Chapter Overview

Collective Action/Pledges and Commitments

As we have seen in prior chapters, sustainability is becoming increasingly important to our society. However, how can organisations become more sustainable? Many initiatives have come into existence which provide a network and support for organisations that want to operate more sustainably. In this section we will review some of the larger initiatives.

One criticism of these initiatives is that they are voluntary. This can mean that signatories can decide not to take their commitments seriously, and also the commitments cannot be enforced (other than potentially delisting the organisation from the initiative). This in turn can lead to criticisms of greenwashing. Greenwashing is a commonly used term to describe misleading, or dishonest, information provided by an entity to make it appear more sustainable than it is.

United Nations Global Compact

In Chapter 2 we introduced the Sustainable Development Goals. Organisations, including companies, have a part to play in meeting the SDGs, and the United Nations Global Compact (UNGC) was launched in 2000 to assist them to do this. The UNGC is the largest global corporate sustainability initiative and has over 23,000 signatories from 166 countries. Well-known Australian and New Zealand UNGC signatories include Bunnings Group, Coles Group, and Air New Zealand.

UNGC signatories commit to responsibility in their everyday operations, strategies and culture across four areas: human rights, labour, environment and anti-corruption. UNGC signatories are required to implement ten principles, shown in the graphic below, and communicate how they are implementing these principles in their annual or sustainability report. The UNGC also provides education and training to its signatories on how they can more effectively embed the SDGs into their businesses.

Uniting business for a better world: 20 years of the UN Global Compact (YouTube, 1m 32s):

Principles for Responsible Investment

The United Nations-supported Principles for Responsible Investment (PRI) is another important large global sustainability initiative. The PRI was designed to help the finance industry – asset owners, investment managers and service providers – to become more sustainable by integrating ESG into investment and operating decisions.

The PRI was launched in 2006 with 46 signatories, including two from Australia and New Zealand. The number of signatories has grown astronomically since its launch and today there are over 5,300 global signatories. More than 260 signatories are from Australia and New Zealand – including BP Funds Management (NZ) Ltd, City of Brisbane Investment Corporation and New Zealand Superannuation Fund.^[1]

PRI signatories commit to six Principles on how they will operate and invest. The list of Principles can be seen in the figure below. Signatories are also required to report annually to the PRI on their progress on ESG issues. Signatories that fail to report for two years are delisted.

The PRI also provides education and investor tools for its signatories to help them to become more sustainable. PRI conferences and workshops provide an opportunity for signatories, and academics working in ESG, to share knowledge and information, and network.

In addition, the PRI facilitates collective action on ESG issues e.g., writing joint letters to companies, engaging or voting collectively on ESG issues. A recent example of a collective action coordinated by the PRI is when signatories could sign a letter addressed to Nike for reparations because their largest supplier had not paid wages to 4,500 garment workers in Cambodia and Thailand.

Other Sustainability Initiatives

Recent years have seen a proliferation of voluntary sustainability initiatives, many of which focus on one particular issue. The table provides information on some of the larger initiatives.

Sustainability initiatives

Measuring Sustainability

The next question is how organisations can measure, report on and communicate their sustainability to their stakeholders. Without compulsory reporting standards, there is a huge diversity in how this information could be reported. Consequently, several frameworks have been developed which are designed to assist organisations to report this information in a standardised, informative way.

Global Reporting Initiative

The Global Reporting Initiative (GRI) was one of the earliest initiatives to provide a sustainability reporting framework. GRI was launched in 1997 and now is the most widely used sustainable reporting standard, with more than 10,000 organisations in 100 countries reporting using GRI standards. GRI is governed by the Global Sustainability Standards Board. The Standards are reviewed regularly to ensure they reflect global best practice.

GRI standards are a “modular” system of three series of standards:

• GRI universal standards, which provide disclosure and guidance on topics that are likely to be material for all organisations.
• GRI sector standards, which are tailored for specific sectors and (will) cover 40 sectors e.g. Oil and gas; Textiles and Apparel.
• GRI topic standards, which relate to a specific sustainability issue e.g. human rights, waste.

