As socially responsible investing (SRI) continues to surge, stakeholders are calling for more comprehensive ESG reporting frameworks. We explore how Australia measures up to other countries in its efforts to report on ESG metrics.
What is ESG reporting?
ESG stands for Environmental, Social and Governance, and are the three broad categories that define what “socially responsible” investment decisions are.
ESG criteria often covers:
- Energy and resource use
- Waste and pollution such as carbon emissions
- Responsible handling of adverse environmental effects
- Compliance with government regulations
- Employee health, safety, and diversity
- Engagement with and providing aide to local communities
- The structure and remuneration of the company’s board
ESG reporting involves the disclosure of both ESG risks and opportunities. Companies explain how these risks and opportunities inform core strategy, decisions, and performance.
ESG reporting in Europe and the US
Europe
The European Commission’s Sustainable Finance Disclosure Regulation (SFDR) came into effect on 10 March 2021. The legislation applies to asset managers and financial advisers and requires them to:
- Disclose how sustainability risks factor into their decision-making on their financial product recommendations.
- Explain how ESG branded financial products will fulfill their ethical and sustainability promises at a pre-contractural stage. These explanations are to be displayed on easily accessible mediums such as the company website and in marketing communications.
- Provide an assessment of potential adverse impacts their investments could have on the environment and society – or explain why they have failed to provide one.
SFDR legislation was introduced with a double-pronged purpose. The first is to make it easy for people to identify and invest in ESG-friendly products. The second is to stamp out greenwashing, a practice whereby companies exaggerate the environmental or ethical claims of their operations.
It is no secret that Europe is pioneering the ESG movement. Nathan Lim, Head of Wealth Management Research at Morgan Stanley commented on its trailblazing position in a webinar:
“Europe leads the world on responsible investment, there are a lot of offerings and sophistication, there is a lot more depth than in Australia. If you want to see what Australia will look like in 10 years then look to Europe.”
America
The Biden administration has made climate change and ESG matters a priority through significant funding and legislative support. In its first few months, the administration pledged $2 trillion to help the US meet sustainable targets, re-joined the Paris Climate Agreement, and started a mass review of 100 Trump-era environmental rollbacks.
On March 4, 2021, the US Securities and Exchange Commission (SEC) announced the formation of an ESG task force that has two main points of focus. The first is to identify disclosure gaps and misstatements by issuers; the second is to analyse disclosure and compliance issues that factor into the ESG strategies of funds and financial advisers.
On 15 March 2021, Acting SEC Chair, Allison Lee announced the opening of a comment period regarding climate change disclosures. Submissions from this will be used to guide the development of a more comprehensive ESG disclosure framework.
What’s happening in Australia
ESG reporting is currently optional in Australia and is a mixed bag when it comes to effort and results.
Lagging in environmental commitment and targets
A report released by Refinitiv in 2020 found that many Australian companies were setting environmental policies without delivering on targets. The document included data from 283 Australian-based companies and stated the nation lags behind its global peers across categories of emissions, resource use, and innovation.
The report cites an “intention gap” in Australia. Although 46% of Australian companies have emissions policies there has been only a 7% increase in those with specific targets around reducing emissions.
While there has been an increase in the number of Australian companies with resource reduction policies, the country is still catching up with global trends. 65% of Australian companies currently have resource reduction policies while 78% of global companies implement such policies. Only 16% of Australian companies undertake waste and recycling activities.
Despite our sustained drought period and cataclysmic bushfire season, only 36% of Australian companies have a water efficiency policy, and just 11% have set specific targets.
Excelling in ESG-related pay
While Australia is still a work-in-progress with its reporting, it does excel in paying for results. A report by Guerdon Associates found that Australian companies pay more for positive ESG outcomes than any other country. The report documented how the world’s largest companies are incorporating ESG metrics into their executive incentive plans. Data was taken from companies listed in the ASX 100, the S&P 100 in the United States, the TSX in Canada, the CAC 40 in France, the DAX 30 in Germany, the SMI 20 in Switzerland, the FTSE 100 in the United Kingdom, and Singapore’s STI 30.
It was found that 81% of ASX 100 companies have included ESG metrics as part of their CEO’s remuneration.
Australia also leads the world in how ESG metrics are weighted in incentive plans at 30%, with the global median sitting at 20%.
The need for increased transparency and clear targets
PricewaterhouseCoopers (PwC) released a report on ESG reporting in Australia that analysed data from the ASX 200 – many of its findings mirror those reported by Refinitiv.
Both reports cite the need for adequate ESG disclosure and clearly defined targets and strategies. PwC found that despite growing demand for ESG disclosure, that 42% of the ASX 200 did not warrant inclusion in the study due to insufficient reporting. For the 115 that were reviewed, more than 80% disclosed their ESG strategy. However, most companies provided little evidence on how ESG strategies are incorporated into core corporate decisions and limited information on targets. According to PwC, Australian companies run the risk of being seen as “ESG-optional” if they do not clearly define how ESG-strategy is incorporated into core business decisions.
From the companies analysed, 62% do not clearly have medium or long-term goals clearly defined in their strategy, 32% set medium-term goals and only 6% have long-term goals. This is negative as investors are now wanting clearly defined metrics of ESG performance. The report states:
“For companies to be trusted to meet their stated ESG commitments, it’s becoming increasingly important to identify performance indicators for material ESG topics, set targets for performance, and allocate accountability for these targets, including linking executive remuneration to achievement.”
PricewaterhouseCoopers
While Australia has a way to go with its ESG reporting, it is making slow but steady gains to get there.
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