Green-hushing is the practice of companies pulling back over time on their stated ESG targets. Perhaps they stated an overly ambitious climate or environmental target before studies had progressed, or perhaps increased regulatory scrutiny on ESG reporting means that directors have realised that they are likely to be held accountable on ESG disclosures, as they are for financial disclosures.
Whatever the motivation for walking back a target, the increase in this activity is an emerging issue for companies and their access to capital.
Fundamentally, ESG data serves the purpose of allowing investors to assess and compare companies, and in particular, quantifying progress over time. If you are reporting on too many metrics or reducing (or removing) your stated targets from your disclosures, then you are likely to compare poorly on “progress” metrics and be pushed out of the investable universe for these funds.
This starts to matter for junior mining companies as they look to raise larger amounts of capital by accessing the institutional fund market.
ESG funds make up a significant proportion of total global equity funds, estimated at ~7.5% of global equity assets under management, according to Morningstar. Taking into account the broader landscape of funds with ESG integrated into their process, that jumps to around 12% of equity assets.
This trajectory is set to continue, with April 2023 fund data showing global ESG equity fund flows (+$5.8 bn) outpacing non-ESG flows (-$23.7 bn), according to Goldman Sachs.
With competition for capital as fierce as ever, who can afford to exclude 12% of the addressable market?
ESG regulation is progressing quickly. International reporting standards will be released in June 2023, at which point Australia will open a consultation period with a view to regulation being implemented here in Q1 2024. Australia’s focus will be on international alignment, and there is a high chance that reporting will be mandatory for companies. Initial scope will be for large, listed companies, but this is expected to expand rapidly to include smaller companies. As a guideline, EU regulation applies to companies with 250+ employees and/or >€100m revenue. Smaller companies in Australia need to prepare for this.
As a junior mining company approaching the size and scale where institutional capital is important, directors need to consider which ESG metrics are material to the company and what might be realistic for ongoing disclosure.
The message from investors is clear – don’t be too ambitious, and don’t make commitments just because you see them from others in the industry.
Analysts and investors need access to your company metrics, preferably all in one place and easy to download. Most institutional investors don’t need to read a sustainability report, and many investors don’t use third-party ESG ratings – or if they do, this is simply used as an anchor to their own proprietary ESG framework.
Case studies are useful for your company narrative, but data is the starting point for the investment community. Investment decisions are based on data with context, not context with data.
Whether you view ESG reporting as an exercise in value creation or simply a compliance requirement, it is clear that non-financial disclosures are already taking on the same importance to investors as financial disclosures. This reporting will be an inescapable requirement for accessing institutional funds in the future.
*White Noise attended the ESG, Sustainability and Activism program at the AIRA (Australian Investor Relations Association) Conference this week. This was a well-attended event designed for an audience of investor relations and sustainability professionals from listed companies, with an agenda of speakers including company representatives, industry specialists and fund managers specialising in ESG, Sustainability and Stewardship.