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Chairperson Masterclass: Session 4-7: Leadership Navigation: Carbon Pricing.

Updated: Apr 8

Feedback and interactions during webinars and the National Climate Governance Summit made clear the demand for specialized content tailored for directors. In a recent masterclass organized by Climate Governance Malaysia, chairpersons and directors converged for a session addressing the critical issue of climate risk management, led by an industry veteran. This interactive approach of inviting questions and discussions ensured directors were better equipped to navigate the evolving landscape of climate governance. Climate Challenges and Urgency for Directorial Action

The masterclass was facilitated by Wendy Mackay, managing director from Pollination, who is an experienced strategic advisor to corporate clients (further details about her below).

She highlighted the urgent need for directors to take ownership of climate risk and emphasized the importance of understanding and applying carbon pricing to business operations and centred the discussion on the negative externalities of climate change. The audience was prompted to recognize the imperative for directors to address these issues in their decision-making processes.

Despite the global goal of achieving net-zero emissions by 2050, Wendy pointed out the stark reality of a 1.5° warming increase. The escalating frequency of extreme weather events was emphasized, highlighting the systemic risks perceived by regulators in financial and capital markets.

Acknowledging the externalities of greenhouse gas emissions, Wendy highlighted the need for companies to assess their exposure and value their carbon footprint. This, she explained, is crucial for informing investment decisions and influencing behaviour.

Wendy then dived into the details of using Shadow Pricing as a strategic approach for organizations seeking to factor in the externalities of carbon, without immediately impacting their balance sheets, profit and loss statements, or cash flows. It provides a method for integrating the cost of carbon into decision-making processes, contributing to a more comprehensive understanding of the financial implications associated with climate risks. Wendy’s presentation also delved into the evolving landscape of internal carbon pricing, citing data from the CDP (formerly the Carbon Disclosure Project). There is a steady increase in companies adopting internal carbon pricing, with the financial services sector leading the way, reflecting the sector's broad exposure and investor pressure to reduce financial emissions.

Regionally, Europe has the highest number of companies using internal carbon pricing, followed by Asia, with Japan housing about half of the Asian companies in this category. She further shared that Japan recently introduced a voluntary emissions trading scheme with plans for implementation in 2026. This initiative could be driven by Japanese companies heavily investing in markets potentially impacted by such schemes.

The presentation took a closer look at the surprising revelation that Asia ranked second-highest in the number of companies adopting internal carbon pricing. The speaker engaged the audience with a quiz, prompting participants to guess how many Malaysian companies reported using carbon pricing. The answer, five, emphasized the relatively low adoption in the country.

Examples of Malaysian companies using internal carbon pricing were discussed, with Maybank cited as one disclosing their use by applying a carbon price to business travel. The presentation encouraged exploration into how other companies, including airlines like Malaysia Airlines, could leverage internal carbon pricing to influence decision-making amid global efforts to decarbonize.

The focus on Malaysia was particularly significant, given anticipated changes in the operating environment related to carbon pricing. The introduction of the EU Carbon Border Adjustment Mechanism (CBAM) and its implications for goods imported into Europe were discussed.

As of last month, a transitionary period is in effect until 2026, after which companies importing into Europe must disclose associated greenhouse gas emissions and obtain certificates linked to the EU emissions trading scheme.

Questions from the audience addressed the interplay between federal and state regulations in Malaysia, with a particular focus on Sarawak and Sabah. The speaker acknowledged the interest of these states in establishing regulations to generate and trade carbon credits but emphasized the need for further clarity on the intersection with federal regulations.

Wendy highlighted the increasing trend of companies proactively adopting internal carbon pricing to prepare for potential external regulatory measures. Real-world examples, such as Equinor focusing on scope one emissions and conducting portfolio stress tests, and GarantiBank strategically applying shadow carbon pricing to shift towards renewable energy, illustrated the versatility of internal carbon pricing in shaping investment decisions.

