Weathering the new storms: risks and culture in agribusiness

Dr Turlough Guerin

Chair, Ag Institute Australia



Introduction

Climate, culture and risk are now mainstream governance issues in agriculture and natural resource management.

In a recent risk and governance forum held in Australia, experts highlighted that organisations should undertake rigorous review of their non-financial risks, in particular those related to culture and climate. While some sectors – including banking and agriculture – were directly called out in terms of their impact, there were implications for all sectors of industry.

With the increasing focus on the need for good governance, and expectation that the advice provided by professionals meets the highest ethical standards, it is incumbent upon professionals in all sectors to demonstrate how they are acting in the interests of their clients and organisations as a whole, and not just focus on financial performance.

Agriculture and natural resources management are no exception, and special attention was paid to primary production and how its management of water will increasingly occupy the minds of investors.
Farmers, business owners, company directors, landowners, natural resource managers and rural advisors now need to think through a more complex array of risk as well as opportunities.

This report distils key findings from the Governance Institute of Australia’s governance and risk forum (1) held mid-2018 in Melbourne. The main areas covered at the conference and reported on here are:

A corporate view of risk and culture

Regulatory view of risk and culture

Climate-related risks and opportunities


A corporate view of risk and culture

Cultural change in corporate Australia was the clarion call of the conference. Boards must define purpose, code of conduct, remuneration and how this is aligned with risk appetite. Codes of conduct are usually more detailed than core values, as they specify behavioural expectations. Management should draft these for board approval, and they should be more than a poster on a wall. In summary, directors must take responsibility for culture. In terms of actions to be taken, management reports to boards should include non-financial requirements and their management. Reporting of material misconduct is now critical.

An interesting insight from the conference was that an organisation can now measure and predict culture automatically using algorithms (i.e. dynamically), which can lead to the identification of 'culture carriers' who should be positively recognised. (2)


Questions for directors and business owners:

What is the tone that we are setting at the top?

Does our organisation’s culture support long-term shareholder value?

Does it increase our brand loyalty and bolster reputation?


Regulatory view of risk and culture

Culture needs to focus on more than short-term performance. Culture reflects thinking and behaviour. As the corporate regulator in Australia, the Australian Securities and Investments Commission (ASIC) is interested in how standards of behaviour and culture are set. Constructive challenge and professional scepticism are needed by directors and it is important directors call out unethical behaviour.

All companies, including those involved in agriculture and natural resources management, need to ensure that the customer is put at the centre of culture conversations. A key recommendation from the conference was the need for a more rigorous view and assessment of non-financial risks. (3)

The recent publication of the Australian Prudential Regulation Authority (APRA) report on the shortcomings of the Commonwealth Bank of Australia (CBA) was a watershed moment for risk managers and directors. (4) The report highlights the need for greater transparency in their business, along with greater trust, accountability to customers, and the need for a change in culture to focus on professional and ethical standards.

While this inquiry by APRA examined the performance and behaviours in a large bank, there are ramifications of the findings outside of banking. Similar traps and missteps could befall any number of businesses, professionals and sectors, not just banks, bankers and their advisors. The Royal Commission into the Banking and Financial Sector in 2018–19 (5) further revealed new insights into the failings of the Australian financial system, including its impacts on the rural sector.


Questions for directors:

Directors should ask management: How does our organisation measure culture? What does good culture look like?

How mature is our organisation’s view on risks?


Climate-related risks and opportunities

The conversations that boards and their businesses are now having in this regard are shifting from talking about the weather to material climate-related business risks and opportunities. Although this category has been perceived as an environmental or sustainability risk for many years, it has become clear that it is now a financial, legal and operational risk for organisations, and not just to those organisations with direct carbon liabilities such as fossil fuel producers.

So-called ‘Black Swan events’ are becoming more frequent. While these occur in rare circumstances, their impacts are very high. It was noted that three such events occurred in South Australia in the recent past.

The Hutley Opinion (6) (on “Climate Change and Directors Duties”) has been an important step for clarifying responsibilities of directors and officers. This opinion states that directors will be liable for failing to ask about the risks facing their organisations, noting that climate change must be taken into account when making decisions about company strategy, performance and risk disclosure. This decision has direct implications for agricultural and natural resources management organisations.

APRA has also come out with a position and has indicated that organisations would be wise to comply with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations regarding climate risk disclosures. (7) While the Federal Government has not yet set targets for net zero emissions, state governments have varying extents of regulatory authority in this area and may act independently. Being ready for further legal regulation is prudent governance. The critical first step for organisations not yet engaged with this issue is to disclose their carbon emissions and climate risks.

Parallels were drawn at the forum between the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (8) and the handling of climate risks, the common issues being that victims now have a voice and will act. The audience was reminded that the earth is currently sitting around a 1 degree increase in average global temperatures, and that a change from 1 to 2 degrees is exponential and not linear. The point was also made that Millennials are voting with their feet on climate-related issues and are therefore influencing the flow of capital.

