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All posts by Nick Harford

ESG Outlook – What will the Federal election outcome mean for ESG and how should companies be preparing

The extreme weather we have witnessed along the eastern seaboard of Australia, accompanied by wide scale flooding, has once again brought into sharp focus the impact and presence of climate change.  This assuredly means that as we approach the Federal election, all matters environmental can be expected to form a key policy and political battleground between the two major parties.

Many in corporate Australia will no doubt observe this with more than a passing interest, in particular the impact the election outcome will have on so called ESG (Environment, Social, Governance).  The ESG prism presents both risks and opportunities for companies, especially in the way they act to address climate change, most notably what they commit to do and by when, and how they intend to do it.

Specifically, companies are currently grappling with the scale of the commitment they should make with respect to reducing carbon emissions.  Given that both the major political parties support a policy of achieving net zero emissions by 2050, this surely becomes the absolute minimum a company must commit to.  Some have, and will be, more adventurous and it may well be that if Labor wins power, the 2050 date will be reduced even further.  Labor is already committed to a 43% reduction by 2030, (with the Coalition sticking to between 26% to 28%), so emissions reduction and how it is achieved may well become even more ambitious and prescriptive.  Indeed, the Coalition is warning that Labor’s target is just an opening gambit and that if they form government, the figure will be increased.

Regardless of where these targets may eventually end up, some have clearly decided it is beneficial from a business and reputational perspective to make a firm commitment to reducing emissions.  For example, the major retailers appear to be heeding the wishes of their customers and the market () by committing to definite action.  Woolworths says it will deliver a 63 per cent reduction in emissions from its own operations (scope 1 and 2) and a 19 per cent reduction across its supply chain (scope 3) by 2030. Both Woolworths and Coles have also committed to source 100 per cent renewable electricity by 2025.

What is even more important for companies is that they must also decide whether it makes them an attractive investment proposition as a result of building their ESG credentials.  For example, if they undertake significant capital expenditure on renewable energy, which with current low electricity prices can often have a long-term payback, will they be rewarded for their ESG commitment, including greater access to capital at a more competitive rate, so called ‘green financing’.

Australian superannuation funds who between them manage assets totalling $3.4 trillion, have made their intentions clear as to what they are committed to and what they expect companies and significant sectors of the economy to do.  For AustralianSuper, this means reducing their investment portfolio carbon intensity to a net zero level by 2050.  They go on to proclaim that ‘the steps to achieve this include transitioning away from high-carbon investments, such as fossil fuels, and toward renewable investments such as wind and solar. This is consistent with the transition occurring globally.  It also means influencing the way companies operate so they emit less carbon in their business operations.’  This last sentence is telling, and it is effectively a warning to all companies, (not just the energy sector) that they will be expected to take real action to reduce their carbon emissions, regardless of what sector they operate in, and by definition they should also properly assess the financial risks of climate change to their ongoing profitability.

This then raises the question as to how companies will reduce their emissions.  On a macro level, the Coalition has stated that net zero by 2050 will predominantly be achieved through new technology.  If one takes the view that there is eventually a technological solution for everything, then it may well be that technology comes to the fore before or by 2050.  The Coalition also credits recent forecast emissions reductions to Australian households taking up solar energy and other renewables in greater numbers than ever before.  On that basis, it can be assumed the Coalition will seek to make solar energy more affordable, while Labor on the other hand has committed to also boosting electric vehicle numbers, supported by investment in so called ‘green metals’ to enable expanded battery power storage.

Whoever wins the next Federal election, and it may well be that one or two of the so called ‘Climate Action’ independents have a say in the balance of power, it is clear there will be an expectation that corporate Australia play its role in reducing carbon emissions.  In many respects it already is, and the market has spoken, and some companies have undoubtedly taken the lead.  For the others though, both public and private companies, they need to start turning their mind to how they will track, manage and reduce emissions – and the potential costs of doing so.  To be certain, there are many things they could do beyond using renewable energy, such as reduced transport, greater materials efficiency and reducing waste to landfill.

Regardless of what the government may do, taking the easy route such as buying carbon credits or seeking to indirectly reduce emissions through the efforts of others, will simply no longer cut it in the world of ESG.  Companies will be expected to take direct action and although they may not know exactly how they will do it. Government, the market and broader community will only allow them a certain period of grace before they make them act, either through a legal requirement or public pressure.

As an election year, 2022 is shaping up as the year in which ESG becomes mainstream and is no longer just a nice thing to do.  Government policy and decision making will contribute to this as will capital and equity markets which are placing ever greater store in how a company addresses the risks and opportunities presented by climate change.  Utilising reporting frameworks such as the Taskforce on Climate – related Financial Disclosures (TCFD) will grow ever more important, but so will practical action, with companies needing to navigate how they will deal with climate change through their entire supply chain.

Those who fail to act or at the very least fail to start planning, will attract not only the attention of government and policy makers, but they will also potentially become pariahs in the marketplace. Those who do act stand to reap the benefits of not only greater access to capital on more preferential terms, but also the reputational enhancement in the eyes of a public that is increasingly demanding greater ESG action from both governments and companies.

Packaging target progress patchy

The Australian Packaging Covenant Organisation (APCO) Collective Impact Report is a presentation and analysis of the current progress towards APCO’s 2025 packaging targets.

Although the report is written using optimistic and positive language, it is reporting significant shortcomings in performance towards APCO’s 2025 targets.

Two of the three key APCO 2025 targets are going in the wrong direction and the “problem” of packaging is, by APCO’s measures, getting worse.

It is notable that the report puts forward actions to address the current gaps.

