• The alphabet soup of regulations confuses ESG investors
• Stockhead provides a summary of the most important legislation
• Interview with ESG expert Catherine Bell from BDO Australia

The Ethical Investor is Stockhead’s weekly look at ESG movements on the ASX. This week’s special guest is Catherine Bell from BDO Australia.

Investments in ESG assets are exploding.

According to data from Bloomberg, global ESG assets are on track to surpass $53 trillion by 2025, or one-third of all assets under management.

Europe currently accounts for half of global ESG assets, but projections indicate that the United States could dominate from 2022. After that, the next wave of growth could come from Asia, particularly Japan.

Meanwhile, regulators are scrambling to catch up with this explosive demand.

The current lack of a cohesive set of global frameworks has understandably confused investors. And to compound this confusion, there is no global ESG rating agency.

What is the world doing about it?

Things could soon become much simpler.

The European Union (EU) has put sustainable finance at the top of its agenda and is putting in place a set of rules for the industry.

The United States is also beginning to take steps to legislate activities in the ESG world. In March, the SEC took a first step by proposing rule changes that would require listed companies to include climate-related information in their reports.

Meanwhile, Australia have taken a more followed approach to the leader.

Many companies here have already published their ESG measures, but there is no comprehensive source of ESG regulation. Rather, the ESG regulatory landscape in Australia is a patchwork of rules operating at Commonwealth, State and Territory levels.

Here is a brief summary of the legislation currently in place around the world and what each means.

Europe leads in ESG regulations

The SFDR

The cornerstone of EU ESG regulation is the Sustainable Financial Disclosure Regulation, or SFDR.

The SFDR imposes mandatory ESG disclosure requirements for asset managers from March 10, 2021.

It aims to level the playing field for financial market participants and financial advisors when it comes to sustainability claims for financial products.

EU taxonomy

The SFDR was introduced by the EU alongside the Taxonomy Regulation.

the EU taxonomy is a classification system that lists what can be considered environmentally sustainable economic activities.

In other words, it provides businesses and investors with appropriate definitions for which economic activities can be considered environmentally sustainable.

The idea is to create safety for investors and protect them from greenwashing, while helping to move investments to where they are needed most.

Benchmarks and indices

the EU Low Carbon Benchmark Regulation obliges benchmark or index providers to disclose ESG factors in their methodological documents.

Suppliers are required to use a specific model and to disclose information such as the consideration of ESG factors in the reference methodology.

This information also requires a description of the ESG data sources used in the methodology.

Other Global Frameworks

In November last year, the trustees of the IFRS Foundation announced the creation of a new standards board – the International Sustainability Standards Board (ISSB).

The ISSB aims to unify the whole alphabet soup of agencies and regulations into a simpler and more transparent soup.

Around 40 governments around the world have expressed support for the formation of the ISSB, including Australian regulator ASIC.

Another global standard, the Task Force on Climate-Related Financial Disclosures (TCFD), was created by the international organization FSB to develop consistent information on climate-related financial risks.

The TCFD framework encourages companies to undergo scenario analysis and stress testing to assess the materiality of their climate-related risks.

The United States and Australia are catching up

The US Securities Exchange Commission (SEC) has a mandate to regulate the sector, but there is currently no mandatory ESG disclosure at the federal level.

Prior to March, the SEC only required all public companies to disclose information that may be material to investors.

But the SEC recently proposed changes to its rules and wants to make it mandatory for listed companies to report their exposure to climate change risks.

Meanwhile, in Australia, only the biggest emitters are required by law to report their emissions, a process overseen by the Clean Energy Regulator (CER).

But despite the pushback by the Morrison government, Australian businesses are increasingly drawn to using the TCFD and ISSB frameworks.

Interview with Catherine Bell, ESG expert

To put all this confusing confusion into perspective, Stockhead contacted an ESG expert Catherine Bell, Director of Sustainability at BDO Australia.

Bell was responsible for launching BDO’s global sustainability program three years ago.

She has worked with many top global brands such as The Economist, IDC, Mercer and National Australia Bank in Australia, Singapore, Thailand and Europe.

Please summarize the landscape around ESG regulations at the moment

“It’s a very difficult time right now because there’s no clear framework,” Bell said. Stockhead.

“That means people interpret the data in different ways and rank companies in different ways.

“You can have rating agencies analyzing the same company on ESG and get very different results. Facebook is a great example.

“But fundamentally you can’t make your way to a good ESG rating. And I wouldn’t recommend looking for a good ESG score because market methodologies are very different.

“What we suggest as consultants is that you examine the fundamentals of your business from an ESG lens, to ensure that you are addressing and responding to your business risks in an authentic, responsible and transparent manner.

“This includes making sure you have systems and processes in place to track, measure and improve, and to embed those metrics into the corporate culture.

Are these global frameworks converging?

Yes, the frameworks are converging and aligning,” Bell said.

“And he goes to the ISSB, which is the International Sustainability Standards Board.

“Biodiversity will also become a hot topic this year, with the release of the Task Force on Climate-Related Disclosures (TFCD).

“They are already becoming almost mandatory in Europe and the United States, and eventually they will land in Australia in the not too distant future.

“The framework they are moving towards is a mixture of qualitative and quantitative. The idea being that there will be apples to apples comparisons, where everything has to be measurable and quantifiable.

“We live and operate in a global economy so most businesses here in Australia are connected to other businesses around the world.

“The commercial world has essentially taken over the regulatory world, which means companies know they have to align with global ESG standards.

As a consultant, how do you advise companies on sustainable development?

“ESG is obviously very broad, and there are a number of rabbit holes you can go down, so nobody can be an ESG expert,” Bell explained.

“My job at BDO is to help companies activate sustainability within their own business, because if they don’t get into the business that early, no one will invest.

“When we look at the ‘E’ or environmental aspect of a mining company, for example, we look at things like water management, tailings management, emissions and what they are doing to reduce emissions.

“We also measure the loss of biodiversity caused by mining operations.

“When you talk about ‘S’ in ESG, the most important thing is community engagement. What are you doing in the community around which you operate? Obviously indigenous lands are also very important.

“And then for ‘G’ governance, it’s all that binds people together. These are the policies that ensure that what you do is backed by a governance and risk management framework.

“For companies like lithium miners, who are currently in high demand, the fact that they mine ‘green’ metals does not exempt them from their ESG requirements or obligations.

“Regardless of what you dig out of the ground, every company needs to activate their ESG baseline and sustainability in their business.

“Most importantly, they must align with a global framework that can be understood by global markets.

“There’s no point in saying that I do community engagement, because it has to be in a format that is understood by the external market.”

Other ESG news on the ASX this week

As Stockhead green expert Jessica Cummins reported:

close the loop (ASX:CLG)

The recycling company won the Diamond Award, which is the world’s highest award for packaging sustainability, at the Dow Packaging Innovation Awards in Switzerland.

Close the Loop creates products and packaging that include content that is recyclable and made from recycled materials. They also collect, sort, recover and reuse resources that would otherwise go to landfill.

Vulcan Energy Resources (ASX: VUL)

Vulcan has signed a binding purchase agreement with MVV Energie for 240 gigawatt hours per year of renewable heat under a 20-year long-term contract starting in 2025.

The agreement includes the supply of a minimum of 240,000 MWh per year to a maximum of 350,000 MWh per year to households in Mannheim, outside Frankfurt, Germany.

Any views, information or opinions expressed in the interview for this article are solely those of the interviewee and do not represent the views of Stockhead.

Stockhead has not provided, endorsed, or otherwise taken responsibility for the financial product advice contained in this article.