Date:Sep 2022

Description:

Climate Change and Sustainability - Environmental, Social and Governance (ESG) Best Practices from the Boardroom

 

Part 5 (of 5) Energy – CLP Power Hong Kong Limited (CLP), interview with David Simmonds FCG HKFCG, Vice-President and Chairman, Membership Committee, HKCGI; Chief Strategy, Sustainability & Governance Officer, CLP Holdings Ltd.

 

Powering the global race to net zero

 

‘Cause the power you're supplying, it's electrifying,’ (some of) you may recall are lyrics from the 1978 Grease movie soundtrack, undoubtedly one of my all-time favourite and first movies I watched in cinema.

 

The lyrics would not be out of place as the company slogan for CLP, which was incorporated as China Light & Power Syndicate back in 1901, which supplied electricity to the Kowloon peninsula and subsequently began electrifying the rural areas in the 1960s.

 

Electricity, available at your fingertips today, you may appreciate, was a novelty at the turn to the twentieth century and CLP never stopped investing in innovation to power millions of homes and businesses in Hong Kong and the rest of Asia-Pacific. It is now serving more than six million people in Hong Kong, and operates in the Mainland of China, Australia, India, and Southeast Asia.

 

Interesting factoid related to two of the China and India markets where CLP operates. Did you know that the world in 2021 consumed 595 exajoule of energy (one exajoule is equivalent to around 163 million barrels of oil) and that China (26%), the United States (16%), and India (6%) accounted for almost half of it (according to the BP Statistical Review of World Energy 2022) and as such are destined to play a pivotal role in the global race to net zero with 2050 as the finish line for most of its signed up runners.

 

 

I am delighted to have the opportunity to exchange thoughts with David Simmonds, who is CLP’s Chief Strategy, Sustainability and Governance Officer and part of its ten-person strong senior management team, on CLP’s purpose to be the 'leading responsible energy provider in the Asia-Pacific region, from one generation to the next.'

 

Today’s interview is part of a series of in-depth and in-person ESG discussions with leading Hong Kong listed companies with the objective 1) to identify best practices in Hong Kong and internationally, and 2) to inform the design of an upcoming HKCGI ESG survey to assess the current state of ESG expertise, processes, technologies and data capabilities of listed companies in Hong Kong, and the real-life challenges and opportunities they face in dealing with climate change and sustainability requirements expected of them from their diverse stakeholder constituents.

 

They include, aside from CLP, Bank of China (Hong Kong) Limited (financial sector), CK Hutchison Holdings Limited (a diversified conglomerate, whose businesses include ports, retail, infrastructure, and telecom), MTR Corporation Limited (transportation), and New World Development Company Limited (real estate development), covering all five industry sectors for which the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) provided industry-specific supplemental guidance.

 

1. Sustainability sits at the heart of CLP’s business strategy according to the 2021 Sustainability Report. What does that mean in practice and how do CLP’s priorities map to the UN Sustainable Development Goals (“SDGs”)?

 

“It means that our strategy is to have a sustainable business over the long term and so our thinking on sustainability is integrated into the development of our strategy, it is not an after-thought or an add on for reporting purposes. In relation to the UN SDGs, CLP made the decision to prioritise four of the seventeen goals that we consider as the most relevant to our business and where we can make the biggest impact,” David kicks off the interview with.

 

If you are new to the topic, sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs within the planet’s physical boundaries.

 

“Affordable and clean energy (SDG7) is one of our four priorities, alongside Decent work and economic growth (SDG8), Industry, innovation and infrastructure (SDG9), and of course Climate action (SDG13).”

 

Climate action, according to my definition, consists of three components:

 

•	Reducing and mitigating climate change risk through initiatives in cutting greenhouse gas emissions (actioning against climate change).
•	Resilience building to droughts, flooding, and other extreme weather events impacting a business’ assets and communities it operates in (adapting to climate change).
•	Raising awareness and understanding of the causes of climate change (acknowledging climate change and advocating climate change actions).

 

“In practice, CLP’s business strategy focuses on topics that are financially material, impact material, or both. Impact material topics are those topics which reflect significant positive or negative impact on people, planet, and profit, and comprise of 1) Shaping and executing the transition to net zero, 2) Reinforcing resilience in a challenging operating environment, and 3) Aligning business activities with community, company employee and customer expectations.”

