Top 10 ESG Markers - February 2021

More movement in ESG this month! Momentum continues to build and tectonic shifts are appearing. So, more great stories in this February 2021 blog.

Again, if I happen to miss some key markers in a particular month. Just drop me some comments, and I will pick them up next month! 

*‘ESG Markers’ – like biomarkers that tell us how healthy our body may be, ESG Markers showing us the big movements in the field of ESG in Oceania and globally. 

So, here are my Top 10 for February 2021, again not in any particular order.

Professor Graeme Samuel AC releases Interim Report on the Independent Review of the Environment Protection and Biodiversity Conservation Act 1999

Professor Graeme Samuel has made 38 recommendations to transform the EPBC Act, including new independent oversight bodies in his interim report. The review has found that Federal Government must overhaul Australia’s environmental laws, including establishing new independent bodies to take on responsibility for monitoring the environment and enforcing compliance with the law. They include short-term reforms, including the immediate introduction of legally-binding national environmental standards to boost protection, and longer-term changes needed to address the “trajectory of environmental decline”. Samuel said the government would be accepting “the continued decline of our iconic places and the extinction of our most threatened plants, animals and ecosystems” if fundamental changes were not forthcoming. 

Professor Samuel also emphasised that “the EPBC Act had failed to fulfil its objectives as they relate to Indigenous Australians….Sustained engagement with Indigenous Australians is needed to properly co-design reforms that are important to them…..Much more needs to be done to respectfully incorporate valuable Traditional Knowledge of Country in how the environment is managed.”

All Australians are invited to have a say about the reform directions in the Interim Report. To read the Interim Report and have your say visit the website https://epbcactreview.environment.gov.au/

A Review of 100 Studies Finds Sustainability is Good for Business

As the Integrated Reporting <IR> and SASB frameworks merge around the notion of ESG and value creation and the IFRS considers sustainability standards (see below), a meta-analysis has recently found from a review of 100 studies that sustainability, ostensibly, is good for business. Of the studies, 64 found that undertaking sustainability innovations was good for the bottom line, the researchers report in the Journal of Cleaner Production. Only 2 studies found negative effects, while 29 reported mixed results and 5 had inconclusive findings.

The papers reviewed in the new analysis looked at 188 different relationships between sustainability and increased value creation and found 120 of them to be positive, as well as 18 of 31 relationships between sustainability and cost reduction, and 27 of 35 relationships between sustainability and the ability to attract non-financial assets.

Given that return on investment from sustainability keeps improving, I expect the next 100 studies will show an even stronger correlation.

IFRS considers next steps on global sustainability standards

The Trustees of the IFRS Foundation met on 1 February 2021 to review responses to the first three questions asked by their consultation paper on sustainability reporting—demand for global sustainability standards, whether the IFRS Foundation should play a role, and, if so, the requirements for success in doing so. The responses indicate growing and urgent demand to improve the global consistency and comparability in sustainability reporting, as well as strong recognition that urgent steps need to be taken and broad demand for the IFRS Foundation to play a role in this.

The Trustees agreed the formation of a Trustee Steering Committee to oversee the next phases of work. Consultation feedback letters can be found at IFRS - Consultation paper and comment letters.

SASB has commended International Organization of Securities Commissions (IOSCO)’s vocal support of the IFRS Foundation’s plans to establish a Sustainability Standards Board (SSB). As IOSCO has stated, “building on the efforts of existing sustainability reporting organizations will give the IFRS Foundation a running start in developing a common set of international standards for sustainability-related financial reporting to investors.” Further, IOSCO stresses the need “to promote greater emphasis on industry-specific, quantitative metrics” in order to yield comparable disclosure. SASB has indicated it is committed to supporting the IFRS Foundation, IOSCO, and others working to advance critical progress on sustainability disclosure.

Plant-based foods critical to managing biodiversity crisis

A UN-backed study has pointed its finger at the global food system as being the most significant contributor to the destruction of the natural world. The report has suggested that a global shift to plant-based diets is crucial to halting this damage.

