Can ESG help you protect your wealth and business from the impacts of climate change? talkBIG podcast | Season 3 Episode 3

Andrew Sykes (00:00)

Hello, and welcome back to RSM's talkBIG podcast. I'm Andrew Sykes, and I'll be your host today as we discuss how to save, grow and protect your wealth. This episode of talkBIG is a discussion on the difficult problem of climate change and its impacts. On this podcast, we're to have a talk about money and wealth and also extend from that into how the impact of climate change can impact your bottom line. But also reflecting that money and wealth are more than dollars. It's about our health, our quality of life and our loved ones. What's important is not only how we run our business and how we generate wealth but how we protect those around us, our environment, our property and our assets and the impact of climate change.

Andrew Sykes (00:53)

So, we've got a couple of guests with us today who are specialists in ESG, and one of them will define ESG for us as we start. Firstly, I'd like to introduce Linda Romanovska, who's a partner in the Sydney office and who focuses on ESG as a seasoned specialist in this area with expertise in sustainable finance and natural capital. Welcome, Linda.

Linda Romanovska (01:19)

Thank you very much.

Andrew Sykes (01:20)

We also have Karien Erasmus, who's a director of RSM Australia's risk consulting team based in Perth. So, thank you for joining us from Perth with a focus on practical solutions and developing impactful policy frameworks across a diverse range of industries. Hello, Karien, how are you?

Karien Erasmus (01:41)

I'm good. Thanks. Thanks for having me, Andrew.

Andrew Sykes (01:45)

Good. Excellent. Thank you both for joining us. 

And who wants to define ESG for me?

Linda Romanovska (01:50)

I can give it a go. I guess the simplest way to do that is just to spell out what E, S, and G stand for. It's quite simple in terms of E being the environment, S being social, and G being governance factors. But that does not really tell us much, right? So, what does it actually mean, E, S and G? And even knowing what they stand for... When we look at what is actually behind those three letters, there is a lot that can be fit under those letters. 

Actually, the most popular sustainable reporting assessment frameworks that are being used by companies around the world fit under those letters. We can talk about 40 to 50 different sustainability topics that cover different environmental aspects, and I can name a few, and Karien, I'm sure, can add others. We can talk about climate, biodiversity, sustainable water management, circular economy, pollution, and so many other topics that are only under the E.

When we go to S, then we can talk about a range of social topics, everything around human rights, diversity, engagement with communities, and anything around Indigenous rights as well. It's about safer and fair working conditions. So, there's, again, quite a range of topics that you can fit under the S. 

And under the G, we're always thinking about, how does a company manage these sustainability factors both internally and externally? Also, how do they engage with the broader environment around them, the regulatory framework, and how do they manage responsibilities within their company? And also make sure that there is enough knowledge to manage these factors, both from opportunity perspective but also from a risk perspective.

 And I'm sure Karien could add quite a lot to that, but in a nutshell, that's what we think about when we think about ESG.

Andrew Sykes (03:32)

So, Linda, from what I'm hearing and what you're saying is that sometimes we see in the media organisations behaving badly, doing the wrong thing, polluting, not meeting societal standards. From what I'm hearing, ESG is about how we measure those companies and how we measure companies and businesses, organisations in general.

So, is that really what it is? Is it some sort of framework or standard where we can measure a business or an organisation against what society expects?

Linda Romanovska (04:03)

I'll start with that; I would like to bring Karien into this conversation as well, as she has a really good understanding of all the different frameworks and standards. ESG in and of itself is not a framework; it's not a standard, it's just a way of thinking. It's just a way of organising our thoughts and putting them in these clear categories. Although I have to say there's also a huge overlap between E and S and S and G and all of them, right? But it just helps us structure our thinking. 

And it's not a framework in and of itself. Therefore, we do have a need for more specific standards that help us in practical terms say, okay, how do we work with these topics? How do we, in the first place, decide which of these 40 or 50 topics are relevant for our organisation? How do we then measure them, monitor them, address them, decide what actions we want to take on them and then report on them? And so, for all of these other actions, we need to have frameworks, standards, and sometimes regulations in place. And I'm happy to have Karien comment on that as well.

Karien Erasmus (04:58)

Thanks, Linda. I think Linda hit the nail on the head, the E, the S, and the G is a framework in which a whole host of different themes, topics, and then different types of standards and frameworks fit within that framework. What's important to also distinguish is that they are reporting standards.

If we think about standards such as the Global Reporting Initiative, if we think about standards like SASB, if we think about what's happening in Australia at the moment, the Australian Sustainability Reporting Standards and Financial Disclosure Requirements, those are standards guiding what and how companies should disclose on the various themes and topics relevant to them within the E, the S, and the G bucket.

