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.
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.
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.
©2022 Westpac Institutional Bank is a division of Westpac Banking Corporation (‘Westpac’) ABN 33 007 457 141 AFSL and Australian credit licence 233714.
Things you should know
Westpac collects, uses and discloses your personal information for the purposes of providing the information and insights requested from us and otherwise in accordance with our Privacy Statement. Each time someone visits our site, data is captured so that we can accurately evaluate the quality of our content and make improvements for you. We may at times use technology to capture data about you to help us to better understand you and your needs, including potentially for the purposes of assessing your individual reading habits and interests to allow us to provide suggestions regarding other reading material which may be suitable for you.
This information has been prepared by the Westpac Institutional Bank. It is not intended to reflect any recommendation or financial advice and investment decisions should not be based on it. To the extent that this information contains any general advice, it has been prepared without taking into account your objectives, financial situation or needs and before acting on it you should consider the appropriateness of the advice. Certain types of transactions, including those involving futures, options and high yield securities give rise to substantial risk and are not suitable for all investors. We recommend that you seek your own independent legal or financial advice before proceeding with any investment decision. This information may contain material provided by third parties. While such material is published with the necessary permission none of Westpac or its related entities accepts any responsibility for the accuracy or completeness of any such material. Although we have made every effort to ensure this information is free from error, none of Westpac or its related entities warrants the accuracy, adequacy or completeness of this information, or otherwise endorses it in any way. Except where contrary to law, Westpac and its related entities intend by this notice to exclude liability for this information. This information is subject to change without notice and none of Westpac or its related entities is under any obligation to update this information or correct any inaccuracy which may become apparent at a later date. Past performance is not a reliable indicator of future performance. Whilst every effort has been taken to ensure that the assumptions on which any forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from any forecasts. In the normal course of offering banking products and services to its clients, Westpac may act in several capacities (including issuer, market maker, underwriter, distributor, swap counterparty and calculation agent) simultaneously with respect to a financial instrument, giving rise to potential conflicts of interest which may impact the performance of a financial instrument. Westpac may at any time transact or hold a position (including hedging and trading positions) for its own account or the account of a client in any financial instrument which may impact the performance of that financial instrument. This information does not constitute an offer, a solicitation of an offer, or an inducement to subscribe for, purchase or sell any financial instrument or to enter into a legally binding contract.
Australia: Westpac holds an Australian Financial Services Licence (No. 233714). This material is provided to you solely for your own use and in your capacity as a wholesale client of Westpac.
New Zealand: In New Zealand, Westpac Institutional Bank refers to the brand under which products and services are provided by either Westpac (NZ division) or Westpac New Zealand Limited (company number 1763882), the New Zealand incorporated subsidiary of Westpac ("WNZL"). Any product or service made available by WNZL does not represent an offer from Westpac or any of its subsidiaries (other than WNZL). Neither Westpac nor its other subsidiaries guarantee or otherwise support the performance of WNZL in respect of any such product. WNZL is not an authorised deposit-taking institution for the purposes of Australian prudential standards. The current disclosure statements for the New Zealand branch of Westpac and WNZL can be obtained at the internet address www.westpac.co.nz. For further information please refer to the Product Disclosure Statement (available from your Relationship Manager) for any product for which a Product Disclosure Statement is required, or applicable customer agreement. Download the Westpac NZ QFE Group Financial Advisers Act 2008 Disclosure Statement at www.westpac.co.nz.
Singapore: This material has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (as defined in the applicable Singapore laws and regulations) only. Recipients of this material in Singapore should contact Westpac Singapore Branch in respect of any matters arising from, or in connection with, this material. Westpac Singapore Branch holds a wholesale banking licence and is subject to supervision by the Monetary Authority of Singapore.
UK and Europe: The contents of this communication, which have been prepared by and are the sole responsibility of Westpac Banking Corporation London and Westpac Europe Limited. Westpac is registered in the United Kingdom as a branch (Branch No. BR000106), and is authorised and regulated by the Australian Prudential Regulation Authority in Australia. Westpac is authorised in the United Kingdom by the Prudential Regulation Authority (PRA). Westpac is subject to regulation by the Financial Conduct Authority (FCA) and limited regulation by the PRA in the United Kingdom. Details about the extent of our regulation by the PRA are available from us on request. Westpac Europe Limited is a company registered in England (number 05660032) and is authorised by the PRA and regulated by the FCA and the PRA.
