New ESG standards from the ISSB will make putting the ESG puzzle together a lot easier for Small Caps companies and investors alike. Pic via Getty Images.
In late June 2023, the International Sustainability Standards Board (ISSB) released its inaugural set of ESG Standards – but what impact will they have on Australian companies and investors?
Regardless of where on the “Save The Planet / Climate Change is a Hoax” spectrum you sit, the rise of the importance of ESG (Environmental, Social and Governance) reporting by ASX-listed companies is now too big to ignore.
The simple fact is that ESG-driven – or, at the very least, influenced – investing is already developing into a major factor guiding the moves made by Australians looking to get their money behind companies that are doing whatever they do as ethically and responsibly as possible.
But as prevalent as ESG already is, it’s about to become a far more entrenched part of the investment and corporate landscapes. Voluntary ESG reporting standards are rapidly being standardised and unified, which will help industry regulators keen to leverage robust standards to use them as foundations for their own jurisdictional rules.
So what does that look like, and how is it likely to affect ASX-listed companies, and the people who want to invest in them?
On a topic that’s as complex as this, it’s always best to get straight on the phone with the people who know what they’re talking about – so I did.
I got the always affable Brad Gurrie from Socialsuite on the linen, to pick his brains – his company provides a market-leading platform for more than 100 of the ASX’s small and mid-cap companies, designed specifically to make ESG as simple and affordable as possible.
Gurrie knows a thing or two about ESG – and he’s pretty excited about what these new ISSB standards mean.
“Prior to the new ISSB standards, there were hundreds of different ESG standards and frameworks doing the rounds,” Gurrie says, “that created market confusion, message dilution and a lack of comparability, rendering a decent slice of ESG reporting a lot less meaningful than it can be.”
“With the ISSB standards we now have a single global baseline of sustainability-related disclosures for the capital markets, which makes ESG a lot simpler,” he continues. “It provides a common language with comparable metrics for companies small and large to report on, which drives simplicity and affordability.”
“A huge percentage of our clients are small – sometimes very small – operators compared to the big names on the ASX,” Gurrie says. “But the metrics in ESG reporting are the same for the big guys as they are for the little guys.”
“Where the big companies can afford to hire a team of ESG experts to gather data, and produce flashy reports for their investors, mid- and small-cap companies simply don’t have the time or the resources to compete.”
“These new ESG standards are built to drive comparable, decision-useful, and cost-effective ESG reporting. The fact that the ISSB is so focused on proportionality and interoperability will surely level the playing field for the smaller companies, so they can provide material, digestible sustainability-related information to their investors and show them that everything’s above board.”
The benefits of the ISSB standards aren’t all just for companies, though. Investors will also see an upside as the standards are rolled out.
Thanks to this standardisation and unification of ESG disclosures, investors now have a globally relevant single set of ESG metrics that will allow them to take an “apples vs apples” look at how each company is performing from a sustainability point of view.
“Investors may have historically looked at a company’s financials, or who’s on the board, and seen what looks like a rock-solid investment opportunity,” Gurrie says. “But then, some time down the road, they’ve been blindsided by news that the company has been engaging in unethical practices.”
“In a hypothetical example, let’s say that a mining company might look like a fantastic investment on a spreadsheet, but in reality they’ve been engaging in terrible environmental practices, which have been made public.
“With headlines screaming about a company releasing tonnes of toxic waste into a nearby river, naturally that stock price is going to plummet – and investors will lose their money, because they had no idea what was happening on-site.
“A reliable ESG reporting framework will allow investors to determine whether the company they’re putting their money into is doing the right thing, or whether there’s a potential risk of company failure that a straight-up financial overview would never reveal.”
The new ISSB standards will also help inform any government plans to make mandatory ESG disclosures a reality, which is something that several interest groups have been pushing for quite some time.
In mid-June, ASIC Chair Joe Longo addressed the Committee for Economic Development of Australia’s State of the Nation conference, during which he spoke about the future of ESG and what it means for Australian investors, and the companies they’re seeking to invest in.
“At the end of last year, the Australian Government published a consultation paper on mandatory climate risk disclosure requirements and tasked the Treasury with developing a comprehensive sustainable finance strategy,” Longo said.
“This will encompass a range of measures to improve transparency, deepen Australia’s green finance markets, and seize opportunities presented by surging global momentum in sustainable finance.
“As part of this strategy, we will see the development of new standards or taxonomies for sustainable investment, further initiatives to reduce greenwashing and strengthen ESG labelling, and continuing participation in global forums to support climate and sustainable finance frameworks and investment.”
As you could probably imagine, establishing a government-led framework would inevitably turn into a heavily partisan bunfight in Canberra, and take months, if not years, of protracted wrangling to decide even the simplest of things.
The release of the ISSB standards means that a massive amount of the heavy lifting is done – and all the government needs to do is then accept that this is a standard that the world expects and adopt it with any relevant jurisdictional add-ons and refinements.
This article was developed in collaboration with Socialsuite, a Stockhead advertiser at the time of publishing.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.
Experts
Experts
Mining
