Marcus and Emma Doo and Mood Group’s external advisor, John Gilchrist (The Team) met virtually to discuss long term scenarios in the Printing and sustainable Packaging (P&P) sector; this is a summary of the meeting. This is a classic Think Piece, providing a discussion theme for the P&P sector to consider. While Marcus and Emma are focused on their clients and prospects, they have become custodians of the short and long term problems impacting the P&P business activities; the development of Mood Etcetera is a key stage development in supporting the sector.
Scenarios force individuals to examine their perceptions, to stretch their mental models, and to develop a shared view of uncertainty, all of which lead to an increased confidence in decision making.
We kicked off the session with a general discussion on the background shaping the current situation.
Global greenhouse gas emissions have continued to increase, with varying historical and ongoing contributions arising from unsustainable energy use, land use and land-use change, lifestyles and patterns of consumption and production across regions, between and within countries, and among individuals.
As of November 2022, 48 countries have either pledged, enacted or introduced a net zero target in policy. Another 48 countries are proposing a net zero plan. However, the time-lines for achieving net zero are not the same across different countries and are dependent on levels of economic development. The International Energy Agency states that some countries are due to reach net zero well in advance of emerging and developing economies, with emissions falling most rapidly in the power sector.
Clearly the focus is on a future P&P sector and the skills needed to operate in a radically different organisation, work ethos and the substantial drivers of change; the discussion focused on three trends:
Sustainable companies are likely to be disrupted as ‘greenwashing’ raises concerns over consumer and investor protection. The companies ‘green’ credentials brings with it an obligation for accurate and reliable reporting which will transcend organisations functions, requiring a thorough review of governance, marketing, business development, finance, reporting, compliance and human resources. The companies compliance officer and staff may become fully engaged and fully loaded in this rapidly evolving process; indeed IT may need to add regulatory compliance measures to to in-house MIS systems. Raising ESG finance and listing on an exchange are heavily regulated processes in their own right. Sustainability reporting is becoming a mandatory process but going beyond the factual and timely information required for investor protection to include similar requirements aimed at consumers.
Perception is everything when it comes to reputation and brand experience and organisations will have to ensure their board reporting, marketing, financial and sustainability reporting, compliance and auditing functions are robust to avoid perceptions of ‘greenwashing’. This is no longer a best endeavours process but one an increasingly statutory and regulatory one. A thorough process and skills profile review is essential.
We discussed the amount of investment needed to comply with evolving trends and concluded that such would be sizeable and that companies would continue to seek out sustainable investment options. Often grouped with socially responsible investing (SRI) or environmental, social, and governance (ESG) criteria, green investments focus on companies or projects committed to the conservation of natural resources, pollution reduction, or other environmentally conscious business practices. There are also a range of financing instruments required. Products that can finance net zero-aligned activities include: green bonds, ESG based equity investments by funds that in turn nudge companies to disclose their ESG performance, transition bonds, impact bonds, and development loans. In essence, this is not a short-term problem but long-term with 2050 often cited as the date for Net Zero. It is also true that the opportunities for socially responsible investing is also long term during which innovation will be significant and the rules and regulations will evolve as will international and national standards.
While the ESG initiative is logical and compelling, the dark side of Greenwashing has raised its ugly head. Greenwashing is a critical issue since regulators are required to take action to ensure investment information is reliable and accurate. The same is true for consumers in so far as labelling must be accurate and not misleading.
The P&P sector will face a onslaught of new laws, regulations and standards, some applied internationally, some nationally. While the labelling issue is likely to carry the most media and blog coverage, the issuance and prospectus process is also coming under scrutiny from the various capital markets and their regulators. Green and ESG financing continues to increase, and P&P issuers will face tougher scrutiny, increased reporting and monitoring and, as such, compliance costs. At the same time institutional investor activism will also increase placing additional pressure on Board reporting and compliance. The P&P sector will find itself caught between a rock and a hard place. John updated the team on his research into EU initiatives to tackle greenwashing and their aims to ensure consumers benefit from accurate and timely information.
The European Commission is proposing common criteria against greenwashing and misleading environmental claims. Under the proposal, consumers will have more clarity, stronger reassurance that when something is sold as green, it actually is green, and better quality information to choose environment-friendly products and services. Businesses will also benefit, as those that make a genuine effort to improve the environmental sustainability of their products will be more easily recognised and rewarded by consumers and able to boost their sales – rather than face unfair competition. This way, the proposal will help establish a level playing field when it comes to information about environmental performance of products. (EU announcement)
An EU Commission study from 2020 highlighted that 53.3% of examined environmental claims in the EU were found to be vague, misleading or unfounded and 40% were unsubstantiated. The absence of common rules for companies making voluntary green claims potentially leads to ‘greenwashing' and creates an uneven playing field in the EU's market, to the disadvantage of genuinely sustainable companies. With a proposed new law on green claims, the EU is taking action to address greenwashing, and protect consumers and the environment. Ensuring that environmental labels and claims are credible and trustworthy will allow consumers to make better informed purchasing decisions. It will also boost the competitiveness of businesses who are striving to increase the environmental sustainability of their products and activities. Europe and the EU are listed as examples of change - but the issue is global and the various national authorities will need to intervene to protect investors and consumers.