Carbon Disclosure Project

The Carbon Disclosure Project (CDP), also a not-for-profit organisation, focuses specifically on enabling companies to disclose their greenhouse gas emissions and other climate-related information, as well as water usage. The CDP has become the leading global organisation through which companies and cities report their greenhouse gas emissions data. CDP data is widely used by investors, data providers, academics and governments for decision-making, product offerings and research.

There are now companies, cities, states and regions from over 90 countries disclosing through CDP on an annual basis. This includes over 23,000 companies worth more than half of global market value.

For an idea of what companies are asked to disclose, have a look at CDP’s questionnaires.

In 2021, the CDP launched a new strategy that aims to expand to cover all planetary boundaries, including other areas such as biodiversity, plastics and oceans, and recognises the interconnectedness of nature and earth’s systems (see Chapter 5).

Since the Paris Agreement in 2015 there has been a large increase in reporting frameworks and guidelines. Initially, the CDP provided an overview of how its reporting aligned with and differed from the GRI. Now, the CDP has aligned its reporting standards with the recommendations by the Task Force on Climate-related Financial Disclosures (TCFD), which is discussed next.

Task Force on Climate-Related Financial Disclosures (TCFD)

Following the Paris Agreement in 2015 an important international financial body – the Financial Stability Board – set up a Task Force to develop guidelines on climate risk disclosures. It was tasked to identify the financial risks and opportunities associated with climate change, and to provide global guidelines on how to report on these. These guidelines were published in 2017 and have formed the groundwork for other guidelines and initiatives on climate, including from regulatory bodies across the world.

Explained | Task Force on Climate-Related Financial Disclosures (TCFD) (YouTube, 2m 19s):

The significance of the TCFD as a milestone in climate reporting cannot be understated. The TCFD has been so influential because it was a document written by a globally significant financial body, led by well-known leaders in the financial sector. The Task Force was led by Michael Bloomberg, founder of Bloomberg, a world-leading financial information provider, and presented to the Financial Stability Board’s Chair, Mark Carney, former governor of the Bank of England.

The TCFD is focused on increasing transparency to make “markets more efficient and economies more stable and resilient”.^[2] It streamlines climate reporting and classifies its disclosures according to four categories (see the figure below). At the core of the TCFD are metrics and targets, as a fundamental for what is needed to start managing climate risks, setting a strategy, and consequently governing the organisation.

Each category has several recommended disclosures, including explanations of what should be included in the disclosure. For example, for metrics and targets, one of the recommended disclosures (disclosure c) is “Describe the targets used by the organization to manage climate-related risks and opportunities and performance against targets”^[3] and then there is a description of what should be disclosed, including several elements on the type of target, time frame, base year from which progress is measured, and key performance indicators used to assess progress against targets. There are disclosure guidelines that apply to all sectors, but the TCFD has also increasingly published sector-specific guidelines.

Climate-related risks and opportunities and their impact on the financials of an entity can also be divided into different categories (see the figure below). Broadly speaking there are two types of climate-related risks: transition risk and physical risk. Transition risk refers to the risks associated with the world transitioning to a lower carbon, and ultimately fully decarbonised, economy. These risks include policy and legal (increased regulation and litigation), technology (innovations), market (supply and demand) and reputation (stakeholder perceptions) risk. The more rapidly economies transition, the greater the transition risk. Physical risk, however, increases the more rapidly the climate changes. Physical risks are the risks associated with a warming planet. Some risks are acute, such as extreme weather events. Others are chronic, such as sea level rise and water scarcity. Fortunately climate change does not only come with risks, it also comes with opportunities. Addressing climate change provides opportunities in using resources more efficiently and changing sources of energy (potentially saving costs!), innovating to provide new products and services, entering new markets, and ultimately make organisations more resilient to climate-change-related risks.

Following the TCFD, a similar task force was established but for a broader purpose; nature-related disclosures: Taskforce on Nature-Related Financial Disclosures (TNFD). The TNFD follows a similar structure to the TCFD in terms of the elements covered (governance, strategy, risk management, and metrics and targets). It recognises other natural systems that are important to maintain for financial stability, covering biodiversity and other planetary systems (using the planetary boundaries concept we cover in Chapter 5). The figure below demonstrates how the TCFD and TNFD are informed by international policy goals, and are currently being worked into corporate reporting standards, including the IFRS which we discuss next.