In between or underneath these reporting standards, there are also different methodological standards. So many companies would say, well, we've got an ISO for 14 ,001 environmental management system in place. Where does that fit in? We've got an ISO 5000 energy management system in place. Where does that fit in? Those types of methodological standards form part of what companies do and what companies act and implement, within the context of their environmental indicators as an example.

 You have similar ISO standards related to some of the S elements, and there's an emergence of ISO standards looking at various different governance or the integration of governance-related elements. So, you have these methodologies that form part of that kind of hierarchy of what we look at when we talk about frameworks, if we talk about disclosure, if we talk about methodology. 

And then in and amongst those, particularly at the moment within this landscape, you have different standard setters or guidance setters. So, if we talk about carbon emissions, for instance, the standard to go to is the greenhouse gas protocol. If we talk about emission target setting, guys to knock on the door is the science -based target initiative. And these international organisations further develop targeted, very specific methodologies which speak to both what you're doing and implementing and provides reference to what and how we should disclose information.

So, it is bit of an alphabet soup, but yes, E, S, and G, and then all of the different ways in which we report, the different ways in which we implement programs, initiatives related to these themes fall under that.

Linda Romanovska (07:25)

What Karien is describing is a big rediversity of standards, right? And it can get very confusing. The more topics of sustainability you want to act on, the more different standards, capabilities, approaches you will have to be exploring and deciding on which of those are the right ones for me and which one should I be applying or certifying and so on. And it can get quite confusing. And this is where we're actually seeing now regulatory action happening.

Where everyone's recognising it can be quite difficult. So why don't we try and bring these things together and start combining them or harmonising them so we can achieve more harmonised approaches. Also, because these standards, they're not the same. So sometimes they differ in their requirements and therefore we're not comparing apples to apples when we're using different standards. And so, because of these reasons, because of this pre-existing diversity, now there is this movement to try and harmonise that. And we have two ways of doing that. One is building bigger, global more harmonised standards, which is what's currently with the IFRS, ISSB (International Sustainability Reporting Standards), and they have released their first S1 and S2 standards. And the other way of doing that is the jurisdictions, the governments or regulators coming in saying, we will have our national standards, right? And we will, and then we will harmonise that and it will be applied harmoniously across our jurisdiction. 

Now, when they do that, they, of course, look at everything else that's in existence and has been developed before. They look at the international standards, but then they make their deliberations, usually, adapt it to the local reality as well. And that's exactly what's happening now in Australia with the development of the ASRS, the Australian Sustainability Reporting Standards. They're not developed from zero. They're taking the diversity of different relevant standards that have been in existence. They have taken the international ISSB standard, and they have developed a version which is about to be adopted as the mandatory standard for Australia.

Andrew Sykes (09:18)

So, is it fair to say that we've come from a background where we had a methodology, a way of thinking about business that's developed into some standards and we're heading towards more mandated regulation around ESG?

Linda Romanovska (09:33)

We're absolutely having a big, big move towards more regulated disclosures because there have been quite a few issues with the approach in the past because no one has been controlling or checking on what is being reported and the claims that are being made. And we are slowly realising that a lot of those claims may not have stood up to scrutiny. So, when you scratch the surface, you would realise that a lot of that, or at least some of that would have been what we now call greenwashing right? When certain entities are making certain claims without sufficiently substantiated proof or evidence behind them. And what this move towards regulation does, it gives us more clarity around, what is sufficient proof? How do I justify a statement that I make about my sustainability? And increasingly, there is an expectation on the other hand, that these claims wouldn't be made, that companies do comment on their sustainability or provide certain level of transparency. And this pressure is coming from various stakeholders.

The investors are worried about the risks of their investment that may be related to sustainability matters. Other stakeholders just want to see companies doing better. Communities want to have companies operating in their territory that are actually benefiting the community. So, there is this increased pressure from the outside of expectations, but on the other hand, improving regulation that actually clarifies on how we do it, how we do it better, and how we do it in a way where there are no doubts about these statements going forward in the future.

Andrew Sykes (10:56)

So you used a really interesting term there and Karien throw it over to you to maybe define greenwashing. What's greenwashing and can you give us an example of it?

Karien Erasmus (11:06)

I've now heard a couple of different iterations of greenwashing over the past. There's greenwashing and greenhushing, but we don't want to get into the 50 shades of green for the purposes of this discussion. In essence, greenwashing is the misstatement of ESG, the cognisant misstatement of ESG-related information to paint a better picture than what the actual reality is. 

It happens when companies, as an example, when companies say, we have a net zero emission target. And then, if you look at the methodology for carbon-related emissions, you scratch under the surface, you find that, in actual fact, there is no such target in place.

There was a recent example of greenwashing only about a week ago or so in the Australian market where several companies were called out not from an environmental perspective, but because they have made misstatements with regards to their social impact investments and how they monitor social impact and what they quantify as part of that social impact funding or social impact project.

