Asset owners adjust to new sustainability reporting rules
Asset owners in Asia Pacific have welcomed new sustainability reporting rules, but urge patience as they get to grips with the practicalities.
The IFRS Sustainability Disclosure Standards, effective from January this year, create a global baseline of investor-focused sustainability reporting that local jurisdictions can build on.
“They provide a clear idea of what companies need to report to meet the needs of global capital markets – providing investors with globally comparable information,” said Mark Vaessen, chair of KPMG’s corporate and sustainability reporting team.
KPMG
The International Sustainability Standards Board (ISSB), which generated the reporting methodology based on a framework devised by the now disbanded Task Force on Climate-related Financial Disclosures, has indicated it is committed to working with the Global Reporting Initiative (GRI) to ensure its new investor-focused standards are complementary to and compatible with the existing GRI standards.
The GRI’s objectives meet wider stakeholders’ information needs.
Although the standards were effective from January 1, 2024, individual jurisdictions will decide whether and when to adopt them.
The adoption process is expected to be slower in the Asia Pacific than in Europe, where larger asset owners are already looking closely at their obligations.
VALUE-CHAIN EMISSIONS
Until recently, companies and investors have focused their attention on emissions from their own operations that fall within the Greenhouse Gas (GHG) Protocol’s Scope 1 and Scope 2 framework.
They now need to also account for GHG emissions along their value chains and product portfolios, which is covered by Scope 3 of the protocol.
NZ Super
New Zealand Super’s head of sustainable investment, Anne-Maree O’Connor, told AsianInvestor that Scope 3 reporting is important for two reasons.
Firstly, the category of emissions can represent a company or a sector’s most material impact on climate change. Relevant sectors include automakers, oil and gas companies, and finance.
Secondly, companies across the board making an effort to reduce Scope 3 emissions – for example in business travel or supply chain – can drive large-scale change across business and society.
“However, scope 3 can be difficult to measure. It is best if a company does a materiality assessment and tries to measure what is most important,” said O’Connor.
Meanwhile, “guidance is getting better on how to describe the limitations of scope 3 data, and this is important to trying to improve reporting."
New Zealand’s climate-related disclosure rules require Scope 3 emissions reporting.
For the fund itself, O’Connor confirmed that NZ Super’s most material emissions fall within the category and are its investments or financed emissions.
So far, its carbon footprint targets are more directly addressing Scopes 1 and 2.
“We indirectly address scope 3 for the fossil fuel sectors through setting targets on fossil fuel reserves, potential scope 3 emissions.”
The fund’s shift to the MSCI Paris-aligned Index for listed equity addresses Scopes 1, 2 and 3 emissions.
The fund shifted about 40% of its overall investment portfolio to the MSCI benchmark in 2022, including the fund’s passive reference portfolio benchmark and its corresponding $25 billion of global equity holdings.
INVESTOR AWARENESS
“It’s too early to suggest that all super funds have certainty on how corporate climate reporting will tangibly help their responsible investing efforts," Joey Alcock, head of responsible investment at Frontier Advisors told AsianInvestor.
Frontier Advisors
“However, their awareness of the impending mandatory disclosure regime, including Scope 3 emissions, is now pretty high and there is a general view that this is a positive development. That said, simply having access to more data is not necessarily constructive, and the quality and usefulness of that data will be critical.”
Alcock said time is needed to ascertain how effectively funds can leverage the added data to reach their ESG and stewardship objectives.
Michael Wyrsch, chief investment officer at Melbourne-based Vision Super, agreed that the sustainability reporting standards are a good initiative and will be helpful to asset owners in the long term.
Vision Super
“However, I think the government should be more hands-on with the [reporting] scenarios as these may be subject to a wide range of interpretations. And the government will need to be patient as the methodology matures.
“For asset owners there are challenges in that most of our portfolio holdings are incorporated in other countries not subject to Australian regulation.”
Meanwhile, some observers say it may take time for the new regime to permeate Asia’s small and medium-sized family businesses.
Singapore-based family office investor Cheong Wing-kiat believes that while larger listed companies talk about sustainability, there still remains a gap between rhetoric and action.
He feels that regional governments also remain cautious about implementing measures that might deter new investors.
“To effectively promote sustainability, there needs to be pressure from various sources including the media, public education initiatives and social pressure from young consumers,” Cheong said.
"This multi-faceted approach is essential for driving meaningful change towards sustainability practices.”