Thirty new actions have been identified. While inherently good, the 30 new actions beg some questions.

Firstly, there is no explanation in the report on the evidence supporting the actions, so are all 30 actions a priority and how will they be implemented?

Secondly, the 30 new actions are on top of APCO’s business as usual, so is APCO resourced to adequately and effectively fulfill and manage these additional actions?

The report ultimately shows an underperformance so far towards the 2025 targets. In response the report identifies gaps and interventions that can be taken. The issue then comes in the complexity of APCO simultaneously coordinating and completing its current activities, as well as fulfilling the 30 identified actions in the report, in the three years left until the target date.

In terms of the Collection Action Framework, it could do with revamping to ensure that it is still applicable and being utilised effectively.

The report used the Framework as a performance lens to evaluate progress against the targets, but it could really do with an evaluation to ensure that all parties are continuing to fulfill their obligations and requirements under the Australian Packaging Covenant more broadly.

 

Call for collaboration and coordination on circular economy

The CSIRO has released a National Circular Economy Roadmap calling for a national strategy to address fundamental environmental issues and foster regional development.

The Roadmap is a strong call for collaboration and coordination however it is somewhat limited in its scope and thereby risks compounding the problem of circular economy just being another term for standard practice.

The CSIRO defines circular economy as continually seeking reduction of the environmental impacts of production and consumption and enabling economic growth through more innovative uses of natural resources and efficient recovery of materials.

However, the Roadmap focusses on the end-of-pipe issues. It presents the 2018 recycling report figures for plastic, glass and paper as the indicators of a need for a change in current systems and strategies.

Nonetheless, the central recommendation highlights the critical need for Australia to adopt a unified and innovative circular economy strategy to achieve a national shift in mindset with lasting results and impact.

The report highlights:

> Lack of consistency across Australia particularly in waste governance, consumer education and industry standards along with differing definitions and practises.
>An “end of pipe” focus rather than upgrading product design materials selection and manufacturing.
>That the “take, make and dispose” way of thinking and consumption pattern has barriers including more expensive primary materials and unacceptable ways of dealing with waste.
>Australia’s economy and reliance on imported goods creates the need for a symbiotic strategy that links and aligns with global forces and activities.

All participants in the circular economy have a shared responsibility to make it efficient and effective, it is not just an environmental shift but a whole new way of economic thinking.

Australian Governments are currently promoting circular economy as primarily a waste and recycling policy – which is a limited scope of the concept.

The Australian Council of Recyclers has recently noted that the fervent use of the term circular economy risks just being a rebadging of current activities and programs. Or as the University of Queensland Centre for Recycling of Organic Waste director Johannes Biala put it  ”…we are at grave risk of merely exchanging one buzzword for another without conceptualising and defining what we mean and what we want to achieve.”

Government, industry, community and research all play paramount roles within this hypothetical yet achievable system.

The priorities set out in the CSIRO Roadmap highlight some specific moves needed to advance Australia towards a circular economy, and consistency, collaboration and coordination will be a good step.

To read the CSIRO report in full visit this link.

 

Setting up an Environmental Management System (EMS)

An Environmental management system (EMS) can be a powerful tool to not only monitor and manage environmental impacts but also as an instrument for overall organisational improvement.

When well developed, implemented and used to full effect, an EMS can of course reduce environmental risks and harm, but can also:

> leverage efficiencies and cost reduction;

> facilitate cultural change and engagement; and

> support competitive advantages and brand differentiation.

Like any business system, whether for safety or quality or other businesses elements, the effectiveness of an EMS is ultimately a function of the effort and commitment that goes in to executing and employing the system.

As a guide to getting started, the basis of an EMS is often about getting data right. Tracking key environmental impacts such as energy, water, waste and greenhouse emissions forms the foundation to understand an organisation’s environmental footprint, issues and opportunities.

An EMS then establishes a framework to guide decisions that have a material effect on those impacts. Policies and procedures then provide guidance and instructions on how people are expected to operate, day to day requirements and what is the desired outcome.

An Environmental Management System (EMS) is a structured framework to manage the environmental performance of a company’s activities while helping to ensure environmental compliance. An EMS provides a structured approach to identifying and managing environmental impacts, targets, responsibilities, priorities and actions.

As with many systems there is of course an international standard for EMS, ISO14001. The standard is a great framework whether an organisation seeks accreditation or not. With or without that standard, a good EMS covers off on:

Regulations and compliance

> Does your organisation have an environmental strategy and policy and is it compliant with environmental laws and regulations?

Roles and responsibilities

> Does the company have an Environmental manager or someone responsible for environmental issues and conduct environmental training and induction?

Monitoring and Reporting

> Do you currently measure and record key environmental impacts and is there an Environmental Risk Assessment?

Environmental control

> Are you aware of your organisations environmental risks, impacts and significant aspects relating to activities and operations?

As the following shows, an EMS can be developed and implemented in a relatively short time and then the on-going benefits accrue and drive on-going benefits.

It has been noticeable that there is an increased take up of EMS. In the last 12-18 months Equilibrium has fielded increased inquiries from organisations seeking advice and support to det an EMS and gain greater control of their environmental impacts.

The stated reasons are many. Some are motivated by their customers, clients or the market generally and want to be seen to be doing the right thing, others recognise the need to measure so you can manage, and others are on a longer journey where environmental management is a foundation piece in a values driven approach to overall sustainability.

Whatever the inspiration, a good EMS is a solid approach to organisational and reputational improvement.

If your business is interested insetting up an EMS, please contact the Equilibrium team on (03) 9372 5356 or at info@equil.com.au

Visit our Case Studies page to see some prior EMS projects.