Daniel Aguet

Global index provider Scientific Beta has welcomed new Australian laws which will force large organisations including financial institutions to adopt mandatory climate disclosures. 

ASIC has urged businesses to prepare for this mandatory climate reporting (24 – 205MR)^[1] and says climate disclosures will grow in importance as more people consider environmental sustainability when making financial decisions.

From 1 January 2025, many large Australian businesses and financial institutions will need to prepare annual sustainability reports containing mandatory climate-related financial disclosures, following the recent passage of a major bill through Parliament. The legislation regulates how large businesses, and financial institutions report on climate-related risks and the integration of these risks into their decision-making processes. 

From 1 January 2016, the new laws will apply to asset owners with more than $5 billion in assets under management, including superannuation funds. The law brings Australia into line with global reporting frameworks and boosts transparency on climate disclosures in the boardroom and on balance sheets.

“The new mandatory corporate climate reporting laws being introduced by the Australian government are a key step towards improving transparency and capital allocation in financial markets, in a context where investors have much to lose from climate change,” said Daniel Aguet, Deputy CEO and Index Director of Scientific Beta.  

“Investors are right to be very concerned by the impact of climate risk on equity valuations. Analysis conducted for  Scientific Beta-EDHEC Research Chair indicates that over 40% of global equity value is at risk if decarbonisation efforts do not accelerate, with losses exceeding 50% when climate tipping points are factored in. Prompt and robust action by regulators and companies is needed to keep losses below 10%,” Mr Aguet said.

“We welcome the action by the Australian government to bring local laws into line with those already in place in the UK, New Zealand, and the EU. When investing in assets that are at risk of significant loss from climate impacts and policies, investors need improved corporate disclosures to understand which companies are most at risk, and which stand to benefit.

“Now, with better corporate reporting that will be brought about by these new laws, investors can also more accurately steer their capital towards those companies making the most efforts to transition, and to those offering climate solutions.”

Mr Aguet said ASIC is right to stress the importance of improved corporate climate disclosures that the new laws bring. “Communicating standardised and publicly available raw data straight from the source is far more useful for investors than opaque, proprietary scores on ESG ratings from data vendors. Indeed, research from Scientific Beta has shown that ESG scores diverge significantly from one provider to another, and are largely unreliable,” Mr Aguet said.

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Notes:
[1] https://asic.gov.au/about-asic/news-centre/find-a-media-release/2024-releases/24-205mr-asic-urges-businesses-to-prepare-for-mandatory-climate-reporting/

Further reading:
Scientific Beta’s position on ESG data, please download our white paper Can We Make ESG Scores Great Again?: https://docs3.scientificbeta.com/Library/External/White_Papers/Can_We_Make_ESG_Scores_Great_Again

How Does Climate Risk Affect Global Equity Valuations? A Novel Approach, EDHEC-Scientific Beta Research Chair: https://www.scientificbeta.com/download/file/how-does-climate-risk-affect-equity-valuations

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Daniel Aguet

Following the Australian Prudential Regulation Authority’s (APRA) recent announcement^[1] regarding significant improvements in performance test outcomes for superannuation funds and introducing new product performance metrics, Scientific Beta has emphasised its commitment to providing cost-effective investment solutions with a strong focus on risk management.

The Australian Prudential Regulation Authority (APRA) has recently released a comprehensive package of product performance metrics and insights to increase transparency and sharpen superannuation trustees’ focus on improving superannuation member outcomes.

APRA’s Comprehensive Product Performance Package (CPPP) comes after it reported last month a significant drop in the number of MySuper and choice products that failed the performance test in 2024 (37 down from 97) with 52 products that failed the 2023 performance test exiting the market.  The CPPP covers 876 MySuper and choice products.^[2]

“While the performance of superannuation products has improved following the introduction of the performance test, there are still underperforming products that need improvement, particularly in terms of risk management,” said Daniel Aguet, Deputy CEO and Index Director of Scientific Beta.

“This underscores the importance of robust risk-controlled strategies for retirement savings, which aligns with Scientific Beta’s Market+ framework. This framework allows investors to pursue outperformance and sustainability goals while maintaining tight control over benchmark-relative risk,” he said.

“Scientific Beta’s Market+ framework offers tailored solutions for investors aiming to achieve financial outperformance and sustainability objectives, all while maintaining close alignment with standard market benchmarks,” he said.

