Ahead of his session at the InvestorDaily’s ESG Summit 2023, gold partner Zenith Investment Partners’ head of responsible investment and sustainability, Dugald Higgins, outlined the key environmental, social, and governance (ESG) issues that will dominate 2023.
First, he said, the rise of global regulation for market participants continues apace, as major legislative and industry rules are either being tabled or coming into effect across many countries.
While the US, the UK, and Europe tend to dominate headlines in Australia, Mr Higgins said developments in China, Hong Kong, Singapore, and Japan are also worth monitoring.
Moreover, while Australia adopted a “relatively light touch” across most segments of the market until last year, it could ramp up this year with Treasury tabling potential mandates for climate risk disclosures across the financial system, backing the Task Force on Climate-Related Financial Disclosures (TCFD) and International Sustainability Standards Board (ISSB) frameworks, he added.
The Treasury released a consultation paper in December 2022 on climate-related financial disclosures, which said a new ISSB was created to develop “comprehensive baseline global standards for climate disclosure (based on the TCFD) and sustainability reporting”.
The paper said that overseas developments on sustainability and climate regulation “create a potential guidance gap for Australia, as market expectations for certainty may not be met without government action and without efforts by businesses to continue to improve the quality of their disclosures”.
It added that this could cost the economy and impact firms’ ability to raise capital, and insisted that Australian disclosure obligations must be credible and comparable to other “prominent jurisdictions to remain aligned with major international capital markets.
“They need to provide investors with decision-useful information about the financial risks that firms face from climate change and provide regulators with information to identify and manage systemic risks,” the paper said.
Australia must align with the world
Mr Higgins agreed, warning that the world is changing rapidly, and the risk of Australia becoming the “victim of information asymmetries relative to the rest of the world on climate reporting is very real”.
“This intersects with greater demands for hard data on ESG and sustainability issues and the increasing realisation that audit and verification will play a critical role. Understanding these challenges and how they will impact your business is essential,” Mr Higgins said.
Australia is a net recipient of direct foreign investment, and in 2021, more than 85 per cent of exports was sent to countries that have net zero greenhouse gas emissions pledges in place, he pointed out.
“Alignment with international trade partners on key climate and other sustainability commitments will increasingly impact capital allocation,” he said.
“The cost of not aligning with international practices increases the risk of global regulators mismanaging systemic risk and adverse competition outcomes, risking real-world economic costs.
“Moreover, lack of comparable decision-making information means risk may not adequately be reflected in asset prices with financial volatility resulting from climate-related market and economic shocks. If mis-pricing becomes widespread, the cost of contagion regarding financial failures may be significant for governments, markets, investors, and the general public.”
With other countries also operating under much higher disclosures than Australia and implementing carbon adjustment measures, tariffs could be imposed on some Australian products because the nation is perceived as being a “decarbonisation laggard”, Mr Higgins warned.
When asked how ESG investment could thrive in 2023, Mr Higgins said the industry needs to arrive at a consensus on how to define ESG to avoid risks like greenwashing claims, investor disillusionment, or misdirection of critical capital.
“By failing to clearly separate ESG from sustainability, the industry plays into the hands of those who seek to hijack, co-opt, and otherwise bastardise ESG for their own ends,” he said.
“The industry can’t afford to waste more time arguing about this. We need to come to an understanding on whether ESG is just another process to assess risk and opportunities, or whether it’s a way to pursue actual sustainability, or even impact in the real world.”
ESG Summit 2023
Mr Higgins’ comments preceded the ESG Summit 2023, for which Zenith Investment Partners is providing support as a gold partner.
He said the summit is a platform to share knowledge with advisers and the broader market.
“With more questions on the issues in the space and how advisers can best prepare, we will be at the ESG Summit to help them start that conversation and identify the tools they may need to succeed,” Mr Higgins said.
“The speed of change for all market participants because of these ongoing developments is undeniable. Understanding how these changes impact clients and businesses is vital, whether you are starting on your ESG journey or want to keep up with the latest trends.”
To hear more from Dugald Higgins about how advisers could incorporate ESG principles into their advice process, how to simplify ESG assessment of funds, and what global regulatory trends mean for your business, come along to the ESG Summit 2023.
It will be held on 23 March at Aerial UTS Function Centre, Sydney, and 29 March at Grand Hyatt Melbourne.