway: And Catherine, last question on this topic. If you were on a board, and you felt looking at the approach that the organisation's taking to ESG that it's more in that compliance world than a governance-led approach. What are the steps that you would want to take as a Director, or encourage the management team to take, to move more into a GSE approach to these things?

[00:08:15] Catherine Livingstone: Well, I mean, that really comes down to the way you run the board and set priorities for the board. If you really want E and the S to be priorities, they've got to come onto the formal agenda over a cycle. There's got to be investment of resources by management and inevitably, it really has to go into the performance metrics that relate to performance pay. And that certainly does get management's attention when you do that. But if that's the only way to get attention, that's a sad situation.