For investors with limited risk budgets, the Market+ framework offers a reliable and transparent approach. By focusing on portfolio-level risk management and avoiding potentially unreliable stock-level optimisations, it allows for the efficient integration of financial and sustainability objectives, according to Mr Aguet.

“The advantage of Market+ Indices is their ability to integrate a variety of goals within a robust and transparent framework. When it comes to sustainability drivers, we avoid using opaque and unreliable ESG ratings, which diverge significantly across data providers on seemingly identical measures.

“Instead, we focus on verifiable fact-based climate measures that do not rely on crystal balls, such as forward-looking climate transition risks, green revenues based on regulated taxonomies, and science-based targets. Our factor strategies are designed to target exposures to academically validated risk factors that provide rewards over the long term in a systematic and risk-controlled approach. This enables an efficient capture of their return premium through time.”

Regarding the effective management of tracking error, Mr Aguet said that traditional optimisation approaches rely on stock-level risk estimates, which are noisy, leading to estimation errors.

“Our risk management framework allocates between the investor’s unconstrained index—including financial and/or sustainability goals—and a cap-weighted index to achieve the maximum of their goals within their risk budget. By employing a robust statistical model at portfolio-level to forecast tracking error, we avoid the pitfalls of inaccurate and opaque stock-level optimisations.”

Mr Aguet emphasises the importance of transparency in the Market+ methodology: “Each objective serves as an independent building block, which we aggregate into the final index to precisely meet the tracking error target. This structure ensures that our indices are fully transparent, providing clear insights into how each component contributes to the overall strategy. As the regulatory landscape continues to evolve and sharpen, Scientific Beta remains dedicated to assisting investors, including superannuation trustees, in achieving their investment objectives, at a low cost.”

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Notes:
[1] https://www.apra.gov.au/news-and-publications/apra-releases-performance-metrics-and-insights-package-to-improve
[2] Ibid.

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Daniel Aguet

ASIC’s recent report on its interventions against greenwashing misconduct for the 2023–2024 period (REP 791)^[1] understates the need for improvement on ESG ratings, which often mislead consumers regarding the measurement of the sustainability of investment products.

ASIC said in its report that “our surveillance indicates there is ample room for improvement”.

Daniel Aguet, Deputy CEO and Index Director of Scientific Beta said “the report underlines the extent of greenwashing prevalent among investment managers and ASIC has proven itself as one of the most active watchdogs internationally. Nevertheless, the regulator’s work also has room for improvement, especially when it comes to the use of ESG ratings”.

“Sustainability-related information, like any other, should be accurate, based on reasonable grounds and be easily understood by investors,” said ASIC Commissioner Kate O’Rourke.

However, many investors use so-called ESG ratings, which bundle together many criteria, often qualitative, to create investment products and inform investors about their sustainability features. Qualitative research can be highly subjective, with conclusions relying primarily on researchers and their interpretation and analysis of the data.

“ESG ratings typically fail ASIC’s three information quality standards”, said Mr Aguet. “They are not accurate, not reasonably grounded and not understood by investors”.

ESG ratings diverge from one rating agency to the other, undermining their credibility as accurate and objective metrics.

The CEO of MSCI, the market leader for such ratings concedes as much in a recent interview with the Financial Times saying that “an ESG rating is an opinion … we are going to arrive at different opinions, we are going to arrive at a different rating”.

In a 2022 policy recommendation “to improve the transparency and credibility of ESG rating methodologies and promote market integrity”, the OECD “finds that despite progress, ESG approaches suffer from considerable shortcomings with respect to consistency, comparability and quality of data and transparency of associated methodologies that undermine their broader use and the trust of investors”.

Moreover, beyond being inaccurate, investors do not even understand what these ratings are intended to convey. According to a Bloomberg BusinessWeek article “[MSCI’s CEO] concedes ordinary investors piling into such funds have no idea that his ratings, and ESG overall, gauge the risk the world poses to a company, not the other way around. ’No, they for sure don’t understand that,’ he said in an interview last November. “I would even say many portfolio managers don’t totally grasp that’”.

In line with this admission, the OECD states that “greater clarity on the high-level purpose of elements in ESG ratings is warranted”.

“Until ESG ratings reasonably accurately measure what their providers intend them to measure, and until investors understand what these intentions are, ESG ratings are a source of investor misinformation,” Mr Aguet said.

Read the Whitepaper.

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Notes:
[1] https://asic.gov.au/regulatory-resources/find-a-document/reports/rep-791-asic-s-interventions-on-greenwashing-misconduct-2023-2024/

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