With the ASX200 Resources Index down nearly 7% over the past year and headlines screaming for Government support in some of the most beaten-up commodities, one might think that investor priorities would turn away from burnishing their sustainability credentials by chasing “green” returns to simply chase, well… returns.
Most of our readers will have found themselves at the sharp end of the lack of liquidity in small cap equities in the past 12 months, and while the ESG fund universe has not escaped completely unscathed, it has outperformed on a relative basis and could be described (as the phrase goes) as the least dirty shirt in the laundry basket.
Morningstar analysis of global fund flows shows that inflows into sustainable equity funds were lower through 2023 compared to the heady days of 2020-2022, however importantly – these strategies managed to gain market share over the year as a percentage of global equity assets under management.
With mandatory climate related financial reporting for Australian companies on the very near horizon, the focus on sustainable investing seems unlikely to change any time soon.
Australia is set to introduce mandatory reporting for any entity required to lodge financial reports, this will be rolled out in three phases based on the size of the entity.
The largest entities will be required to report the first set of climate disclosures for 30 June 2025 year ends (Group 1 >500 employees & > $500m revenue). Smaller entities will commence reporting two and three years later (where Group 2 is >250 employees & > $200m revenue and Group 3 is >100 employees & > $50m revenue).
Can you opt out? Technically not. Small businesses that do not have material climate risks will still need to report that fact (and be able to be able to justify it).
What might the new regulations mean for ASX-listed companies and the ability to attract investors?
The new standards that are being implemented for Australian companies are based on those from the International Sustainability Standards Board (ISSB), which were based on Task Force on Climate-related Financial Disclosures. For most of the Group 1 reporters, the reporting requirements will likely not be a shock, with many just tweaking existing reporting frameworks to match.
The main divergence from the ISSB standards for Australian companies is the removal of ‘sustainability’ measures, with the proposed AASB standards focused just on ‘climate’ related risks.
Looking at Europe, which is entering the second year of sustainability-aligned reporting, might show the pathway forward for Australian investors. A recent analysis by Goldman Sachs tracked “Taxonomy leaders” (companies classified as having high green revenue, according to reporting standards) and found them to outperform the benchmark by 20%, and to be significantly overweight in ESG funds.
With global ESG equity funds representing $3 trillion of global Assets under Management in December 2023, according to Morningstar, this is not a market to be ignored.
Investors are going to be presented with new assessment metrics over the coming years that will complement financial reports and remuneration reports as measures that shareholders can use to assess performance. Having a standardised format for presenting data ‘should’ allow investors to better compare investments, however, there is likely to be a period of adjustment, for companies and investors alike.
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Photo by Valeriia Miller