There's a range again of what one could group under greenwashing. But in essence, the problem is if you cognisantly misstate information around environmental, social, or governance performance.

Andrew Sykes (12:31)

Thank you, Karien. So, part of what I'm hearing there is that companies are potentially making misstatements. They're saying that they're achieving, for example, that they're on track to achieve certain targets, but they're not, and they're misreporting. What's some of the impact?

If this goes wrong for a company, what's the potential impact with regulators, consumers? Have you got some insight into that and some examples?

Karien Erasmus (12:56)

So, a good example is ASIC is quite active within the greenwashing space. So that would be one of the areas of impact that we will see. We know that ASIC has set up additional funding to fund particularly their greenwashing-calling-out activities. And this relates to major company fines and director liability issues.

The second area where we will see this being called out is in this incredible rise in shareholder activism. A really good example of that was Woodside Energy's recent AGM, where their transition plan was called out for not being sufficient, not being cognisant of the current climate crisis.

Interestingly, Australia is one of the countries that saw a great rise in shareholder activism over the last financial year. The third element where we will see this play out from an impact perspective is in terms of litigation. Again, interestingly, RSM has done some research and we found in corroborating different journals and industry reports that outside of only the US and the European Union, Australia is the most litigious country when it comes to climate change litigation. And these are stakeholders, stakeholder groups, shareholders taking companies to court because of insufficient environmental social practices, incorrect or wrong environmental and social practices.

As well as what companies would perceive, or the stakeholders perceive as being greenwashing or misstatement. So, there's a range of impact apart from the reputational damage, of course, that this could do particularly in the products and materials sector, the damage that this could do to those companies from a consumer perspective.

Linda Romanovska (14:46)

I think really interesting is that these different things are crossing over. The regulators are not just calling out companies, they are the ones litigating against them as well. So, ASIC has been really successful in two cases right now, and they do intend to bring more cases to the court. And the penalties that the court decides are -- penalties are in the millions. So, these entities will have to suffer certain financial losses because they have made these misstatements. And ASIC is only focusing on their ASIC regulated entities, but we have also ACCC that is doing very similar things, that's doing broad sweeps across various industries. And they do not announce to the industry and say, we're now doing a sweep in your industry. They go on the internet, and they sweep the websites of the companies without them knowing that. Because, of course, they want to catch out any sort of misstatements.

And they're not only looking at your sustainability reports, but they’re also looking at your social media. They're looking at anything that's present on your website, on your advertising. And so, this can be quite far reaching, and the regulators have the mandate to go to the courts around these cases. Why? Because they are basing all of this in consumer rights protection. If you're making misleading statements, you are breaking the consumer rights law. And then that's a clear legal basis for that.

Andrew Sykes (15:58)

OK, so when we mentioned things like ASIC and ACCC, immediately my mind goes to big companies. Is this only big companies or does this apply to smaller businesses? What size of business are you really starting to get worried about ESG?

Linda Romanovska (16:13)

I would worry about any size, especially about making statements, whichever company, whenever they make statements, they should be really careful about those statements being true and substantiated. Of course, there are smaller companies where they will not have as much pressure in terms of regulation, perhaps also regulators, maybe slightly less pressure in terms of they will be not targeted by litigation. 

However, they have to be very careful and they will be affected because the moment the broader market moves and is expected to have certain types of disclosure and transparency, these smaller companies will likely be suppliers to larger companies. There will be somewhere in their value chains, which means that the entities reporting will be asking for information from these suppliers as well. So not only the regulation, but also the stakeholder expectations will push larger companies to request information from smaller companies that may be in their supply chains. 

So, if you're somewhere in that environment, in that ecosystem of working with these larger companies, you will be caught up in this almost inevitably. And generally, it's also your value question. Karien, I'm sure you can add on that. There are plenty of examples where we are working also with smaller companies where they have inherent mission and values that are closely linked to sustainability. And even if they're not mandated or don't have any mandatory requirements or substantive pressure just yet, they want to do this and they want to do this right because it simply aligns on how they see themselves and how they market themselves, how they position themselves in the market and also to even attract and keep their employees.

Karien Erasmus (17:43)

If I could add to that, I think that you're absolutely right, Andrew. This is the bigger end of town that would feel this pressure first and that has been feeling the pressure first. But we are seeing it manifesting, as Linda said, across a much bigger segment of the market. And the reason for that is twofold. Firstly, because there's such an increased pressure on your bigger end of town to set targets, take care of what's happening across their value chain. A lot of that responsibility is now passed on to smaller companies. 

So, they have to be sure of the information that they have to meet the requirements if they want to continue supplying, if they want to continue to work with the bigger end of town, to meet their increasingly ESG-aligned procurement requirements. So that's one of the areas where we see.

that responsibility being shared across the value chain. The other area is it is a shifting market. So as consumer preferences change, as certain market segments open or other market segments close, companies are starting to feel the pressure in making sure that they have sufficient and auditable ESG credentials in order to play in these different areas. As an example of small business, might be on the verge of selling or merging with a bigger competitor. But they have to do that within the context of having the necessary ESG requirements from a financing and from a merger and acquisition perspective.