Primary producers are being impacted now as a result of changing climatic conditions. The availability of water is probably the most significant issue facing Australian farmers. So-called ‘Day Zero events’ are becoming more frequent, e.g. when a city or locality runs out of potable water, as was the case with Perth a decade ago, and the recent near-occurrence of this in South Africa. (9)

Evidence of the crystallising risk was reported with examples of large corporates (Nestle and Coca-Cola Amatil) having their operations limited in locations where groundwater availability and quality were impacted. A key point was made that water is no longer “free”. The rural sector is taking action to mitigate such risks with Meat and Livestock Australia setting a goal for the red meat industry to be carbon neutral by 2030.


Questions for directors and business owners:

What are our climate-related risks and opportunities? Have we disclosed these?

How are we protecting our balance sheet from the potential of our assets becoming stranded?

Do we as an organisation know our pathway to zero emissions?

Is our business adequately prepared for direct and indirect extreme weather events?

Have we undertaken effective climate risk scenario planning and have these plans been stress-tested by a credible third party?

Are our mitigation plans for ensuring water and energy availability going to be effective in the longer term, i.e. the next one to two decades?


Summary

The lessons learnt from the finance and banking sectors on risk and culture should be considered by professionals in agriculture and natural resources management.

Organisations can’t eliminate risks, but they can mitigate them. The forum audience was challenged to seek to understand the quality of risk controls in place in their organisations. Regulators are increasing their focus on non-financial risks, such as those which are climate-related, and these risks are now increasingly being considered mainstream in the governance of organisations. In addition, a strong organisational culture is not a luxury but the foundation for a successful business.

Ethics must be at the core of any organisation’s culture, and climate risks can no longer be considered as outliers but must be central to organisational risk management in Australia.


About the author

Turlough Guerin has a PhD in Agricultural Chemistry from the University of Sydney, is a graduate member of the Australian Institute of Company Directors and a Fellow of the Governance Institute. He is currently Chair of the Ag Institute Australia and holds several non-executive director roles. Turlough has worked for large corporates in the energy, resources and communications sectors.


Table 1: Governance and risk questions that should be asked of non-executive director and business owners.

Area

Questions

Climate risks and opportunities

What are our climate-related risks and opportunities? Do we know how our organisation could be impacted under various legal, market and physical impact scenarios? How are we protecting our balance sheet from the potential of our assets becoming stranded? Do we as an organisation know our pathway to zero emissions? Have we had our climate risk scenarios adequately stress-tested?

Organisational culture

How can we as directors be responsible for culture? Are we doing the right thing by our customers? How mature is our organisation’s view on risks? Does the organisation’s culture support long-term shareholder value? Does it increase brand loyalty and bolster our reputation?

Cyber risks

As a board member, have I understood the cyber risks to our organisation? Is there a cyber risk mitigation plan in place? Are we (the board) monitoring it? What is the organisation’s digital strategy (not IT strategy) and will it support what we do now and in the future?

The future of work

Where are our people working? What are they doing? With what we are trying to achieve as a business, what impact will current work arrangements have on the workforce including staff wellness? Considering the mobility of the modern workforce, how do we prove where our data is?

Blockchain

How do we solve today’s problem with this solution? How do we prepare for it as a board and in our business? Where is it going to go in our sector? Who in our sector is successfully using it now and how?

Table 2: Summary of key highlights and insights.

Stakeholders/Issue

Highlight/Insight

Banks

Regarding the APRA report into CBA: The financial success being experienced by the bank was making it harder (for the bank) to hear the critical “voice of risk” and the “voice of the customer”. A culture of chronic ease set in.

Blockchain

Organisations must keep a close watch on the application of blockchain (to their businesses) otherwise catching up will be too expensive when the time comes for your sector or business to adopt. It will have teething problems, but the key message was keep open to the concept.

Climate-related risk

No longer viewed as an environmental or sustainability issue but a financial and strategic risk and opportunity. Directors are now recognised as being liable for addressing these foreseeable risks. Water availability and pricing are good examples.

Communication

The old quote still holds true: “The single biggest problem in communication is the illusion that it has taken place” (George Bernard Shaw). This applies at the board level with respect to risk and culture where the message may start as the tone at the top, that becomes the mumble it the middle and finally degrades to a groan on the ground.


1 Highlights from the 2018 Governance Institute Governance and Risk Forum Relevant to Non-Executive Directors, Members of Governance and Risk Committees, Risk Managers, Advisors and Consultants

2 This article provides a good summary of this idea related to the finance sector: https://finsia.com/insights/news/news-article/2018/05/10/why-ai-is-so-important-to-banking-and-risk-culture

3 “Managing culture – A good practice guide” was recommended as required reading (https://www.iia.org.au/technical-resources/publications/managing-culture---a-good-practice-guide)

6 Full details of the opinion are given here: https://cpd.org.au/2016/10/directorsduties/

7 The details of the task force are presented here, including the standard now published: https://www.fsb-tcfd.org

9 Origins of the ‘Day Zero’ announced by the South African Government in 2015: https://en.wikipedia.org/wiki/Cape_Town_water_crisis

Image:  NOAA