Danone, a food and beverage company, showcased its commitment to climate leadership by disclosing both traditional and carbon-adjusted earnings per share. Utilizing a $35 per ton shadow carbon price on scope one, two, and three emissions, Danone aimed to underscore its dedication to decoupling company growth from emissions growth.

British Land, a UK property development company, implements internal fees by having each development project estimate carbon emissions and pay a £60 per ton fee into a central fund. This fund is utilized for retrofitting assets, researching low-carbon building materials, and acquiring carbon offsets.

Microsoft employs a business unit-level fee system, with units paying fees based on emissions, contributing to extensive carbon sequestration and removal projects. Fees vary by activity, with higher charges for business travel compared to other emissions. Two Malaysian companies, CIMB and Sunway, demonstrated the global applicability of such practices by implementing business unit-level targets and fees. If a business unit exceeds its set target, it must pay a fee into a fund used to support decarbonization projects. CIMB starts relatively low at $7 per ton but plans to increase it significantly over time. In Sunway's case, the fees are deducted from the bonus pool, aligning financial incentives with decarbonization goals.

The presentation prompted discussions around the challenges of data transparency, the role of leadership in climate action, and the impact of internal carbon pricing on project financing and insurance premiums. The examples provided serve as valuable insights into the diverse applications of internal carbon pricing and the potential for influencing organizational behaviour toward sustainability goals.

Practical Considerations and Challenges:

The session emphasized the significance of initiating internal carbon pricing efforts despite measurement imperfections, framing it not as a cost transfer but as a decision-informing tool steering sustainability. Wendy highlighted the necessity of clarifying objectives and intended outcomes before determining the pricing structure. The introduction of four reference prices, encompassing regulatory, transition pathways, carbon credit, and decarbonization costs, provided a comprehensive understanding of pricing influences. A global perspective on carbon pricing revealed a $35 per ton average across various regulatory regimes, reflecting regional and economic variations.

Notably, real estate companies were identified as having the highest internal carbon prices, attributed to their distinctive decarbonization considerations and regulatory exposure. The presentation traced the global evolution of average internal carbon prices, doubling to $40 per ton over four years, acknowledging the complexities of setting accurate and straightforward pricing. During the Q&A, audience explored topics such as uniform versus differential pricing and dynamic pricing, where the internal carbon price adapts over time. The session delved beyond pricing, examining how companies integrate internal carbon pricing into financial models and decision-making processes. It concluded with examples showcasing the adaptable nature of internal carbon pricing, offering valuable insights into its practical applications for organizations striving towards sustainability.

Key Takeaways and Future Engagement:

As the session concluded, key takeaways for directors were highlighted. The evolving landscape of mandatory carbon pricing, the need to align incentives for management teams toward decarbonization, and the explicit consideration of carbon in board discussions were underscored. Practical advice included starting with clear objectives, focusing on areas of greatest value, and maintaining a pragmatic approach to pricing. The overall sentiment echoed the urgency of addressing climate change and the instrumental role of internal carbon pricing in steering businesses toward sustainability.

About Wendy Mackay

Wendy Mackay, managing director from Pollination, is an experienced strategic advisor to corporate clients, with a particular focus throughout her career on providing solutions to financial institutions across a range of strategic, organisational and operational issues. She is passionate about accelerating the transition to a decarbonised and sustainable global economy. Prior to joining Pollination, Wendy was a Managing Director and Partner at Boston Consulting Group, where she led their Climate, Sustainability and Social Impact work in Australia and NZ, and was a member of the Asia-Pacific leadership team. She has a deep understanding of the client perspective, having held a number of senior strategy, M&A, and capital transaction roles during her long tenure at Stockland, one of Australia’s largest diversified property companies. She has also previously worked with leading international specialist consultancies, ERM and Ramboll, where she advised corporate and government clients on environmental and sustainability issues. Wendy holds a Master of Business Administration from the Australian Graduate School of Management, Master of Science from Lund University in Sweden, and Bachelor of Planning (University Medal) from the University of New South Wales in Australia.

Click here for the recordings, photos and slides


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