Climate Integrity and Sustainability Reporting
Never has the issue of climate change and governance been more politicised than this year, at the same time that the ill advised AGL demerger has been derailed by shareholders. So, why is climate change heating up the boardroom?
Australia in a lot of ways has been a back water for climate change and sustainability, but while Australia has been moribund, the rest of the world has moved significantly forward requiring international companies to change their reporting disclosures while investors are selecting lower overall returns to focus on ESG asset classes.
Australian companies and therefore Boards with an international focus will be ahead of their domestic competitors when Australia is dragged forward by the new government.
Boards need to be aware of two things:
- The climate and sustainability policies of its key trading partners; and
- The proposed new reporting requirements on sustainability and how they impact on-going disclosure.
Trade Policy
The European Union (EU) is using trade policy to implement and support climate change action with its trading partners. The EU carbon border adjustment mechanism (CBAM), which was announced on 14 July 2021 could change trade in favour of countries with lower emission levels. This could take the form of tariffs on Australian goods into Europe, or an exclusion from trade categories.
Consumer Demand
Consumers are now demanding more information regarding a product's supply chain which are not just focused on climate change, but also other sustainability and ethical practices. These may include asking questions around a company's sustainability footprint and labour conditions such as the amount of Co2 a garment leaves behind, and ethical working conditions such as employee safety and fair wages.
As a consequent, if companies fail to provide policies or programmes to report against these issues, then they risk losing customers to companies who can provide such policies.
Greenwashing
The issue of greenwashing - where companies make misleading statements about their environmental credentials is now a highly charged topic in asset management.
On 31 March, German police raided the offices of DWS and Deutsche Bank in response to allegations of fraudulent greenwashing in respect to DWS statements regarding its disclosures that over half of its US$900 billion asset portfolio was invested under the criteria set for ESG (Environmental, Social and Governance). This follows the suspension of the HSBS Global head of Responsible Investing, following his comments in relation to climate change investing.
A far as Australia is concerned, although falling slightly behind from the rest of the world, in its release of the 2022/23 compliance and enforcement report Australia's competition watchdog, the ACCC has announced that greenwashing is becoming its new priority. This includes targeting greenwashers in "problem sectors" proactively, rather than waiting for complaints to act. In its most recent efforts, the ACCC has launched "internet sweeps” for company websites, which aim to identify false or misleading environmental and sustainability marketing claims, as well as fake online business reviews. The most affected industries include fashion and footwear, beauty and cosmetics, energy, vehicles, household products and appliances, and food and drink packaging.
Financial Reporting
The International Sustainability Standards Board has issued its draft IFRS Sustainability Disclosure Standards to reduce the impact of greenwashing of investor-focused reporting in the same way that the IFSR Accounting Standards drove comparability across financial reporting.
Additionally, under the ED IFRS S2 Climate Related Disclosures form, the Climate Proposal which includes any transition plans and climate specific metrics, will also consider other matters around broader sustainability reporting.
Conclusion
It is understandable that business wants a stable playing field moving forward, where its obligations are clear and known and the new Labour government may at least provide some certainty in that regard.
Nevertheless, Directors need to have a clear climate strategy moving forward and develop the mechanisms to track and report, or else risk getting caught by their customers and investors. It is therefore important that Boards are extra cautious about their investment criteria and asset holdings where ESG is concerned.
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