The report by thinktank Chatham House suggest that agriculture is the main threat to 86% of the 28,000 species at risk of extinction. The report focused on three solutions:

-         Firstly, global dietary patterns need to converge around diets based more on plants, owing to the disproportionate impact of animal farming on biodiversity, land use and the environment. Such a shift would also benefit the dietary health of populations around the world, and help reduce the risk of pandemics. Global food waste must be reduced significantly. Together, these measures would reduce pressure on resources including land, through reducing demand.

-         Secondly, more land needs to be protected and set aside for nature. The protection of land from conversion or exploitation is the most effective way of preserving biodiversity, so we need to avoid converting land for agriculture. Restoring native ecosystems on spared agricultural land offers the opportunity to increase biodiversity.

-         Thirdly, we need to farm in a more nature-friendly, biodiversity-supporting way, limiting the use of inputs and replacing monoculture with polyculture farming practices.

Focusing on the most challenging, which is a shift to plant-based diets is key because cattle, sheep and other livestock have the biggest impact on the environment. More than 80% of global farmland is used to raise animals, which provide only 18% of calories eaten. The food system causes about 30% of all greenhouse gas emissions, with more than half coming from animals. Changes to food production could also tackle the ill health suffered by 3 billion people, who either have too little to eat or are overweight or obese, and which costs trillions of dollars a year in healthcare.

The Chatham House report said the world had lost half its natural ecosystems and that the average population size of wild animals had fallen by 68% since 1970. In contrast, farmed animals, mainly cows and pigs, now account for 60% of all mammals by weight, with humans making up 36% and animals just 4%.

Federal Government launches Corporate Emissions Reduction Transparency Report

Federal Energy Minister has launched the Corporate Emissions Reduction Transparency Report encouraging big business to provide detailed progress to their key stakeholders towards their progress towards emission targets, including reaching net zero by 2050. He has written to ASX 200 chief executives sighting that while participation would be voluntary, companies who do not participate while having public targets would be recorded as having not reported on progress.

The government will incentivise greater corporate voluntary action by removing barriers to increased supply of domestic offsets and extra resources will be extended to the Clean Energy Regulator to halve the time it takes to develop new Emissions Reduction Fund methods and to develop an exchange-traded market for Australian Carbon Credit Units. Those participating companies will declare their annual progress towards corporate voluntary emissions and energy targets and give a renewable electricity percentage and net emissions figure as determined by the proportion of the corporation’s emissions and purchased electricity, respectively.

ASIC says disclosing and managing climate-related risk is a key director responsibility

ASIC considers that the law requires an operating and financial review to include a discussion of climate risk when it is a material risk that could affect the company’s achievement of its financial performance. ASIC’s climate change disclosure surveillance began in the first half of 2019–20 and commenced with examinations of several large listed companies spanning a range of industries including energy, financials, industrials, property and consumer discretionary.

Based on its surveillance, ASIC notes the challenges for preparers and users of climate-related disclosure continue to be:

-         Scenario analysis – where listed companies choose to undertake and disclose it. Particularly, the diversity of scenarios being disclosed against, and how individual scenarios are applied differently by companies operating in similar industries, locations and circumstances.

-         Physical risks of climate change – the assessment, management, mitigation and disclosure of the physical risks of climate change. The intersection of scientific outputs with financial-sector input remains an underdeveloped area, including the lack of common language and taxonomies.

ASIC has issued the following guidance to company directors:

-         Consider climate risk

Directors and officers of listed companies need to understand and continually reassess existing and emerging risks that may be applicable to the company’s business, including climate risk. This should extend to both short- and long-term risks. Boards should ask if they have considered climate risk in their decision-making process.

-         Develop and maintain strong and effective corporate governance

Strong governance facilitates better information flows within a company and facilitates active and informed engagement and oversight by the board in identifying and managing risk. Boards should consider if they are comfortable with the level of oversight they maintain over climate risks and opportunities and the governance structures in place to assess, manage and disclose these risks and opportunities.