International Financial Reporting Standards (S1, S2)

You are probably familiar with the International Financial Reporting Standards (IFRS), which are issued by the International Accounting Standards Board. The IFRS are international standards for how to report on financial data, making statements comparable across international boundaries. In 2021, the IFRS Foundation established the International Sustainability Standards Board in response to demand for global sustainability reporting guidelines. In 2022 the first two drafts of IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures) were issued, with the latter built on the recommendations by the TCFD and sector-specific guidelines from the Sustainability Accounting Standards Board. In June 2023, the IFRS S1 and S2 were officially issued.

Many countries are in the process of integrating the IFRS S1 and S2 into their national reporting requirements.

Taxonomies and Other Sustainable Finance Frameworks

The EU has been a leader in the area of sustainable finance frameworks and standards. The aim is to facilitate sustainable investment and increase capital flows to support the EU’s green deal and achieve the EU’s sustainability objectives.

In 2018 it set up a Technical Expert Group to assist with developing items as listed in their legislative proposals:

• an EU taxonomy: a classification system that specifies whether an economic activity can be regarded as environmentally sustainable
• an EU Green Bond Standard: which we briefly discussed in Chapter 3
• a methodology for EU climate benchmarks and disclosure for ESG benchmarks.

The EU’s taxonomy came into force in July 2020. For an activity to be classified as sustainable, it must:

• (1) make a “substantial contribution” to at least one of six environmental objectives – climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems. Then, it needs to also make sure it does
• (2) “no significant harm” to any of the other five environmental objectives and
• (3) comply with minimum safeguards (social standards) and
• (4) comply with the applicable screening criteria of (1) and (2).

Australian Sustainable Finance Taxonomy Development

In 2022 there were over 15 taxonomies globally, as outlined in the Australian Sustainable Finance Institute (ASFI) Taxonomy Project’s analysis of international taxonomies and considerations for Australia.^[4] ASFI is in the process of developing a taxonomy for Australia. Such a classification system will standardise what encompasses a sustainable activity and make it easier for capital to flow to sustainable activities.

EU Climate Benchmarks

In 2020 the EU had officially adopted regulation on the minimum standards for a benchmark to be classified as “Climate Transition” or “Paris-aligned”. This is aimed at reducing the risk of greenwashing, and increases the transparency and comparability of information on different benchmarks. Benchmarks are important in the financial industry, as funds often are required to compare themselves against benchmarks, or directly invest in index funds that replicate a certain index. Many index funds label themselves as “green”, “low carbon”, etc, but this regulation ensures that only funds that meet certain requirements can have a certified EU label of being a “Climate Transition Benchmark” or a “Paris-aligned Benchmark”. The requirements are for the funds to “(a) for equity securities admitted to a public market in the Union or in another jurisdiction, at least 7% reduction of GHG intensity on average per annum; (b) for debt securities other than those issued by a sovereign issuer, where the issuer of those debt securities has equity securities admitted to a public market in the Union or in another jurisdiction, at least 7% reduction of GHG intensity on average per annum or at least 7% reduction of absolute GHG emissions on average per annum; (c) for debt securities other than those issued by a sovereign issuer, where the issuer of those debt securities does not have equity securities admitted to a public market in the Union or in another jurisdiction, at least 7% reduction of absolute GHG emissions on average per annum.”^[5]

Sustainability Ratings Agencies

Ratings agencies are independent organisations that rate other organisations. The most well-known are probably credit ratings agencies – the largest of which are Standard and Poor’s, Moody’s and Fitch – which assign companies and governments scores on how likely they are to be able to repay their debts.

Similarly, there are sustainability ratings agencies, which are independent organisations that assess and then provide ratings on how sustainable companies are. The ratings are usually based on publicly available information (such as from companies’ sustainability reports), but can also include interviews with company management, or information from the media. The ratings usually start by assessing very granular-level information, and then are aggregated up to give an overall sustainability or ESG rating. An example of such a rating scheme is in the figure below.

Recent years have seen a huge increase in the number of sustainability ratings agencies. Unfortunately, each ratings agency uses its own methodology and criteria for rating companies. This has led to criticisms, because the sustainability ratings of a particular company are not consistent across the ratings agencies.