ESG Impact: What you need to know - February 2023
Welcome to Westpac IQ’s first monthly round-up for 2023 of the latest standout ESG developments making the headlines, from corporate highlights to policy updates. What's happening globally? Why does it matter? What does it mean for you?
2023 is already shaping up to be an eventful year, and as the race to net-zero gathers pace, we’ve compiled a list of the top five ESG trends to watch out for, including what they mean for you.
5 TRENDS TO WATCH
Growing pains for the offset market
The voluntary carbon market is on the rise as more companies seek to offset their emissions as part of their net-zero strategy. Data from Boston Consulting Group shows the global market reached USD 2 billion in 2021 – four times its value in 2020 – and that rapid growth continued last year.
However, as offsets move to the mainstream, the market’s integrity and purpose are subject to greater scrutiny. While companies need to demonstrate they are using offsets as a last resort, the key integrity questions relate to measurability, additionality, and permanence.
The credibility of Australia’s AUD 4.5 billion Emissions Reduction Fund, which issues Australian Carbon Credit Units, was also in the spotlight last year following concerns raised by the Australian National University’s environmental law and policy scholar Professor Andrew Macintosh. Findings of a subsequent independent review dismissed claims that the system lacks integrity, however it recommended a number of changes to clarify governance, improve transparency and enhance confidence in the effectiveness of the scheme. The Federal Government has accepted all 16 of the review’s recommendations in principle.
Why does it matter?
Christophe Denoux, Westpac’s Executive Director, Head of Sustainable Trading Financial Markets, says confidence is vital to the success of the broader carbon market.
“No one refutes the need for reforms if carbon is to become an established asset class while providing an efficient way to allocate capital towards preserving nature and fund new decarbonisation technologies,” he says.
Denoux notes that the carbon credits are not uniform. They come from various sources, such as renewable energy projects and reforestation, and carry different governance standards and prices. However, he expects a robust, credible market to be a key part of the race to net-zero.
“The pathway to reform remains uncertain, and 2023 will be decisive in providing answers that may help companies shape their transition strategy.”
Scope 3 emissions in the spotlight
As practices for measuring and reporting of Scope 1 and 2 greenhouse gas (GHG) emissions become embedded in organisations across the globe, attention is now turning to Scope 3 emissions that exist throughout their chains.
Scope 3 emissions are widely considered to be the hardest to measure and to address, as they occur up and down a company’s value chain and not within direct control of the organisation. Data from Deloitte estimates that Scope 3 emissions account for more than 70 per cent of the total carbon footprint of many businesses. They may be tough to tackle, but as stakeholders increase expectations, we can expect Scope 3 to be high on the corporate agenda this year.
Why does it matter?
Tim Parker, Director, ESG at Westpac Institutional Bank, says that while Scope 1 and 2 GHG emissions have relatively clear boundaries and a clear strategy for calculation, Scope 3 emissions can be quite opaque and therefore harder to measure.
“Engagement with suppliers and customers will be critical, and corporates will need to understand how the goods they purchase are manufactured and transported,” he says. “Corporates will also need to understand how their products are used by customers.
“While organisations can have some influence over their Scope 3 emissions by closely tracking activities across their value chain, the internationally recognised GHG Protocol, created in partnership by the World Resources Institute and the World Business Council for Sustainable Development, also provides clear guidance for calculating and reporting of Scope 3 emissions.”
Higher expectations of reporting and disclosure
The push to develop a global baseline of sustainability disclosures will continue this year, driven heavily by the International Sustainability Standards Board (ISSB), the European Union’s Corporate Sustainability Reporting Directive (CSRD) and the United States’ Securities and Exchange Commission (SEC).
The ISSB has voted unanimously to require company disclosures on Scope 1, 2 and 3 emissions, as well as for relief provisions to help companies apply Scope 3 requirements. While the provisions have yet to be determined, final standards are expected to be published this year.
With the release of these final standards, the ISSB aims to improve transparency and consistency on sustainability-related disclosures to mitigate misrepresentation risk in financial markets. Will this mark a turning point for greenwashing?
Why does it matter?
In December last year, the Australian Government released a consultation paper on the introduction of internationally aligned legislative requirements for disclosure of climate-related financial risks and opportunities from FY24. The paper calls for views on key considerations for the design and implementation of standardised disclosure requirements.
“With sustainability-related disclosures becoming increasingly mandatory and disclosure requirements lagging, companies will need to understand the new requirements for emission disclosures,” says Jeffrey Lau, Senior Associate ESG at Westpac Institutional Bank.
“It will also be important to understand whether you are eligible for the relief provisions to apply Scope 3 requirements, although it’s not yet clear what the provisions will be.” Watch this space.
