New research spotlights ASX as most exposed to transition risks of Climate Change. So what?
A review of 35,000 investment funds uncovers that the ASX 200 has more than 8x the emissions intensity ratio as the Dow Jones Industrial Average.
Reuters reports that online ESG data platform ESG Book has released a new tool to rank the relative performance of investment funds’ sustainability. Coinciding with the tool’s release, ESG Book has also highlighted some initial insights gained from the analysis that the new tool is capable of uncovering.
With a focus on the alignment of investment funds to the Paris Agreement target to limit warming to 1.5°C above pre-industrial levels, ESG Book measured the total emissions per million dollars of revenue. This measure is commonly referred to as the emissions intensity ratio, as it shows how much greenhouse gas emissions the constituent assets of a fund produce to achieve a standard level of return. The results of the analysis are sobering.
More than 70% of the US$40 trillion in assets that were analyzed will contribute to warming above the Paris Agreement target by 2050. Expanding the scope beyond individual funds, currently none of the world’s major stock markets can claim that their indices are aligned to the Paris Agreement target. But not all markets faired equally. The Dow Jones Industrial Average (DJIA) had the lowest emissions intensity of the world’s major stock markets. ESG Book attributed this to the types of industries present on the market: financial, retail trade, and technology services. Comparatively, the Australian Stock Exchange (ASX) was the worst performer among major stock markets, more than eight times higher than the DJIA. The poor performance was attributed to the high emissions from utilities and energy mineral companies that constitute ASX-listed entities.
For anyone that has been paying attention to the corporate world’s transition toward more sustainable business practices, with a key component being reducing greenhouse gas emissions, this does not come as much of a surprise. Of the top 30 companies by market cap on the DJIA, only one energy company (Chevron) and one chemical company (Dow) make the list. The other 28 companies are retail, financial, health, and services companies; many of whom have longstanding commitments to reducing their carbon footprints. More than one company has gone beyond to offset their total carbon footprint. Compare that with the ASX top 30 market cap companies and over a quarter are mining, materials, or energy companies. This includes BHP Group Ltd. which has the largest market cap on the ASX.
So what? Shouldn’t we expect diversity among the world’s largest markets? Especially when considering that Australia heavily relies on emissions-intensive industries due to its relative wealth of natural resources?
The reason this gap is so alarming comes down to two key trends:
Rapid pressure building up for financiers to reduce the emissions tied to their investments, and
Markets moving to require greater disclosure from their listed companies.
The first point is the most salient, money is moving away from activities that make climate change worse. The United Nations has launched a Race to Zero campaign to convene groups that are committed to reducing emissions in line with the Paris Agreement target. Race to Zero includes different partner organizations, or alliances, that cover multiple entity types, sectors, and regions. Among them are groups targeting banking, assets, insurance, and investment; basically all aspects of the financial world that companies rely on to grow and remain competitive.
These initiatives have grown to cover an overwhelming portion of the financial sphere of influence. In a little more than a year, the Net Zero Banking Alliance has grown to cover US$68 trillion worth of assets, almost 40% of the global banking total. The Principles for Responsible Investment has the largest number of signatories and represents US$121 assets under management. In the first year, the Net Zero Insurance Alliance has grown to represent 11% of world premium volume, or US$7 trillion in assets under management. Recently, the financial sectors galvanizing to support emissions reductions has grown to include financial service providers and investment consultants. There is an ever-dwindling share of the financial pie that is not rapidly moving away from climate change-inducing industries.
Beyond the individual efforts across various industries, these initiatives are working cooperatively. The Race to Zero campaign acts to pool resources and best practice across the many partners under its umbrella. At last year’s global climate change summit in Scotland, COP26, the Glasgow Financial Alliance for Net Zero (GFANZ) took things a step further to establish a cross-sector coalition that seeks to raise the ambition of the various initiatives and specifically targets net zero transition planning, capital mobilization, and public policy. All of this movement has garnered significant attention which has created a domino effect of increased scrutiny that leads to the second point.
Global markets are moving to require their listed members to disclose their sustainability information. The European Union, Hong Kong, India, Singapore, Canada, New Zealand and the UK have all implemented or set deadlines to require sustainability disclosures for public and/or large corporate entities. Recently the United States has made progress towards requiring sustainability disclosures for public companies. ESG Book has tabulated more than 3,700 sustainability regulations across global jurisdictions. The most widely adopted framework for disclosure, the Taskforce for Climate-related Financial Disclosure (TCFD), specifically targets reducing emissions among it’s more broad sustainability applications.
As we’ve seen, the global providers of capital have collectively determined that climate change is an economic force to be reckoned with and are making deep systemic changes to reduce the worst impacts by reducing greenhouse gas emissions. In response, markets see that the best way to attract capital is to be able to provide information that relates to sustainability of its listed entities and move to require such disclosures. Following in the same vein as the standardization of financial accounting principles in the 1960s and 1970s, the International Financial Reporting Standards Foundation (IFRS) has launched an International Sustainability Standards Board (ISSB) to mirror it’s financial accounting standards board. The aim is to have a global framework and sector-specific standards in place by the end of 2022. Early reports have identified that the ISSB will support the widespread adoption of the TCFD as a framework for disclosure.
So, it seems pretty clear: the global financial world is moving away from greenhouse gas emissions and stock markets are following suit by increasing requirements of their listed companies to comply with publishing their emissions. The downside for the ASX is that it is the most exposed major stock market to this risk. Case closed, right?
Not quite. It gets worse.
As Louie Woodall from Manifest Climate recently pointed out, the herd mentality of financial institutions responding to climate risks has focused on one solution above all others: cutting off financing to carbon-intensive producers. As we’ve just demonstrated, the ASX 200 is both top-heavy with carbon-intensive industries as well as the most reliant overall on emissions to generate revenue. Exacerbating the issue, the ASX has some of the loosest requirements for sustainability disclosure of the global major markets, with no mandatory disclosure requirements and guidelines for ESG disclosures last updated in 2015. This means that overall, the ASX has a reputation for being out-of-sync with a transition away from carbon emissions, the high-level figures back up this stereotype, and any company-level disclosure has no guarantee of being consistent with other companies listed on the same index to provide meaningful comparisons. The confluence of all these factors leave Australian public corporations at a serious disadvantage to stay competitive in a global financial market that is quickly leaving them behind.
There is a glimmer of hope, however.
The chair of the Australian Securities & Investments Commission (ASIC), Joseph Longo, recently gave a speech on the importance of sustainability and disclosure for Australian companies. In the wide-ranging presentation, Longo warned against greenwashing, or misrepresenting sustainable credentials, and that ASIC are open to using enforcement action against any company found to be misleading investors or consumers. Taking it a step beyond, Longo hinted at future requirements for Australian public companies to make sustainability disclosures. He went so far as to recommend companies align with the TCFD framework to disclose sustainability information, stating, “This will place companies in a good stead to comply with any standards that are mandated in future. In other words, any material risk – climate related or otherwise – should be disclosed.”
As industries ramp up their efforts to tackle the transition away from harmful greenhouse gas emissions, they will need the support of financial institutions to facilitate the systemic changes required. As it stands, Australian companies are not well positioned to seize the opportunities of the transition, but rather carry significant exposure to the risks. Without top-down leadership to guide the Australian economy into the future, it falls to individual organizations to self-determine how they will build internal resilience and seek to take advantage of opportunities.