We then discussed the investment process in more detail and the regulatory and reporting changes that were being considered in response to greenwashing and to ensure that private investors were accurately informed.
Greenwashing - The European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) common high-level understanding of greenwashing. The ESAs understand greenwashing as a practice where sustainability-related statements, declarations, actions, or communications do not clearly and fairly reflect the underlying sustainability profile of an entity, a financial product, or financial services. This practice may be misleading to consumers, investors, or other market participants. The ESAs also highlight that sustainability-related misleading claims can occur and spread either intentionally or unintentionally and in relation to entities and products that are either under or outside the remit of the EU regulatory framework.
ESG current and new developments and initiatives will require a fundamental change to raising finance and reporting. Compliance measures and reporting will be on ongoing process and one which will change and evolve over time. Emma commented that the future skills and experience profile of candidates will change and Mood Group need to constantly review this situation with its clients and prospects; we need to be prepared.
Capital markets have always been among the main sources of long-term funding for bond issuers, and of steady revenue and risk diversification for investors, thus matching different economic interests and creating value. The capital markets are arranged via a primary market, bringing issuers and investors together and a secondary market where buyers and sellers are brought together to conduct business in an orderly way. From a regulatory point of view, markets are segmented with rules and obligations pertaining to the professional participants such as institutional investors, brokers, custodians, etc, while retail investors benefit from additional protection under prudential supervision requirements. This is an important distinction, particularly in terms of information, since retail participants are typically less knowledgeable than professionals, so investor reporting will be constantly evolving.
In the last decade, investment instruments designed to help the transition to sustainable development and climate mitigation and adaptation have seen developments in terms of both volume and structure. This reflects a globally widespread requirement that capital markets align with political and social concerns and help in achieving related goals. The International Capital Markets Association (ICMA) currently has around 620 members active in all segments of international debt capital markets in 66 jurisdictions globally. Among its members are private and public sector issuers, banks and securities dealers, asset and fund managers, insurance companies, law firms, capital market infrastructure providers and central banks. ICMA prioritises three core fixed income market areas – primary, secondary, repo and collateral: with two cross-cutting themes of sustainable finance and FinTech and digitalisation. (various ICMA information sources). The team discussed the sizeable investments being made in the various sustainable investment instruments.
According to the Institute of International Finance, ESG debt issuance fell to USD1.3trn in 2022, down from USD1.5trn in 2021. However, a recovery is likely to occur in the second half of 2023, as central banks halt or slow down their interest-rate increases, providing some stability to the market. ESG debt issuance is likely to reach USD1.7trn in 2023, driven by the launch of green bonds in China, Europe and Latin America. (IIF report)
ESG equity mutual funds attracted USD37bn of flows in Q4 2022, according to Morningstar, compared to USB24.5bn in the third quarter of the same year. Most of this rebound is attributable to Europe, Canada and Australia. Strong demand from investors for instruments that focus on ESG concerns and the launch of several new ESG funds were pivotal for the recovery of European sustainable funds.
As the various stakeholders come on-board with the need for change, there has been an increase in stakeholder activism. Shareholder activism can be understood as a spectrum of activities that a publicly traded company’s shareholders can undertake with the objective of prompting change within the company. Activities can take a variety of forms, from proxy contests to shareholder resolutions, and span a range of financial, strategic, and sustainability-focused objectives. While activist shareholders have long focused on governance topics such as board composition and executive remuneration, campaigns championing specific environmental and social objectives have soared in recent years. Between 2016 and 2021, campaigns with an “E” or “S” objective doubled as a proportion of all campaigns, from 10% to 20%. Institutional investors are increasingly demonstrating a heightened focus on transparency and accountability through detailed reporting on stewardship efforts, and in 2021, cast 40% of their voted shares in favour of environmental and social proposals, the highest level in at least five years. This trend continues. John outlined how greenwashing and the drive towards accurate information has resulted in a significant change to financial reporting.
On 26 June 2023 the International Sustainability Standards Board (ISSB) released its first two International Sustainability Disclosure Standards (IFRS SDS or the Standards) that become effective for periods beginning on or after 1 January 2024.