Natural capital reporting on the rise
The World Economic Forum estimates USD 44 trillion of economic value generation is moderately or highly dependent on nature and its services. That means more than half of the world’s total GDP is exposed to nature loss. To measure the magnitude of nature-related risk, organisations must understand the dependencies and impacts their operations have on the natural environment.
Westpac expects natural capital reporting to be a trending topic this year. The destruction of biodiversity and ecosystems presents credit, market, liquidity risk – and a huge risk to the health of our environment. Integrating natural capital into climate transition strategies will highlight opportunities to increase business resilience and productivity.
Why does it matter?
Incorporating natural capital into climate transition strategies makes good business sense, insists Cameron Whiteside, Executive Manager, ESG/Biodiversity and Circular Economy, Westpac Institutional Bank.
“There is also a growing stakeholder expectation for organisations to disclose and report against nature-related risks and opportunities,” he says. “The Taskforce on Nature-related Financial Disclosure [TFND] provides guidance on meeting these expectations.”
Whiteside adds that understanding operational and supply chain dependency and its impact on nature will be essential to identifying the risks associated with current or proposed business operations.
“Industry leaders are already starting to set zero deforestation and land restoration targets to reduce their exposure to nature related risk,” he says.
A taxonomy to set the standard
The development of a sustainable finance taxonomy has been high on the wish lists of Australian financial institutions. Could 2023 be the year we see significant steps taken?
A taxonomy is an important enabler for financial institutions to help the transition to net-zero by 2050 and to support a more sustainable and climate resilient economy. A set of criteria with transparent, credible and comparable standards, a taxonomy supports action to align capital allocation and investments to meet sustainable goals.
These standards have been developed, or are in development, in countries around the globe and include the EU Sustainable Finance Taxonomy, the Canada Transition Taxonomy and the UK Taxonomy.
Recent developments in the Australian sustainable finance landscape include the Federal Government’s announcement to strengthen climate risk reporting and develop a sustainable finance strategy. The strategy will include development of new standards or taxonomies for sustainable investment, further initiatives to reduce greenwashing and provide clearer definition for ESG labelling.
Why does it matter?
Taxonomies promote green, transition and social finance within credible frameworks to mitigate greenwashing.
Trang Trinh, Executive Manager, ESG and Sustainable Finance Advisory at Westpac Institutional Bank, says they help banks to play their vital role in the transition to net-zero. “Westpac aims to play its part in financing and facilitating activities that contribute to climate, environmental and social outcomes, and support Australia’s transition,” she says.
“We are working to develop a Westpac Sustainable Finance Taxonomy that is tailored to our business and aims to provide the classifications and science-based criteria for us to develop sustainable finance products and services, support customers’ transition, and provide greater accessibility to sustainable finance for a broader range of customers.”
WESTPAC IN ACTION
Westpac awarded Asia-Pacific Bank of the Year
Westpac has been recognised by Project Finance International (PFI) as the Asia-Pacific Bank of the Year in their 2022 PFI Awards.
Highlighting Westpac's leadership in sustainable finance, the PFI Yearbook noted: “Westpac had a particularly stellar presence in major greenfield project financings in both Australia and New Zealand, in a stand-out year for the region.”
Green deal for Arena REIT
Westpac has acted as Joint Sustainability Coordinator assisting Australian real estate investment trust Arena REIT to convert AUD 500 million of existing debt to its inaugural Sustainability-Linked Loan (SLL) and ensuring its Sustainable Finance Framework and SLL are aligned to SLL Principles.
The SLL creates incentives for Arena to accelerate its sustainability journey, with key performance indicators based on carbon neutrality, emissions reduction, increasing the rate of rollout of solar, and modern slavery.
Westpac helps Atmos Renewables seal sustainable deal
Westpac Institutional Bank’s project finance and sustainable finance teams were joint sustainability coordinators in Atmos Renewables’ green financing facility for its portfolio of Australian solar and wind power generation assets.
The portfolio refinancing, which is one of the largest for an operating renewable energy portfolio in Australia, consolidates the existing asset-level debt across a large part of Atmos’ high-quality, diversified portfolio of solar and wind assets.
Aligned with Asia Pacific Loan Market Association (APLMA) best practice, the green loan highlights Atmos’ commitment to ESG and demonstrates how the use of proceeds is linked to eligible green projects.
Australia to join the circle
Environment ministers across the country, led by Federal Minister for Environment and Water Tanya Plibersek have agreed to work with the private sector to design out waste and pollution, keep materials in use and foster markets to achieve a circular economy by 2030.
A new article in Westpac IQ, ‘The race to circularity: Can Australia meet the 2030 deadline?’ looks at what the latest set of government policies on the circular economy mean for Australia in the lead up to 2030. You can read it here.
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