-         Comply with the law

Directors of listed companies should carefully consider the requirements relating to operating and financial review (OFR) disclosures in annual reports under s299(1)(a)(c) of the Corporations Act 2001. ASIC considers that the law requires an OFR to include a discussion of climate risk when it is a material risk that could affect the company’s achievement of its financial performance. Depending on the circumstances, disclosure of climate risk may also be required by the law in other contexts, such as a prospectus or continuous disclosure announcement. Boards should ask if material climate-related disclosures have been made and updated where necessary and appropriate.

-         Disclose useful information to investors

The voluntary disclosure recommendations issued by the TCFD are specifically designed to help companies produce information useful for investors. ASIC recommends listed companies with material exposure to climate risk consider reporting under the TCFD framework.

EU carbon levy could impose carbon price of $65-$140 on Australian exports

The EU Parliament’s environment committee has endorsed the proposed Carbon Border Adjustment Mechanism (CBAM), requiring importers of polluting industrial goods to the EU to pay a border levy – by no later than 2023 – based on the volume of greenhouse gas (GHG) emissions used in making and shipping their products, initially commencing with steel, cement, chemicals and fertilisers, but eventually extending to all commodities. This represents a significant risk to Australian exporters, combined with US President Joe Biden also proposing to implement carbon border fees or quotas on carbon-intensive goods alongside the UK considering a G7 alliance on carbon border taxes. The regulation will be voted on by the full legislature in March.

Australian Oil & Gas Companies may not be insurable unless Paris aligned - QBE

QBE’s Annual and Sustainability Reports indicate that QBE has analysed US litigation around climate change and determined, based on risk and exposure, according to QBE's new environmental and social risk framework that, from the start of 2030, QBE won't insure companies that receive more than 60% of their revenue from oil and gas extraction if they aren't operating consistently with the Paris Agreement. Furthermore, from the start of 2040, the threshold for applying the test will include all businesses earning more than 30% of their revenue from oil and gas. QBE last November joined the UN Net?Zero Asset Owner Alliance and is accordingly targeting a net-zero investment portfolio by 2050.

Dasgupta Review recommends overhaul of GDP and valuing nature

Our economies, livelihoods and wellbeing all depend on our most precious asset: nature. We are part of nature, not separate from it” the opening lines of the Dasgupta Review of the economics of biodiversity, says.

The Dasgupta Review is an independent, global review on the Economics of Biodiversity led by Professor Sir Partha Dasgupta (Frank Ramsey Professor Emeritus, University of Cambridge). The Review was commissioned last year by UK HM Treasury and is supported by an Advisory Panel drawn from public policy, science, economics, finance and business.   The recommendations indicate that GDP is not the best measure of wealth, and that nature should be valued in order to incentivise its protection.

“Humanity faces an urgent choice,” he says. “Continuing down our current path presents extreme risks and uncertainty for our economies. Choosing a sustainable path will require transformative change, underpinned by levels of ambition, coordination and political will akin to, or even greater than, those of the Marshall Plan, under which Europe was rebuilt after the second world war”. On Covid 19, Dasgupta says that the devastating consequence economic progress has had on our ecosystems will mean that this pandemic is only the tip of the iceberg. Of note, is that the review found that most governments pay more for nature to be exploited, via farm subsidies and the like, causing damages amounting to 4 to 6 trillion per year.

Solutions could include precision agriculture, genetic breeding, women’s education and family planning, says the review. On the Amazon forest, which provides global benefits, the review recommends an approach whereby nations pay to protect them.

Health, a significant co-benefit of climate action – Lancet Commission on health and climate change finds

Decisive action on climate change also brings huge benefits to human health. This new study looks at 9 countries – Brazil, China, Germany, India, Indonesia, Nigeria, South Africa, UK and US (together 70% of global emissions, 50% of the global population). The study concludes that action consistent with Paris Agreement could result in these countries in an annual reduction of 1.18 million deaths due to air pollution, 5.86 million deaths due to diet-related risk factors, and 1.15 million deaths due to physical inactivity by 2040. This is in addition to the number of deaths displaced by action on climate change reducing extreme weather events as well as chronic impacts of climate change such as impact on food production and coral systems, and sea level rise.