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ESG Impact: What you need to know – June 2022

In our June wrap of the latest ESG developments, Westpac Institutional Bank’s team of ESG experts explain what’s happening domestically and locally, why it matters, and what it means for you.

CORPORATE

Boom time for ESG data market

The market for ESG data is booming in line with a growing investor focus on ESG credentials and tighter regulatory requirements around ESG and climate risk disclosure. Research from US-based management consultancy Opimas shows that the global market for ESG data surpassed USD1 billion for the first time in 2021 and is expected to exceed USD1.3 billion this year.

 

Opimas estimates that 70 per cent of the total ESG data market comprises research and analytics, such as ESG ratings and raw data. The rest relates to ESG indices, but Opimas noted that this segment is growing even faster than the wider market due to demand for exchange-traded funds and the rising number of global indices.

 

Why does it matter?

Increasing investor demand for funds that incorporate ESG risks into investment strategies is driving growth in the ESG data market. However, the growth highlights potential inefficiencies within the ESG data services segment – potentially at the expense of the companies providing the data.

 

ESG data vendors have a wide range of product offerings – along with more traditional data products like ESG ratings, many now offer products focusing on carbon footprint calculations, financial impact of climate change and climate scenario analysis. However, without a uniform approach to data collection, there may be more time and cost involved for those supplying the details.

 

Streamlined reporting around ESG presents a solution. The formation of the new International Sustainability Standards Board (ISSB), announced late last year by the IFRS Foundation, will provide a comprehensive global baseline of sustainability disclosure standards that is expected to meet both investors’ information needs and regulatory requirements around corporate sustainability reporting.

 

 

Crackdown on greenwashing

Authorities have greenwashing in their sights. German police have raided the offices of DWS and Deutsche Bank as part of a probe into allegations of greenwashing and the US Securities and Exchange Commission (SEC) has fined global investments company BNY Mellon USD1.5 million for allegedly misstating and omitting information about ESG criteria for the mutual funds it managed.

 

DWS’s former Chief Sustainability Officer, Desiree Fixler alleged the claim that its assets were “ESG integrated” was misleading as it overstated how much it used sustainable investing criteria to manage its assets. Meanwhile, the SEC announced that from July 2018 to September 2021, BNY Mellon had falsely implied that all investments in the funds had undergone an ESG quality review.

 

Why does it matter?

The DWS / Deutsche Bank case is the first time that an asset manager has been raided as part of an ESG investigation.

 

While greater scrutiny of ESG claims is a positive step for the market, there are few consistent standards for what constitutes an ESG stock or bond. BNY Mellon’s fine has been described as a turning point for greenwashing, but the case also points to the need for more standardised structures and frameworks for ESG reporting.

 

Under the SEC’s proposed disclosure regime, ESG-focused funds would be required to disclose how they measure progress on ESG objectives and how they achieve certain outcomes or impacts as part of the categorisation.

 

The plan follows the SEC’s recent proposal for publicly listed companies to report information on their greenhouse-gas emissions and obtain independent certification of their estimates. Some companies would also be required to report on Scope 3 emissions that occur throughout their value chain.

 

 

 

POLICY

SBTi seeks to tighten guidelines on fossil fuels

Amid dire warnings of the consequences of climate change inaction, the UN-backed Science Based Targets Initiative (SBTi) has announced plans to only verify emissions targets that include clear limits on financing fossil fuels.

 

More than 3,000 businesses and financial institutions are currently working with the SBTi to reduce their emissions and its certifications are currently seen as the best tool for assessing progress among the Glasgow Financial Alliance for Net Zero (GFANZ) signatories.

 

SBTi’s plans may include a 2030 deadline for financial firms to divest from coal and a 2040 deadline to exit oil and gas companies without net zero commitments. SBTi is also expected to demand disclosure of all fossil-fuel investments and an immediate stop to new fossil-fuel investment in line with the IEA Net Zero Scenario recommendations, with final wording expected early next year.

 

Why does it matter?