 So, it manifests in different ways. It might not be exactly the same as being taken to court, but they're certainly feeling the pressure of that market shift.

Andrew Sykes Andrew Sykes (19:26)

Yeah, I think it's really interesting and I think we can see where it manifests from day to day. I know people and I personally won't buy, for example, tank tops under or, you know, polo tops under $10 because I know you can't sustainably produce that and ethically produce it for the price point. And we do also see examples of where people vote with their dollar, and they will go and buy from sustainable businesses that they trust. Do you think that trust factor plays in? So, if you're running good ESG, do you think that helps build trust with the buying public, with the consumer?

Karien Erasmus (20:06)

Absolutely, I think your example is so apt. When we vote with our dollars, what is that voting based on? Can I trust what's in an annual report? Can I trust what's in an advertising campaign? How do I look for the sources of information to make sure that if I spend my $20 or more on a polo shirt, that it is in fact based on the truth. It is in fact based on better practices; it is in fact based on better materials. 

Absolutely, I think it's such a good example of, you know, we need that type of information and your ESG framework and the process of reporting, the process of collecting this information. All of that speaks to what companies are doing and is a way for companies to disclose this information and is a way for the consumer to make use of that information.

Andrew Sykes Andrew Sykes (21:01)

Okay, so just say I'm a small manufacturer. I want to compete. I mean, I might be in the value chain for a large supplier, and we do see this. I'm a business accountant. I have mom-and-pop clients who are asked to make statements to big corporations because they sell to them. Where would I start on an ESG journey in my business?

Linda Romanovska (21:26)

Well, first of all, wrap your head around what is ESG, right? So, education piece is important. And in fact, that's what we're doing quite a lot where we're going and talking to the teams and companies and giving them a bit of understanding of what is ESG, what is sustainability? Also, what are the requirements in the market? So, they understand if they are supplying to that bigger company, what does it mean for that bigger company? And then therefore, what will that by extension mean to them as the supplier? So that information piece is really, really important in the beginning.

But then when you're ready and you're across and you want to make the first steps is well understand which sustainability aspects are the ones that are relevant for me, or I should be reacting to. We do call that materiality assessment and there will be many drivers for what is important, and the regulation will be one driver and if the bigger or your big clients are requested and required to report on climate, then probably climate will be a very big topic that you want to be looking into.

It may also be that while you are actually in an area that's heavily affected by climate change impacts, it's not only about your emissions and what you're doing to the climate, but it well may be that smaller companies are highly vulnerable to flooding, to bushfires, to heat waves, to all sorts of impacts. And that becomes their really important question to address and look into. Or maybe they are working closely or in a community with First Nations people and therefore engagement with First Nations people would be really important for them. 

So, the first step really is to understand what matters to me and why, you what are the drivers. And that's what we will call your materials ESG topics, right? So, first thing really is to do those materiality assessments. And from there, we will have narrowed down, and you will have focused and you will know what your priorities are. And from there, you can start planning, what are my actions?

To plan our actions, you need to understand what my end state is. Where do I want to get? And if your end state is, at first, I want to have an assessment. I want to understand where I'm at within these topics. Are there really big issues with them? Is there anything I need to do? Once I've looked into that and I have a bit of an understanding, I can start planning, if that's my current state and I want to improve and this is how far I want to improve, then these are the actions I could be planning for that. And that's what we call the road-mapping process. So, you would go through putting on a roadmap.

Because realistically you will not be able to do everything at the same time and everything done in a half a year. You will need to have some sort of time plan where you have all these different ways of addressing these topics that you identified as material topics. And then you would be going into, okay, well, how do then I now start reporting on all of this and everything that I'm doing, my efforts and also outcomes. And there are a lot of underlying issues that would be required to put in place. I'm happy to again give it over to Karien because there will be internal systems that would need to be adapted to be able to implement all those plans as well.

Karien Erasmus Karien Erasmus Karien Erasmus Karien 

Karien Erasmus (24:12)

It's interesting that you mentioned, you know, if we think about the systems and, Andrew, you mentioned, as an accountant, you have a client... My colleague, Catherine Bell, and I were invited to present at the Institute for Public Accountants, their boardroom lunch. And we had such a fantastic discussion during the afternoon around exactly this issue.

Small enterprises, family -owned businesses, mom and pop delis, what do they do within this context of shifting sustainability pressures, increased requirements for disclosure, et cetera? I absolutely concur with Linda. It starts with materiality. Where are the pressure points for your business? Where will you realistically interact with some of these challenges?

