Regulators are starting to investigate ESG claims
Last year was notable in environmental, social and governance (ESG) circles for more than just the COP 26 global climate summit in the UK. It was also the year in which a record $649 billion poured into ESG-focused funds worldwide.
It has become mainstream practice for asset managers to offer a range of ESG funds or integrate ESG considerations across portfolios. Not limited to public markets, private equity has also woken up to ESG investing, similarly recognising that it is a better way of managing risks and realising opportunities.
Investors under pressure
Now, in 2022, we are seeing increased demands for more transparency from ESG investment funds due to greenwashing concerns. Regulators are starting to investigate ESG claims and ESG reporting requirements are growing globally.
As a result , investors are under pressure to provide more clarity on their investment claims which is cascading into pressure on corporations to provide reliable data.
The European Union is continuing to pass regulations to make sustainability integral to fiscal policy in support of the European Green Deal (which aims to make Europe climate neutral by 2050). This includes a classification of green activities (Green Taxonomy), standards on green bonds, new reporting requirements for corporations (CSRD), and requiring fund managers to provide data on the ESG impacts of all products offered in the EU.
In March 2022, the US Securities and Exchange Commission proposed new rules to enhance and standardise climate-related disclosures for investors. And in China, the securities regulator has already introduced ESG disclosures for listed companies and bond issuers.
To map this fast-moving landscape, the UN’s Principles for Responsible Investment has published a comprehensive analysis of the global increase in reporting requirements for investors per jurisdiction.
From commitments to change
Several initiatives like Climate 100+ and the Net Zero Asset Managers Alliance, with its $61.3 trillion in assets under management, have increased momentum for decarbonisation across portfolios.
From the spectrum of ESG risks, investors are prioritising climate-related matters. There is no doubt climate change is one of the biggest challenges facing humanity and that emissions are measurable and correlated to rising temperature and extreme weather events. The price of inaction is already prevalent in the impacts experienced from recent climate events such as floodings, droughts and wildfires around the world.
However, the surge of climate targets and goals, like those announced by businesses and governments, are not being followed by credible plans to reduce absolute emissions. So, while these initiatives are a positive move, there is mounting pressure for countries, corporates, and investors to close the gap between commitments and action.
We are seeing more scrutiny on the credibility of net zero targets, and how associated reduction plans are being implemented. What’s more, investors are also under the spotlight and need to evidence action in how they build their portfolios, engage, and divest. The Glasgow Financial Alliance for Net Zero, launched in April 2021 by UN Special Envoy on Climate Action and Finance Mark Carney, has just published enhanced guidance on measuring the alignment of their investment, lending, and underwriting activities with the goal of net zero.
What does this mean for miners?
Mining is a key sector for the transition to a low-carbon economy as green technologies depend on metals and minerals used in batteries, electric vehicles and turbines. At the same time mining presents the full range of ESG risks – from the impacts on the environment and local communities to ethical sourcing of materials and supply chain management. These risks are interrelated and understanding the full spectrum is crucial.
When it comes to climate, there is nowhere to hide. Increasingly when accessing the capital market, miners need to show a clear understanding of their emissions, and a commitment to reducing them by setting science-based near and long-term targets, developing credible plans and showing measurable improvement.
KPMG’s 2022 Global Mining Outlook identified environmental risks, including new regulations, as the top risk for miners. In fact, the pressure from investors and government regulation are interrelated, as the market prices the regulatory risks.
More and more, our mining clients want to understand the potential impact of climate on their bottom line – including risks from a changing climate, resource scarcity and the shift to a low-carbon economy. We support them using the recommendations of the Taskforce on Climate-Related Financial Disclosure (TCFD) not just to be compliant with reporting requirements and stakeholder expectations, but to truly understand their exposure to climate-related risks and opportunities under different climate scenarios.
Given the direct requests from investors for financial information and the implication on performance from climate issues, it is no surprise that CFOs are paying attention. With the potential for significant impacts on financial planning, finance teams hold the key when building the business case for investment in climate adaptation and mitigation by incorporating the full cost of climate change. This information can feed into decarbonisation plans and actionable roadmaps to understand the cost of the transition, achieve ambitious targets, and strengthen business resilience.
• Get ready for increasing demands for data and how to demonstrate improvement to your existing and prospective investors.
• Don’t be distracted by the myriad of reporting frameworks. The credible frameworks all require you to measure your Scope 1, 2 and material Scope 3 emissions; have credible science-based targets (short and long term); and have credible plans to decarbonise.
• Consider using TCFD not just for reporting purposes but to understand the risks of climate on your business and how to seize opportunities, ultimately embedding climate considerations and adaptation into all business planning and processes.
• Be ready to show how you are implementing your credible plans and improving performance.