How Sustainability Disclosures and Regulations Benefit Investors

Art by James Yang

There are several regulations and disclosure requirements aimed at meeting sustainability and greenhouse gas reduction targets worldwide that investors will need to understand and from which they can hopefully benefit.

Asset owners representing trillions in assets have pledged to mandate things such as sustainable, carbon-neutral portfolios and divestments from carbon producers.

For example, the U.N.’s Net-Zero Asset Owner Alliance represents 69 asset owners with $8.4 trillion in assets under management with a target of achieving net-zero portfolios by as late as 2050, with inflows into ESG and sustainable funds exceeding $30 trillion by the end of the decade, predicts Broadridge.

In order to achieve their sustainability and net-zero goals, investors could take advantage of incentives that are offered by some countries, such as tax credits, green bonds and accelerated depreciation incentives, new regulatory and disclosure regimes not only make sustainable investing easier, they will also make them mandatory in order to meet numerous net zero goals by the middle of the century.

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Disclosure Requirements, Incentives and Regulations

A number of countries are planning climate related disclosure requirements, mandating that companies report their climate risks, emissions, and other requirements.

U.S.: In March, the Securities and Exchange Commission finalized its climate reporting and sustainability requirements. The rules are meant to “provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements,” said SEC Chair Gary Gensler in an announcement of the rule adoption.

These disclosures, which will be implemented in 2025, aim to disclose and standardize climate-related risks to public companies, such as the material impact that these risks have on a company’s financial conditions and operations, as well as any material impacts of climate-related risks on a company’s business model and outlook.

“The SEC’s new climate disclosure rules have the potential to be a significant data upgrade for institutional investors. They will enable enhanced risk monitoring across portfolios, especially for sectors vulnerable to climate hazards,” says Maksym Konevshchynskyy, senior strategy consultant at Indefi. “With access to comparable data, investors will now be able to engage more effectively with companies on mitigating these risks. Moreover, increased transparency will help investors weed out greenwashing, spotlighting firms that fall short in addressing climate risks.”

The SEC said in its final rule that institutional investors overwhelmingly expressed a need for more “reliable, consistent and comparable” climate-related information. The SEC argues that the demand for climate disclosures from institutional asset managers reflects what they think is in the best interest of their investors and clients, to whom they have fiduciary duties.

“As stock prices reflect profits potentially years in the future, even long-term climate-related risks can affect profitability, though not all climate risks are necessarily long-term. In any case, risks to cash flows, even those that are far in the future, can still be important for investors today,” the SEC disclosure final ruling states.

Europe: Many European countries already have implemented climate disclosure standards, although specific regulations are not standardized across the EU. However, in late 2018, the European Commission published the first draft of the Sustainable Finance Action Plan, a set of disclosures and regulations aimed at achieving net zero by 2050 across the bloc.

Institutional investors, however, are concerned about the quality of data that would be provided by companies under the EU’s transparency framework, known as the Sustainable Finance Disclosure Regulation, or SFDR, and while they have demand for sustainable investments from asset owner clients, they are also worried about accusations of greenwashing.

“Although institutional investors and banks welcome the Sustainable Finance Action Plan, they are faced with difficulties in collecting granular and reliable data on sustainability to meet their transparency obligations under the EU taxonomy regulation, [the Corporate Sustainability Reporting Directive], SFDR, and the Capital Requirements Regulation (CRR) (Pilar III),” according to research from BNP Paribas.

Australia: Australia will soon be implementing several mandatory disclosure requirements for companies, starting with larger entities, and smaller businesses phased in over time.

The goal of these disclosures, according to the Australian treasury, is to develop a “rigorous, internationally aligned and credible climate disclosure regime” that will make the country an attractive market for international investment to support the county’s transition to net-zero.

“We believe that a global approach to the development of climate-related financial disclosure standards and the implementation of the standards in Australia will support investment decision making relating to climate change risks and opportunities and broader sustainability-related matters” said Andrew Gray, head of ESG and stewardship, and Matthew Harrington, CFO at AustralianSuper, in a statement announcing the pension fund’s position on the new disclosure requirements.

This month, Australia will also begin issuing its s, where were scheduled to be issues this week. The first bonds will mature in June 2034, according to the Australian Office of Financial Management. AOFM says the size of the issue will be roughly AUD 7.0 ($4.64 billion).

These bonds, which like treasury bonds, are intended to raise funds that will be invested in net-zero investments in Australia. A number of pension funds are increasingly engaged with the AOFM’s climate policies and have expressed interest in these bonds, says a spokesperson for the AOFM.

“Investors are responding to pressure from clients, including demands to align portfolios with net zero emissions objectives. Many investors either have specific green/sustainable bond funds, or they incorporate an environmental, social, and governance overlay into existing investment processes,” the spokesperson says.

Inflation Reduction Act

In the U.S., investors can also take advantages of incentives offered through large programs like the Inflation Reduction Act of 2022. The IRA will provide roughly $370 billion in energy infrastructure related tax credits over the next 10 years, these credits could benefit projects in which institutional investors make infrastructure investments.

The IRA also makes it easier for tax-exempt organizations, like pension funds, to take advantage of tax credits from these investments, something they could not do otherwise, writes Matthew Solomon of the Climate Policy Initiative.

“The tax credits in the IRA have been restructured to allow for transferability, meaning that project developers can sell the value of the tax credits to third parties in exchange for cash. Pension funds will no longer be penalized for not being able to access these credits on their own,” Salomon writes.

According to research from Goldman Sachs Asset Management, reviewing one year of the IRA, $282 billion worth of infrastructure investments across 280 clean energy projects were announced across 44 states.

“The Inflation Reduction Act offers a dual benefit to institutional investors. Directly, it provides tax incentives for renewable energy projects and grants for energy efficiency improvements. Indirectly, it boosts companies operating in renewable energy and green technology sectors with significant subsidies, potentially enhancing their financial performance and, consequently, investor returns,” Konevshchynskyy says.

GSAM also suggests investors could make equity investments in industries within verticals that are most affected by the IRA, such as the materials, industrials energy and utilities sectors. “The IRA’s support for jobs, especially in manufacturing, should support economic growth and consumption, in turn supporting the U.S. equity and credit markets,” the GSAM report states.