A really good example is a deli example. So, there are certain supply chain or value chain risks from a modern slavery perspective that might come down the line to you. We know that from a regulatory perspective, that net for reporting for policy is also being cast a bit wider. We know that from a value chain perspective, there are increased pressures and increased diesel pressures, rising energy costs.

[If you're] operating within a shopping centre, operating within one of these arcade malls, again, increasing energy pressures. Those are the practical areas where they will come face to face with these risks. Understanding what those are and quantifying them for the business and within the context of the business is really important. And that's really the first practical step. RSM has also developed what we call an ESG Essentials package.

We started looking at the Ag sector specifically. What are the most critical aspects that you can collect information on? And we've cross -referenced that to where you're probably already collecting some information on where you can start building out this materiality for your organisation and look at ways in which you can easily collate that, collate the data and then provide that data to your clients, to your customers -in whichever format they require.

Andrew Sykes (26:24)

Okay, businesses can actually do a lot of this themselves.

Linda Romanovska (26:30)

A certain amount, yes, but very often in a small business, they will simply not have the capacities, right? So, if someone is really dedicated, they could learn these concepts and on a basic level deal with sustainability topics. However, if, you know, very often we just see clients coming to us, not because they don't understand the topic, but because simply they do not have the capacities to do that, either the time or resources. And the moment you want to go a little deeper in any of this, you need a deeper expertise as well.

If it's a really small business where the topics are not really broad and the consequences are not significant to them, yes, they may be able to deal with it themselves. The moment it is a little bit more critical for them, especially if there are potential financial impacts on them or they are being asked to provide certain reporting that has to comply with certain requirements from their clients, for example, the bigger companies, this is where it becomes a bit more complex and they will probably be needing some help outside.

That will be a combination of internal work and supportive work as well.

Andrew Sykes (27:31)

Okay, so you can advise and that's what you do advise businesses as to what's their risk of not complying and not following some of these standards and principles.

Karien Erasmus (27:37)

you

Linda Romanovska (27:41)

very, very pragmatic as well, because of course we will not be offering a small business, you know, massive engagement where we go through a hundred different topics and we go in depth in all of them, right? So, this has to be pragmatic then. If we're working with a certain type of business, we actually adjust our advice and our approaches and the ways of doing things to what's realistic for them. And also, you know, what is actually important for them? It's no use to use really, sophisticated tools for something that's actually a fairly reasonable problem or manageable problem on sustainability. So that's, I guess, what also characterises us as RSM. We do have a long history of working with SMEs with small and medium enterprises and family businesses where we have that pragmatic approach. We will not come with an exaggeratedly big tasks and say this is everything that you need to do. We will be listening and adapting to exactly what is the aspect that's important for you and especially what is the also pressing and time wise aspect.

Andrew Sykes (28:37)

Yeah, it's interesting that you've mentioned agriculture and we've seen numerous examples over the years where sustainable agricultural practices have actually led to longer term, not only profits, but higher land values, better communities. I think that what I'm hearing is really important is sustainable. So, it's sustainable profits, sustainable production, sustainable environment. If we talk about environment for a minute,

Andrew Sykes (29:03)

You know, we all hear about when it goes wrong. So that terrible moment, terrible for some people moment during the pandemic when we ran out of lettuce. And of course, our hamburgers all had to have cabbage in them. I like cabbage. I didn't think it was such a bad thing. But, you know, lettuce at 12 to 14 dollars a head was clearly unsustainable.

Karien Erasmus (29:08)

you

Andrew Sykes (29:26)

We saw a cyclone in North Queensland a few years ago that wiped out the banana crop. So certainly, there's massive impacts from climate change, which will affect the profitability, productivity and sustainability of it in Australia. Are we starting to see any of those impacts in the ag sector at the moment? We're seeing climate change impact on it.

Karien Erasmus (29:48)

Absolutely. I think those are really good examples. Unfortunately, we've had... When we talk about climate change risks, we normally talk about physical and transitional risk. Physical risk being your acute impact, as increased severity and frequency of cyclones.

Or chronic impacts, the slow shift and the changing of the climate and certain areas becoming increasingly and unsustainably hotter. And then when we talk about transitional risks, that is where we look at things like market shifts. We look at the impacts of the energy transition. We look at policy and regulatory changes. And the agricultural sector really has the worst of both of those spheres of risk.

On the physical side, I think it's a constant battle to get ahead and to adapt to a changing climate. Australia, bushfire, water, prolonged periods of drought, those are all major concerns in terms of crops and the agricultural sector.

But from a transitional perspective as well. I think the agricultural sector is under immense pressure to reform. Reform in the agricultural sector is not easy. It's certainly not cheap. If we look at the fisheries as an example, there's been significant efforts put into determining what does sustainable locally caught fisheries look like.