SBTi’s announcement accelerates the deadline for reaching net zero emissions by 2050. While emission-intensive sectors must undergo rapid transformation to meet the goals of the Paris Agreement, coal-fired power stations are still likely to exist in Australia in 2030 and a timeframe for divestment must result in a just and orderly transition to minimise the impact on workers and communities reliant on the fossil fuel industry.

 

The SBTi is engaging with the finance industry about reducing capital flows to fossil fuels and acknowledges that the deadline may be viewed as a “blunt instrument”. It is also working on a net-zero verification program for the oil industry, however the project is proving complicated due to calculations around the emissions of oil-related products like plastics and of the benefits of moving from coal to gas.

 

 

Kiwis set the course for emissions reduction

The New Zealand Government has unveiled its first emissions reduction plan to address climate change and the transition to a low emissions economy. Featuring sector-specific policies, the plan allocates NZD2.9 billion over four years toward measures, such as phasing out coal boilers, helping farmers reduce methane emissions from livestock and electric car incentives.

 

New Zealand’s climate initiatives also include a 30 per cent target for zero-emission vehicles by 2035 and a NZD 4.5 billion Climate Emergency Response Fund for decarbonisation initiatives.

 

The Government announced that emissions from its energy and industry sectors contribute to up to 27 per cent of New Zealand’s total emissions. It will invest NZD650 million over the next four years to increase the funding available to the Government Investment in Decarbonizing Industry (GIDI) fund and will expand the number and type of projects that receive support.

 

Why does it matter?

While Australia’s pathway to net zero by 2050 was boosted with the recent Federal Government commitment to 43 per cent reduction by 2030, the Ardern Government sets out clear, short-term targets and sector-specific initiatives for transport, energy and industry, building and construction, waste, fluorinated gases and forestry. Its emissions reduction plan may provide a framework for Australia to follow.

 

A country reliant on agriculture, New Zealand also plans to establish a Centre for Climate Action on Agricultural Emissions, which will accelerate the research and development of products that help reduce on-farm greenhouse gases.

 

Some of New Zealand’s climate initiatives will be financed with green bonds, which the government aims to begin issuing later this year.

 

In 2021, New Zealand introduced legislation requiring large banks, investors and publicly listed companies to provide climate disclosures based on a standard in line with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations. Its new emissions reduction plan may extend mandatory climate-related disclosures across a broader list of entities and activities.

 

 

 

WESTPAC IN ACTION

Westpac’s institutional chief talks green finance

A credible plan for cutting their carbon emissions will be vital for big corporations to secure bank loans within five years. That was a message from Anthony Miller, Chief Executive of Westpac Institutional Bank, during a recent interview with The Sydney Morning Herald.

 

In the interview, Miller cited external modelling that suggests Australia will need to fund AUD600 billion in investment on de-carbonisation over the next 10 to 15 years. “It’s a transformational opportunity for Australia, the economy and banks,” he said.

 

Miller also noted the bank’s commitment to working with hard-to-abate sectors to promote change. “For us, that’s the opportunity, to be that partner that helps people transition,” he said.

“What we don’t want to be is the entity that’s not helping the hard-to-abate sectors transition, and working on the glamorous, feel-good, net-zero renewable power capabilities – we want to be a part of that, we’re doing that. But the most important thing we can do is to help the hard-to-abate sector, hard-to-abate clients, transition.

 

 

Westpac to start more EV engines

Westpac is working to accelerate the take up of hybrid and electric vehicles in Australia with a new car loan offer.

 

The loan coincides with a rise both in petrol prices and environmental consciousness. Westpac consumer research reveals that 70 per cent of Australians plan to own a hybrid or electric vehicle in the future and 34 per cent of petrol and diesel drivers are considering making the switch for their next car. Westpac’s new loan aims to help them get behind the wheel faster.

 

The loan rates start from 4.99% p.a (comparison rate 6.21%*) and will enable customers to borrow between AUD10,000 and AUD100,000 to finance their eligible hybrid or electric vehicle purchase.

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