Mandatory disclosure is coming soon to Australia and other jurisdictions
How technology can help asset managers to respond to data requests from asset owners
The ISSB standards provide a common language to understand how sustainability and climate-related risks and opportunities will influence the future of a business.
With this information, investors are primed to make better, more informed decisions in the transition to a low-carbon economy.
Jurisdictions around the world are set to build upon and use the ISSB standards and its strong foundation of the Task Force on Climate-related Financial Disclosures (TCFD), which embeds consideration of climate-related financial risks and opportunities into the fabric of an organisation.
For example, the Australian Government closely followed the ISSB’s newly released standards with a consultation for how and when mandatory, ISSB-aligned requirements could apply in Australia for large businesses and financial institutions.
A proposed roadmap and a phase-in timeline were released, with rules applying to the largest companies from 1 July 2024 then expanding to smaller companies over the following three years.
Against this backdrop, asset managers will experience rapidly increasing disclosure requests from asset owners – to whom the requirements will apply first – here in Australia, in Europe, and around the world.
Some asset managers may wait for asset owner requests and deal with them individually, responding on a case-by-case and siloed basis.
However, there are significant benefits for asset managers who can apply an ‘opportunity-first’ approach to these requests and take a forward-looking view of the broader topic of climate change.
Asset managers with an opportunity-first mindset do two key things:
Those that lead with this approach will be well positioned to differentiate themselves from their competitors and reap the benefits of their efforts across portfolio valuation, shareholder value, and their ability to attract new investors and talent.
It makes business sense for asset managers to have an opportunity-first mindset when navigating the new standards – here are seven likely benefits.
The climate-related information required by institutional investors can provide important insights to asset managers.
For example, measuring financed emissions and identifying climate-related risks will facilitate informed stewardship decisions, particularly in private portfolios where engagement can be more direct and more impactful.
Equally, understanding the emissions intensity of different asset classes or investment strategies can inform the investment decision-making lifecycle.
Asset managers should therefore seek to use the information they are asked to gather by asset owners, rather than sharing it without understanding what insights it may contain.
In many jurisdictions around the world, there is a regulatory spotlight on greenwashing, which can inadvertently lead to ‘greenhushing’.
This leaves asset owners and asset managers stuck between a rock and a hard place, unless they have accurate data to support all and any public claims.
Gathering the data required by the ISSB standards, even before mandatory disclosures are enforced, will give investors the confidence to set informed targets and make public claims that stand up to regulatory scrutiny.
For asset managers, proactively measuring the emissions profile of portfolio companies and engaging with them to reduce climate risk could increase portfolio returns over the long term.
Engaging with portfolio companies on their decarbonisation journey – even if this will outlast an asset manager’s hold period – will positively impact valuation upon exit.
A PwC study, Private equity’s ESG journey: From compliance to value creation, offers striking feedback from private equity firms. Value creation is ranked by 66% of firms as one of the top three drivers of responsible investing or ESG activity.
Additionally, 72% always screen target companies for ESG risks and opportunities at the pre-acquisition stage, while 56% have refused to enter general partner agreements or turned down investments on ESG grounds.
Engaging with the broader climate change agenda will also allow identification of investment opportunities in sectors required to grow exponentially to reach the goals of the Paris Agreement – such as clean or carbon removal technologies.
Globally, carbon removal capacity needs to go from a scale of mega-tonnes (millions) to giga-tonnes (billions), representing an example of an enormous investible growth opportunity.
Carbon pollution has been unpriced for businesses for a long time. Through the new ISSB standards and imminent ISSB-aligned requirements, the carbon price is set to become an intrinsic business consideration.
The European Union’s Carbon Border Adjustment Mechanism (CBAM) is an example of how the pricing of carbon can have far reaching implications, even in countries that have yet to embrace carbon management and pricing.
The CBAM puts a fair price on the carbon emitted during the production of carbon intensive goods that enter the EU and encourages cleaner industrial production in non-EU countries.
In this context, businesses that have already reduced their goods and services’ greenhouse gas emissions profile have a competitive price advantage over those that have not.
For asset managers, this can directly impact the profitability of underlying portfolio companies, and so this becomes an investment consideration.
While there will always be a space for reputable offsets, the current conversation around offset quality shows the limitation of relying on offsets in the long term.
Being proactive and engaging in true decarbonisation strategies will leave companies, and in turn asset managers, less exposed to carbon market turmoil and to carbon pricing volatility.
ISSB standards require companies to disclose their planned use of carbon offsets. This includes the extent carbon offsets will play in achieving targets, who will verify or certify the credits, whether offsets are nature-based or technology-based, and other information around credibility and integrity.
This new transparency, which will put the spotlight on those only achieving targets through carbon offsets, will shift the current global ethos away from offsets and towards actual reduction.
Investors are increasingly demanding that financial firms align themselves with net zero or set similar goals to become climate-responsible organisations
In fact, a survey from Morgan Stanley found that 79% of individual investors and 99% of millennials remained focused on sustainable investing, even during the COVID-19 pandemic.
Similarly, a survey from the Responsible Investment Association Australasia found that 84% of Australians believe it’s important for financial firms to commit to reducing emissions, including from portfolio companies.
Those surveys are in line with others that show that responsible investment is being demanded by the public in ever-increasing numbers.
Numerous studies and surveys have found that authentic efforts to make positive progress towards climate change can have an impact on employers’ ability to attract and retain talent.
A Gallup Survey found that 69% of workers note a company’s environmental record as a factor for job seekers, with one in four describing it as a major factor.
Likewise, recent research by recruitment consultancy Robert Half found that nearly half of younger workers are prepared to leave businesses that fail to implement genuine and sustainable ESG policies.
Asset managers can use technology to facilitate and scale the collection of decision-useful, reliable and comparable emissions information, and communication between market participants.
For asset owners, existing processes to survey or collect ESG information from individual asset managers on an annual basis can be manual, onerous, and time consuming. These processes can also leave the asset owner with information that is not comparable and standardised.
From the asset manager perspective, responding to numerous requests for disclosures can be equally burdensome.
Embracing technology can therefore allow all participants in the financial system to move away from spreadsheets and emails and towards a scalable solution where information is centralised and standardised.
Systematically and holistically gathering disclosures through technology in line with ISSB standards, even before they are requested or become mandatory will, over the long term, reduce manual processes, costs and errors.
Scalability should be embraced, and can only be embraced, once a systematic and holistic rather than ad-hoc, siloed approach to information requests is taken.
Sustainability and climate-related financial disclosures in private markets, in line with ISSB standards, is set to rise in Australia and globally.
However, one challenge to broad uptake is a lack of standardised climate data from portfolio companies, and the lack of in-house expertise.
Pathzero is helping to overcome these barriers by uniting private market participants on a common platform.
We bring asset owners, asset managers and portfolio companies onto a shared platform that offers emissions calculations aligned to leading industry standards including the Greenhouse Gas Protocol, and the Partnership for Carbon Accounting Financials Standard.
The Pathzero platform facilitates secure carbon data sharing between parties, enabling collaboration and data-informed decision-making to reduce emissions.