The development and the justification of the proposed marine parks, although a lot of us greenies at heart would understand and would buy into these marine parks and the justification behind them. The impact of that on the fisheries is just going to be astronomical. And it's about how do we balance this environmental and social related safeguarding that we know we need to do.

Versus the economic impacts versus issues such as food security. So, I think the agricultural sector is in a really tough spot if you look at both sides of that climate risk types.

Linda Romanovska (31:56)

They also exposed huge amounts of complexity here because Karien was really good at laying out the direct physical impacts, but there are so many second and third tier and fourth tier impacts. For example, just changing environment, changing precipitation patterns, changing temperatures, change cropping seasons. Plants do not grow the same way anymore. The spread of pests and diseases because the pests suddenly live in other areas and diseases can spread more easily. So, there are so many complex impacts. It's not just the direct.

Andrew Sykes (31:56)

Get in.

Linda Romanovska (32:24)

It's not just a direct drought that affects agriculture. There are so many insidious ways in how climate is creeping up on farming and starting to really threaten our-- even ways of knowledge on how to do farming in certain areas, right? And so, we have to be really flexible in our adapting and even thinking, you know, what do we do if I've been growing these types of crops or husbandry, you know, over hundreds of years, maybe not hundreds, but tens of years, maybe I will not be able to do that anymore. Maybe I need to think about shifts there.

So, it's really complex and not only that, it also intersects with other crises, which is the biodiversity crisis and decline of ecosystems. Where we're about big problem of pollinators. We can't pollinate our crops; we are even worse affected than just climate alone. So, agriculture really is at the epicentre of various vulnerabilities, very complex climate impacts and additional impacts related to biodiversity decline. Luckily there is...

There are ways out and there is quite a lot of research being done on this, including in Australia. I myself have had the privilege to participate in a big, big effort that's called Farming for the Future that's being done by a non -profit organisation where the aim is to provide evidence on how more sustainable farming practices benefit farming in the future that makes individual farms more sustainable and actually increases their profitability

over time. So, what we need is this evidence base and it's growing and we have already quite a lot of insight into that. So now we are using that evidence base to advise the farms on what does it mean for them and how they could be shifting to more sustainable practices over time. We also know that farmers are fairly conservative. They would like to see examples usually of that being done in other farms as well. And that's also something that's increasingly being done. And we're seeing how some of these farms that have been quite successful in implementing these more sustainable practices are very willing to share that knowledge and go and talk to their peers and explain what the benefits have been for them as well.

Andrew Sykes (34:18)

Yeah, I did look up and found a stat that since 2000, average profits from broad acre farming have dropped by 22%. And over that period of time, beef farms have seen a 5 % decline in profits. That's clearly not sustainable and it's problematic. If profits drop, then farms aren't sustainable. Worst case scenario, we start running short of food and have to import.

So, what can --practical steps, what can those involved in the agricultural industry do?

Karien Erasmus (34:50)

[Without] getting too technical, I think that there's a lot to be said for the work of several industry bodies at the moment and becoming part of these associations, a part of the work that's being rolled out at the moment in terms of research around alternative farming practices, research around sustainable practices, better land and soil care.

And as Linda said, nothing beats a case study or an example. So being able to access that information through these types of structured channels is incredibly important. I also just want to make a quick comment. As much as there's a myriad of sustainability information and ESG related information out there, this has also unfortunately led to a lot of misinformation

around the topic and I think the agricultural sector because of its central location in terms of transitional physical risk, its location in terms of intersection with other sectors. It's one of the prime areas where this information is quite easily shared. so being able to appreciate the need and what needs to happen from a disclosure perspective and the value

of sustainability and what it could do from a safeguarding of profit perspective, from a safeguarding of land and land use perspective is incredibly important. So again, that awareness and education piece. And then there are some of the three basic components. Looking at land, what are you doing in terms of safeguarding land, terms of safeguarding soil, in terms of enriching soil? What are you doing from an energy perspective?

From an operational cost perspective, energy and water are going to be key risks. What are you doing from an energy or an alternative energy perspective? And what are you doing from a water or a water safeguarding or a water buffering perspective? And then of course, looking into your value chain, where are you buying certain products from? Whether it be seed, fertilizer, and are there any potential risks associated with any of those products? But again, I don't want to, I'mby no means an ag or a land specialist. These are high level suggestions of where to start. And as Linda mentioned, there's fantastic work being done by some of our industry associations focused on the ag sector.

Andrew Sykes (37:11)

Thank you for that.

Linda Romanovska (37:11)

The real answer is that there is no one fix-all solution. Not every farm will be implementing the same solutions. You absolutely have to do an individual approach. You do need to go and first of all understand what kind of farming that is, what type of soil is there, what kind of physical impacts they have, what water resources are available around them. So, it's highly individual. So, it's not a direct transfer of someone somewhere in...