The ISSB was launched by the IFRS Foundation at COP26 with the aim of improving the consistency and quality of sustainability reporting across the globe, by matching the importance of sustainability reporting with the current regulations around financial reporting. To reinforce this message, the ISSB sits alongside the International Accounting Standards Board (IASB) and is overseen by the trustees of the IFRS Foundation and the Monitoring board. The ISSB brings together the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF), the name behind the Integrated Reporting Framework and the Sustainability Accounting Standards Board (SASB) Standards
Sustainability reporting is becoming increasingly important for stakeholders, with many larger companies already adopting some form of sustainability reporting to accommodate the demands of their key stakeholders. One of the key challenges faced by many investors and other stakeholders is they have not had access to good quality and globally comparable sustainability information, a stark difference to financial data. The developments being made by the ISSB are therefore game changing for sustainability reporting globally.
This is recognised by the international community. The ISSB has international support and is backed by the G7, G20, the International Organization of Securities Commissions (IOSCO) and the Financial Stability Board, amongst others. The Standards issued by the ISSB will help combat the challenges of companies 'greenwashing', meaning stakeholders will be able to make better-informed decisions with confidence.
IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information
The main objective of this Standard is to disclose all information about sustainability-related risks and opportunities that could reasonably be expected to affect a company’s prospects.
IFRS S1 provides the basic requirements for sustainability disclosures, which should be used with IFRS S2 as well as the future Standards the ISSB releases.
The Standard: requires disclosure of material information about sustainability-related risks and opportunities with the financial statements, to meet investor information needs requires industry specific disclosures and refers to the industry-based SASB standards for guidance when identifying disclosures about sustainability-related risks or opportunities refers to sources to help companies identify sustainability-related risks and opportunities and information (for everything other than in the scope of IFRS S2) requires disclosures that enable investors to understand the connections between the sustainability-related risks and opportunities and the sustainability-related financial disclosures and financial statements. (ISSB report)
The two Standards are designed to be applied together. However, IFRS S2 has been developed to capture climate-specific requirements which includes:
- Strategy disclosures that distinguish between physical and transitional risks
- Disclosure of their plans to respond to climate-related risks and opportunities, including how climate-related targets are set and any targets it is required to meet by law or regulation
- Companies should perform scenario analysis to explain how various climate-related events may impact the business in the future.
The International Organization of Securities Commissions (IOSCO) is a global cooperative of securities regulatory agencies that aims to establish and maintain worldwide standards for efficient, orderly and fair markets. The stated goals of the IOSCO are to:
- Promote high standards of regulation for the sake of orderly and efficient markets
- Share information with Exchanges and assist them with technical and operational issues
- Establish standards toward monitoring global investment transactions across borders and markets.
In a major step towards consistent, comparable and reliable sustainability information, IOSCO announced that it has decided to endorse the sustainability-related financial disclosures standards, recently issued by the International Sustainability Standards Board (ISSB), IFRS S1 and IFRS S2. Indeed IOSCO has called on its 130 member jurisdictions, regulating more than 95% of the world's financial markets, to consider ways in which they might adopt, apply or otherwise be informed by the ISSB Standards within the context of their jurisdictional arrangements, in a way that promotes consistent and comparable climate-related and other sustainability-related disclosures for investors.
In conclusion the Team discussed some of the steps required to meet the reporting challenge and at each stage suggested identifying skills gaps and needs.
Do you have the right skills and resources? Marcus commented that there will be a significant switch in terms of new skills being required, many of which may not exist in the P&P sector and took on board to discuss this with Mood Group clients and prospects.
Get ready – Be prepared for the possibility of reporting on 2024 information – remember the sustainability report will have to be reported on at the same time as your financial statements which will cause increased pressure on year-end reporting.
Assess your position – review your current governance structure and sustainability strategy to ensure it is acceptable and, going forwards, perform a gap analysis to identify areas where work is needed to enable compliance with the new Standards.
Track progress with the EU’s efforts on consumer protection and information.
Take a view on the volume and type of information to be disseminated and examine technological solutions and the need for new forms of E-labelling. See also Think Piece on Laws, standards and a New Generation ethos?
Create a sustainability roadmap – your current position and measures required to address the gaps identified will allow the setting out of roadmap with time-lines of key sustainability milestones, identifying the required skills needed. These may be individuals already employed or individuals requiring to be recruited.
Ensure good quality data – ensure adequate controls and processes are in place now to help pull together and analyse good quality sustainability data that will compliment your disclosures - do you have the relevant skills on-board?
Acquaint yourself with the Standards – Companies who are already reporting on sustainability information will likely have an advantage but it’s important to note there will be some differences in the Standards which you will need to identify. Not having a good understanding of all the applicable standards could result in lengthy reports containing duplication or omitted information resulting in non-compliance.
Train and develop your organisation – Ensure all levels of your organisation (from the Board down) have a sound understanding on the importance of sustainability to help drive, grow and implement you sustainability strategy, ensuring there is buy-in at the top of your organisation to encourage the correct mindset to filter down.