With the much-anticipated International Sustainability Standards Board (ISSB) standards for sustainability and climate-related financial disclosures now here, a new era in global disclosure standards has begun.
The Australian Government has proposed a plan for mandatory sustainability and climate reporting. The plan includes a phase-in timeline for disclosure and assurance, and largely aligns with the new ISSB standards baseline.
The rules would apply to the largest companies from 1 July 2024, and expand to smaller companies over the following three years.
Australian asset owners are likely large enough that the rules would apply to them in the first tranche of application, from 1 July 2024.
In this article, we’ll explore what the new ISSB standards mean for asset owners and considerations to assist in preparing for the potential rollout of new mandatory sustainability and climate reporting in Australia.
Are you new to the ISSB standards? Our guide, ISSB Explained: Better information for better investment outcomes, will help you to understand what the ISSB is, its new standards, and why they matter.
Key sections in this article
- Offsets under the spotlight
- TCFD-aligned asset owners will be winners
- The challenge in defining timeframes
- Climate will need to be embedded into the fabric of organisations
- Executive remuneration meets climate
- Asset owners will be reliant on their asset managers to obtain the relevant data
Offsets under the spotlight
While there will always be a space for reputable offsets in the global transition to net zero, it is well known that offsets do not achieve emission reductions – which is what is needed to align with the goals of the Paris Agreement.
Carbon offsets are primarily used to achieve carbon neutrality, which is an important step towards net zero, but it is ultimately a short-term and unsustainable step.
Being proactive and engaging in true decarbonisation strategies will leave asset owners less exposed to carbon market turmoil and to carbon pricing volatility, as they will have fewer residual emissions to offset.
Additionally, the current conversation around offset quality and reliability reflects another limitation of relying on offsets in the long term.
The ISSB standards require asset owners to disclose their planned use of carbon offsets.
This includes the extent that carbon offsets will play in achieving targets, who will verify or certify the credits, whether they achieve reduction or removal, whether they are nature-based or technology-based, and other information around credibility and integrity.
This new transparency, which will put the spotlight on those only achieving targets through carbon offsets, will drive participants away from a reliance on offsets and towards actual emissions reduction.
TCFD-aligned asset owners will be winners
The ISSB standards set out requirements that are built on, but go further than, the four pillars and 11 recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
Asset owners that have already aligned with TCFD will be in a strong position to gather and disclose the additional sustainability and climate-related financial information required by the ISSB standards.
TCFD-aligned asset owners will be winners in this new era of ISSB disclosures.
- As part of Climate Action 100+, over 700 asset owners and asset managers with over $68 trillion in assets under management are using TCFD.
- Over 680 financial institutions with more than $130 trillion in assets have asked over 10,000 companies to disclose through CDP, which has aligned its climate change disclosures with the TCFD recommendations.
The challenge in defining timeframes
The requirement of the ISSB standards to define ‘short, medium, and long term’ will be a more significant challenge for asset owners than for other business types.
It will challenge asset owners to consider these definitions for sustainability and climate risks and opportunities alongside the equivalent – existing – definitions for their member base and investment approach.
Asset owners are typically long-term investors, with long-term liabilities owed to members and beneficiaries. Shorter term investment theses and macro trends equally need to be considered.
The ISSB standards require the recognition of short, medium and long-term climate risks and opportunities.
The question is, does ‘long term’, in relation to climate risks and opportunities, mean the same as ‘long term’ in relation to investment approach, and member liabilities?
And do ‘short-term’ investment theses play out over the same time period as the ‘short-term’ climate risks that impact the economy? It is unlikely.
If not, do they need to be reconciled? Or is it acceptable to have multiple definitions? Will member liabilities and investment approach therefore determine how the business defines short, medium and long-term?
This is an interesting consideration for asset owners, and in particular, those tasked internally with setting and implementing strategy.
Climate considerations will need to be embedded into the fabric of organisations
Like TCFD, the ISSB standards are not just about disclosure. They are about processes.
They are about updating and embedding processes with sustainability and climate-related risks and opportunities in mind across nearly every part of the organisation. Then disclosing those processes, and the results of those processes.
Building on, and going further than TCFD, the ISSB standards are about embedding the consideration of sustainability and climate-related financial risks and opportunities into the fabric of an organisation.
As such, asset owners should see the ISSB standards as more than a disclosure exercise.
Executive remuneration meets climate
The ISSB standards will be a new way that executive remuneration is placed in the spotlight, specifically in relation to climate considerations.
Through the ISSB standards, there will be new transparency and accountability that strengthens the relationship between an organisation's climate performance and executive remuneration.
The ISSB standards require organisations to disclose ‘whether’ and ‘how’ climate-related considerations are factored into executive remuneration.
This will sharpen the focus of executives on the organisation’s climate performance and will force the topic of climate into the boardroom.
The ISSB standards’ use of the term ‘whether’ implies that considering climate in executive remuneration is optional.
However, the social pressure of having to say ‘no, it is not considered’ is enough to negate any thoughts of optionality. All organisations will be influenced by social pressure to closely tie executive remuneration to climate outcomes.
While this is not unique to asset owners, financial institutions will now need to disclose if and how remuneration is linked to climate.
Asset owners will be reliant on their asset managers to obtain the relevant data
By virtue of the structure of the investment industry, asset owners don’t always have a direct line of sight to their underlying investments and financed emissions.
The often-complex structure of funds, funds of funds, co-investments and the use of numerous asset managers can obscure visibility at the asset level – particularly in private markets.
Where asset owners make direct investments, the gathering of asset-level data will be comparatively straightforward. This will depend on the nature of the investment, such as controlling interest, debt or equity.
Where asset managers are involved, the asset owner will need to ask the manager for information to complete the required disclosures.
Asset owners should look to engage their asset manager network as early and as efficiently as possible.
This will provide a practice run, and a head start on sustainability and climate-related disclosures that are set to become mandatory in Australia, in line with the global baseline of ISSB standards.
Would you like to know what the ISSB standards mean for your asset managers?
Our guide, ISSB Explained: Key benefits of ISSB standards for opportunity-driven asset managers will help you to understand the implications of the release for managers, and focuses on the opportunities available if a proactive approach is applied to implementing the guidance.
The Pathzero solution
Sustainability and climate-related financial disclosures in private markets, in line with ISSB standards, is set to rise in Australia and globally.
However, one challenge to broad uptake is a lack of standardised emissions data from portfolio companies.
Email requests to complete spreadsheets will soon become unwieldy, and technology solutions will bring significant efficiencies and improvements to data consistency and accuracy.
Pathzero is helping to overcome this barrier by uniting private market participants on a common platform, enabling the sharing and disclosure of greenhouse gas emissions and the actions being taken to address them. Emissions calculations are aligned to global standards, such as the Greenhouse Gas Protocol, and the Partnership for Carbon Accounting Financials Standard.
By bringing asset owners, asset managers and their portfolio companies onto a shared platform, Pathzero enables parties to securely share standardised carbon data. This facilitates collaboration, and data-informed decision-making to reduce emissions.