Western Australia is doing this and therefore we can do the same in Queensland, right? It's not the same. Farming can be quite unique because they are located in different unique ecosystems themselves. So, it will have to be an individual assessment, but Karien was really good at aligning some of the key aspects. And also think about your risk. What will leave the biggest financial impact on you? Maybe it is the physical risk because you're really prone in a bushfire zone and you're not well protected.

or maybe it will be a supplier of some key component that you're using, fertilizer for example, that is, you're starting to see issues there, prices rising for some reason. So that really good understanding of where your risks stem from would help guide you on where the priorities are and how to address them. And then the solutions, there's plenty of solutions, right? And we can attend to our agricultural experts, we can attend to our ecosystem experts.

Plenty of that knowledge out there. And if required, then when we advise our clients, we are partnering with these experts, where required, especially when it goes into very detailed, specific agricultural expertise

.

Andrew Sykes (38:43)

OK, thanks for that. So, yeah, we've seen that sustainability and looking after the environment is critically important, not just for the sake of it, but to maintain our profits. So, for a business that's already on this journey, how can we look at ensuring that our financial decisions, our financing, our investment decisions are sustainable?

Linda Romanovska (39:04)

Sustainable finance is something, a topic that I could be talking for hours. I very much enjoy being involved in the topic of sustainable finance and operating that, both in my policy making roles and also as advisor, both to those who seek to access sustainable finance and those who provide sustainable investments or lending as well. And that's a whole big topic and we probably can have a whole other podcast series just on sustainable finance. But in a nutshell,sustainable finance is a really interesting development that opens a lot of opportunities. It opens opportunities for businesses that are sustainable, that can demonstrate sustainability credentials. We spoke a lot about transparent reporting. Once they have done or implemented certain sustainability actions, once they act in a sustainable way and report on that, they start becoming really interesting to sustainable capital.

that is seeking investments that do not only return financial returns, but also make impact or have some positive impact on various sustainability topics. And this capital is fairly abundant in terms of rising in exponential terms. 

Every year we're seeing significantly more capital being poured into sustainable investments and different types of financial instruments that provide that.

And there's currently more offer of that than there is availability of different projects or companies where to invest that capital. A lot of that capital is coming out of certain jurisdictions and geographies. It mostly does come from Europe, as Europe is really advancing very rapidly on their sustainable finance and also the demand for those type of investments is really high. So, it will be more international sustainable finance.

However, there are significant developments where most of the big Australian banks are also piloting already offering sustainable lending products. is rapidly increasing issuance of green bonds, including in Australia, quite a lot of entities in Australia issuing green bonds. So, there is rapidly growing availability of sustainable capital, both internationally and locally, and also growing different ways of raising that capital.

So, what would you need to do to be able to access that? Well, first of all, be good, be sustainable, be able to prove and evidence that you truly are achieving significant impact. At the same time, will this capital be charitable capital? No, it will still expect certain amount of return. But very often it's being offered at a discount or either both at a discount or also as a more patient capital. So, it can wait a little longer until it achieves

financial return because the capital provider also accounts for other types of impact that this investment is making. So, there's quite interesting opportunities around businesses where they can be raising capital or access lending that is tied to their sustainability performance that then offers them better conditions on that capital, better price of capital or better other conditions in other ways. So that's the recipient side. And I really enjoy working with companies who would like to engage with lenders or

or investors and promote and attract that sustainable investment capital. On the other side, we have the capital providers, and it is our financial services entities. It is also your retail investor. So, there's a whole chain. So, there's an asset owner and the retail investor. there's those that actually allocate investments, asset managers, fund managers that create those investment products. And that's a whole infrastructure in and of itself.

that is currently very rapidly building up in Australia as well. And that's why we are starting to see increased choice of different sustainability linked loans, for example. A sustainability linked loan is where the bank, together with the recipient, agrees on certain sustainability key performance indicators. And if the company acts as planned and achieves these indicators, it keeps a lower interest rate on that loan. If they fail on their indicators, the interest goes up.

So, we're seeing increased number of these deals coming through as well. So, there's just rapid development also within financial services. And more and more of even smaller funds are thinking about setting up their sustainable investment strategies. And that's again, the other side of the ecosystem that we really enjoy working with, helping them define on how I define what is sustainable investment.

And the regulation is also catching up. So, we have just recently released a sustainable finance strategy for Australia released by the Treasury. And there are certain actions already well underway. And one of them is the development of the sustainable finance taxonomy. And this taxonomy is really important because what taxonomy does, it actually sets criteria and describes what is legitimately sustainable in our economy. It provides that objective assessment tool.

which means that over time, the lenders, the investors, and also the recipients will not need to use their own definitions of sustainability or struggle to understand which definition do I use in what way and what makes something sustainable. We will have one shared understanding and definition and criteria that we can use to assess. that's really in a nutshell, say, you we can be talking for hours around sustainability and sustainable finance. There are so many opportunities, both for the recipients to access this capital, but also for providers of capital.