 

“Our annual and sustainability reports cross-reference material topics to demonstrate the interconnectedness between financial and impact material topics and CLP’s overall focus on creating value for both shareholders and wider stakeholders.”

 

2. The topic of climate action (SDG13) is dear to my heart. What is CLP’s Climate Vision 2050 and CLP’s vision to become a Utility of the Future? And what risks and opportunities does climate change pose to CLP?

 

“Climate Vision 2050, first launched in 2007, sets out the blueprint of CLP’s transition to net-zero greenhouse gas emissions across CLP’s value chain – including CLP’s upstream suppliers and downstream customers (Scope 3 emissions).  As such, we took the bold move in 2021 to bring forward the date of the complete phase-out of coal-fired assets by 2040 (instead of 2050),” David shared.

 

“As part of Climate Vision 2050 and the scenario analysis which informed the targets we set, we recognise potential climate change related risks and opportunities not only for CLP but also for the communities and markets where we operate.”

 

•	Short term (0-1 year):
	•	Extreme weather events pose a potential risk to the integrity of CLP’s assets or that of the power system, whereas there may be
	•	emerging opportunities in introducing new business models such as energy-as-a-service and increased demand for energy transition enablers, such as innovative energy storage, transmission, and distribution systems.
•	Medium term (1-5 years):
	•	Emissions standards tightening, and other low-carbon policies for the power sector such as carbon pricing regulations pose potential risks, whereas the
	•	Fast-growing demand for low carbon electricity should spur investment in sustainable electricity generation, storage, transmission, and distribution capabilities and spur investment in innovation and R&D in the power sector
•	Medium to long term (5+ years):
	•	The risk of fossil fuel assets becoming stranded (due to asset devaluation, asset being writing down prematurely, or even conversion from an asset to a liability) and climate pattern changes adversely impacting the projected performance of renewable assets (biomass, geothermal, hydropower, solar, wind) in the energy transition
	•	The electrification of transport and other industries increases demand for electricity and energy infrastructure creating new earning streams..

 

“In terms of CLP’s vision to transition to a Utility of the Future, it revolves around five strategic goals: 1) creating a sustainable business portfolio, 2) accelerating our response to climate change for the business and the communities in which we operate, 3) meeting the growing demand for energy solutions, 4) leveraging technology to deliver an enhanced customer experience and enhance operating performance, and 5) investing to build an agile and innovative workforce.”

 

“To deliver an enhanced customer experience, we believe technological innovation can help us to meet our customers’ demand for cleaner energy with more personalised and value-added offerings, including how and where their energy is generated and insights in real-time energy supply and usage which give them greater control.”

 

3. Electricity is projected to double its share of the global energy mix from 20% as of today to 40% by 2050, which combined with the projected uptake of hydrogen has the potential to offset and replace fossil-fuel consumption (according to a 2022 McKinsey study). What is your perspective on energy transition, and can you share what transition enablers CLP invest in?

 

“Beyond the current energy crisis, there is a clear and present need for the global energy sector to shift - structurally and swifty - from fossil-based (oil, natural gas, coal) systems of energy production and consumption to renewable energy sources (in particular, solar and wind). Once the electricity supply has transitioned to zero carbon and renewable energy it can really help accelerate the decarbonisation of other industries (e.g. Transport) through electrification.  So electricity is at the very heart of the energy transition” David shared.

 

“CLP invests in a broad range of transition enablers to transform the energy system as decarbonisation of the generation portfolio cannot be achieved by simply building lots of renewable energy. For instance, renewable energy sources must be complemented with energy storage and a range of digital technologies that can help integrate distributed and intermittent power sources without compromising  reliability and accessibility. Other examples include decentralised renewable generation and smart energy services, transmission and distribution systems, battery or alternative energy storage solutions and EV charging facilities. Digital technologies also provide new tools for customers to interface with the energy system.”

 

“Another clean energy source we are engaged with is green hydrogen, which is an alternative to natural gas with zero emissions at the point of use. When you burn hydrogen, energy is generated and the only by-product is water.  We are looking to use green hydrogen as a fuel for our gas fired power stations here in Hong Kong and Australia. Green hydrogen can be used to deliver heat to buildings, generating power for heavy transport through hydrogen- fuel cells as well as a source of energy for high-temperature processes (think cement, petrochemicals, refining, and the hard to decarbonize steel industry). Whether or not hydrogen is considered ”green” depends on the type of energy used to create hydrogen. In the case of green hydrogen, currently accounting for 1% of global hydrogen supply, it is through electrolysis of water using renewable energy (there is also blue hydrogen, and grey or black hydrogen). The question is when it will become commercially viable at scale to produce and transport and there is a huge level of investment and focus globally to address these challenges.”