This communication is being made only to and is directed at (a) persons who have professional experience in matters relating to investments who fall within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”) or (b) high net worth entities, and other persons to whom it may otherwise lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as “relevant persons”). Any person who is not a relevant person should not act or rely on this communication or any of its contents. The investments to which this communication relates are only available to and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such investments will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely upon this communication or any of its contents. In the same way, the information contained in this communication is intended for “eligible counterparties” and “professional clients” as defined by the rules of the Financial Conduct Authority and is not intended for “retail clients”. With this in mind, Westpac expressly prohibits you from passing on the information in this communication to any third party. In particular this communication and, in each case, any copies thereof may not be taken, transmitted or distributed, directly or indirectly into any restricted jurisdiction. This communication is made in compliance with the Market Abuse Regulation (Regulation (EU) 596/2014).
Investment Recommendations Disclosure
The material may contain investment recommendations, including information recommending an investment strategy. Reasonable steps have been taken to ensure that the material is presented in a clear, accurate and objective manner. Investment Recommendations for Financial Instruments covered by MAR are made in compliance with Article 20 MAR. Westpac does not apply MAR Investment Recommendation requirements to Spot Foreign Exchange which is out of scope for MAR.
Unless otherwise indicated, there are no planned updates to this Investment Recommendation at the time of publication. Westpac has no obligation to update, modify or amend this Investment Recommendation or to notify the recipients of this Investment Recommendation should any information, including opinion, forecast or estimate set out in this Investment Recommendation change or subsequently become inaccurate.
Westpac will from time to time dispose of and acquire financial instruments of companies covered in this Investment Recommendation as principal and act as a market maker or liquidity provider in such financial instruments.
Westpac does not have any proprietary positions in equity shares of issuers that are the subject of an investment recommendation.
Westpac may have provided investment banking services to the issuer in the course of the past 12 months.
Westpac does not permit any issuer to see or comment on any investment recommendation prior to its completion and distribution.
Individuals who produce investment recommendations are not permitted to undertake any transactions in any financial instruments or derivatives in relation to the issuers covered by the investment recommendations they produce.
Westpac has implemented policies and procedures, which are designed to ensure conflicts of interests are managed consistently and appropriately, and to treat clients fairly.
The following arrangements have been adopted for the avoidance and prevention of conflicts in interests associated with the provision of investment recommendations.
(i) Chinese Wall/Cell arrangements;
(ii) physical separation of various Business/Support Units;
(iii) Strict and well defined wall/cell crossing procedures;
(iv) a “need to know” policy;
(v) documented and well defined procedures for dealing with conflicts of interest;
(vi) reasonable steps by Compliance to ensure that the Chinese Wall/Cell arrangements remain effective and that such arrangements are adequately monitored.
U.S.: Westpac operates in the United States of America as a federally licensed branch, regulated by the Office of the Comptroller of the Currency. Westpac is also registered with the US Commodity Futures Trading Commission (“CFTC”) as a Swap Dealer, but is neither registered as, or affiliated with, a Futures Commission Merchant registered with the US CFTC. The services and products referenced above is not insured by the Federal Deposit Insurance Corporation (“FDIC”). Westpac Capital Markets, LLC (‘WCM’), a wholly-owned subsidiary of Westpac, is a broker-dealer registered under the U.S. Securities Exchange Act of 1934 (‘the Exchange Act’) and member of the Financial Industry Regulatory Authority (‘FINRA’). This communication is provided for distribution to U.S. institutional investors in reliance on the exemption from registration provided by Rule 15a-6 under the Exchange Act and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors in the United States. WCM is the U.S. distributor of this communication and accepts responsibility for the contents of this communication. All disclaimers set out with respect to Westpac apply equally to WCM. If you would like to speak to someone regarding any security mentioned herein, please contact WCM on +1 212 389 1269. All disclaimers set out with respect to Westpac apply equally to WCM.
Investing in any non-U.S. securities or related financial instruments mentioned in this communication may present certain risks. The securities of non-U.S. issuers may not be registered with, or be subject to the regulations of, the SEC in the United States. Information on such non-U.S. securities or related financial instruments may be limited. Non-U.S. companies may not subject to audit and reporting standards and regulatory requirements comparable to those in effect in the United States. The value of any investment or income from any securities or related derivative instruments denominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positive or adverse effect on the value of or income from such securities or related derivative instruments.
The author of this communication is employed by Westpac and is not registered or qualified as a research analyst, representative, or associated person under the rules of FINRA, any other U.S. self-regulatory organisation, or the laws, rules or regulations of any State. Unless otherwise specifically stated, the views expressed herein are solely those of the author and may differ from the information, views or analysis expressed by Westpac and/or its affiliates.