To now suddenly have another whole new niche of earning returns on investments that not also bring you returns but also do good for the planet and communities and society.

Andrew Sykes (44:29)

Yeah, it's really interesting. Makes me think about if we look at our finance sector back when I started my career, you could just walk into a bank account, and you didn't even need any ID or sorry into a bank and you could open a bank account. Now, now we have anti money laundering legislation. We have know your client. We have a real sense of responsibility from the banking sector to understand where their funds are going, coming from and going to. Do you think we're going to see more of a move towards that?

With banks, just with business in general, setting their policy around sustainable industries, sustainable investments, so it being real supply side of money driven rather than regulatory.

Linda Romanovska (45:11)

Quick insight, I'm doing quite a few interviews with banks and informal conversations. I'm doing interviews as my own ongoing PhD on sustainable finance. And what I'm seeing in those interviews is I'm asking banks or investors also, what is their motivation to provide any of these sustainable investment products? And almost all of them say, this is our own values, our own sustainability commitments. It's not the return. It's not. And there's something around where a lot of people

in financial services think that this will be the business as usual in future. Every investment and every loan will consider sustainability criteria in the future. The question is how fast the future will arrive, right? So they want to have their foot in the door already now. They want to start working on this now to be ready for that. But currently it really is about, well, we have made certain commitments. We want to live up to those commitments. We do not want to be seen as greenwashing. And that's why we're putting these products out so we can increase the sustainability in our portfolios.

That really is the current big driver and that's really interesting to see that it's not only returns driving the financial sector in many ways. And I think it does translate to the bigger business as well. we are using that.

Andrew Sykes (46:16)

I think it drives many of us in that area. I was reading an article on investment and you would have thought that something like Amazon's the best investment you could ever make. The best investment over the last 50 years, is actually a large tobacco company. I think there would be a lot of people who would choose not to invest in that and go without the returns. We're certainly seeing that move from individuals into a whole of business kind of sense, aren't we?

Linda Romanovska (46:42)

Yeah, absolutely. The regulation that's also that the government is now intending to put in place. One of the commitments that just came through in this budget period is also a commitment to develop a labelling scheme for sustainable investment products that would help retail investors to understand and recognise which options in their super funds or investment funds or any other instruments are in fact sustainable and in what way. Because currently, again, there's a bit of a wild west. There is no regulation. Everyone can call investment funds sustainable

right now. This kind of regulation is very, very advanced in other jurisdictions. In Europe, it's probably the best example, but around 40 different countries are developing their sustainable finance regulations, and Australia is trying to catch up with that. And this will, again, finally give us clarity and information. If I make my own little investment, I'm choosing my superfund, I can make those choices. It enables me, it empowers me. And the other part of that is also our financial advisers.

Financial advisers will also have more information to advise their clients who express these preferences of where they want their investments to achieve more value than just financial returns as well.

Linda Romanovska (49:51)

Another interesting aspect that I see developing is how the sustainability topic is driving banks, especially banks, to have closer relationship with their clients, where they are willing to have that dialogue, they want to have conversations. There are some really good examples. We have banks that, for example, focus on farming, bringing back to the farming topic as well, where they're willing to engage with the farms and see how they can advise even the farms in terms of how they could improve their sustainability and therefore access perhaps finance on better terms. So it's a two -way dialogue increasingly. So it's not just bank going out and say, well, give us the data. It's about, let's work together. Let's work this out. Let's set KPIs together. And that's a really interesting development. And I think it should be celebrated in fact that banks are not just dishing out money really. They're actively engaging with companies and helping the economy become more sustainable over time.

Andrew Sykes (50:44)

Yeah, that's a recognition that banks are enabling business, not just lending to it. So they share, they take their share of responsibility. Well, Linda and Karien, thank you very much for your time today. And for those listening, thank you for joining us today on the RSM talkBIG podcast. I certainly learnt some things today. 

And I think the big things that I learnt is that, first of all ESG and sustainability and looking after environment in business starts with a mindset. So start thinking about it and then start getting that planning and it's not that biggest step to start planning. think that one of the other things that we learnt was that it isn't just big business. This is everybody's responsibility.

And it goes all the way through. So even if you're a small business, it's going to catch you up. So you need to start looking at your ESG and how you're going to meet some of these mandatory reporting requirements that are coming in over the next few years. And then also I think it's a fairly bright future was the last thing that I came away with is if we get this right, we have more sustainable and better business that leads to a better future.

So, if any of our listeners have any questions or stories related to climate change, its impact on business, we'd love to hear from you. You can email us at [email protected] or jump onto our socials or website. We'd love you to subscribe to our podcast wherever you get your podcasts from. 

So once again, thank you for tuning in. We hope you'd enjoyed it, and we'll catch you on the next talkBIG podcast.