 

4. In Board and C-suite training workshops, the question often comes up how to arrive at material ESG topics? Can you share the approach adopted by and best practices from CLP?

 

“Since 2018, CLP has adopted a materiality assessment based on megatrend analysis, which is a continuous analysis of future-defining transformative trends (social, economical or environmental, political, technological) that can have a profound impact on CLP’s strategy and operating environment, today or in the future. Currently, nine megatrends have been identified, which provides CLP with a clear and defined context for reviewing environmental, social and governance (ESG) risks and opportunities, and prioritising topics for CLP management focus and reporting.”

 

1.	Technology as enabler and disrupter: In the utilities sector, for example, AI is driving efficiency gains, underwriting the next generation of clean energy and storage technologies, and helping deliver a better customer experience.
2.	Accelerating energy transition: In Glasgow post-COP26, more than a hundred countries put forward new or updated carbon reduction targets for 2030, where government inaction and supply chain and investment uncertainty remain key risks to the scale and speed of transition required.
3.	Evolving energy business models: The falling cost of renewables and the introduction of new technologies is powering the shift towards an intelligent, integrated and more decentralised energy system. Utilities are exploring new business models and capabilities in areas such as microgrids, storage, electric vehicles (“EV”), and energy-as-a service. Incumbent electric utilities face competition from non-traditional utilities including big tech, communications providers, oil companies and EV manufacturers.
4.	Deglobalisation: Integration at the regional level has grown stronger, partly due to COVID-19, with a bias towards self-reliance (energy, food, technology), shorter and regional supply chains, which is resulting in greater regulatory uncertainty for businesses.
5.	Electrification: Increasing demand for electricity is a trend expected to continue with 2.5 times more electricity required by 2050, driven by electrification of end-use sectors, such as transport and industry, and urbanisation. Despite the increasing availability of renewable energy generation, supply is unable to match increasing demand. Increases in energy needs also create additional strain on energy grids, especially at times of peak demand, with widespread clean electrification limited by current energy infrastructure.
6.	Trust and fairness: In many countries, trust in the government and media is changing with increasing pressure from stakeholders on businesses to respond to and take a stand with regards to environmental, social, governance (“ESG”), and technological issues such as climate change, diversity, equity and inclusion, distribution of wealth, and digitalisation. Businesses are expected to have a clear purpose and communicate its raison d'être, which has far-reaching implications on its engagement of key stakeholders such as customers.
7.	Climate change adaptation: Increase of a company’s resilience to adapt to and withstand the potential impact of climate change is critical. The energy sector is especially vulnerable to physical climate risks, but leading utilities will also be critical to future adaptation solutions.
8.	Future of work: Increased availability and use of digital collaboration tools is accelerating a structural shift in the way people work, communicate, and organise their lives. In response, companies are paying closer attention to worker health, well-being, and morale. In addition, the benefits of a flexible, digitalised, diverse, and inclusive working environment have become increasingly clear, particularly in relation to attracting and retaining talent.
9.	Data privacy and security: Increasing number of vulnerabilities are the result of the mass adoption of working from home. Critical infrastructure targets such as electricity grids, power plants and dams are particularly vulnerable to attack. Customer data privacy expectations and regulatory scrutiny have forced companies to revisit how customer data is collected and used.

 

“The megatrends and external environment analysis is only the first step in CLP’s materiality assessment process and informs the subsequent stakeholder and senior management interviews to arrive at a list of material topics, which are prioritised in a prioritisation workshop. The structured process helps create senior management buy-in and commitment to the topics that are material and matter to CLP.”

 

“Lastly, I am proud to share that part of our material topic of shaping and executing the transition to net zero, 76% of our operating earnings in 2021 came from non-carbon generating assets and transmissions, distribution and retail.”

 

David, it was an absolute delight to exchange thoughts with you today and I look forward to seeing more leading listed companies like CLP act as pioneers and role models in the sustainability journey to help balance people, planet and profit, one company and business sector at a time.

 

By Prof. Lapman Lee, Professor of Practice (ESG, FinTech, Governance), Hong Kong Polytechnic University