ACSI writes a new chapter

The Australian Council of Superannuation Investors’ (ACSI) latest governance guidelines reflect growing market interest in Environmental, Social and Governance (ESG) issues.

The ACSI Governance Guidelines, updated every two years, present the expectations of ACSI members about governance practices of companies they invest in. ACSI members manage more than $1.6 trillion in assets and, on average, 10 per cent of every ASX 200 company.

The latest version of ACSI Governance Guidelines, released in November 2017, has a new chapter on the board’s oversight of ESG issues and disclosure expectations. Guidance is given on four ESG themes: climate change, labour and human rights, corporate culture and tax transparency.

The expanded ESG commentary is another example of institutional investors expecting greater oversight and disclosure of ESG issues that are potentially material. This is the first guidance on these topics that ACSI has developed for Australian investors and companies.

ACSI CEO Louise Davidson said: “Companies that are well-governed and that effectively manage their environmental and social impacts are more sustainable over the long term.”

The ACSI Guidelines state that directors should monitor ESG issues, assess their materiality and disclose any financial impacts on the company.

ACSI’s view on ESG disclosure (point 18 in the Guidelines) is particularly important. It says listed organisations should:

  • Identify the environmental and social issues that may have a material impact on the company’s value over the short, medium and long term.
  • Provide data and a supporting narrative explaining why the issue is material and where the material impact occurs in the value chain.
  • Describe policies and procedures for managing the environmental or social impact over the short and long term and demonstrate how policies and procedures are implemented by the company.
  • Include information about how the company evaluates whether its ESG management systems are effective, including performance against metrics and targets.

The guidelines add: “Companies should update investors regularly throughout the year on material ESG issues in engagement meetings, corporate reporting and on the company’s website.” Increasingly, chairmen are having a greater role in the disclosure of this information by spending more time on investor relations, which is blurring with ESG issues.

Here is a snapshot of ACSI’s view on key issues within ESG, for boards:

1. Climate Change

The Guidelines state: Over the next few years, we expect companies materially exposed to climate-change risk to make substantive improvements in their climate-related reporting with reference to the Taskforce on Climate-related Financial Disclosure.”

ACSI expects to understand if a company can:

  • Successfully identify and manage the climate-change risks and opportunities it faces.
  • Demonstrate future viability and resilience by testing business strategy against a range of plausible but divergent climate futures, including a 2°C scenario.
  • Achieve cost savings through efficiencies and identify low-carbon opportunities.

2. Labour and Human Rights

ACSI says its members believe it is part of their fiduciary duty to engage with companies to ensure labour and human rights risks are mitigated in the company’s direct operations or in its supply chains. Investors expect boards to disclose (where relevant):

  • How the company identifies, prevents, mitigates and accounts for labour and human rights risks in its operations and supply chains, i.e. its policies and procedures.
  • How the company’s due-diligence processes are implemented and tested for effectiveness over time.
  • Whether the company incorporates the outcomes of its risk assessment in procurement decisions. And if independent third-party audits are conducted, and how far down the supply chain these audits reach.
  • Whether labour or human rights risks are identified, how the company responds to address the impacts, and what remediation processes are in place.
  • What accountability standards the company has for employees or contractors that fail to meet company standards on labour and human rights risk management.

3. Corporate culture

Unhealthy corporate cultures with departments or organisation “silos” can lead to high-risk behaviours that, if left unchecked, can cause major financial loss, argues ACSI. The Guidelines expect companies to encourage:

  • A “speak-up” culture where boards, executives, managers and employees raise concerns such that there is robust decision-making and corrective management steps where poor behaviours are detected and effectively addressed.
  • A “no-blame” culture supported by the board and the CEO, where it is “safe” to make mistakes and where the organisation is quick to learn.
  • Boards and senior management to set the tone from the top and monitor the drivers that shape culture and seek insights into how culture is aligned to the organisation’s values.
  • That when a CEO is selected, sufficient weight is given to his or her capacity to deliver a strong culture.

4. Tax transparency

Aggressive tax-planning strategies are becoming a bigger focus for the investment community as evidence of tax evasion emerges and regulators lift surveillance. Long-term investors are concerned about the potential for aggressive tax planning to create earnings and governance risks, damage corporate reputation and cause economic and social problems.

The Guidelines state that comprehensive disclosure about tax practices should include:

  • Disclosure of a tax policy signed by board-level representatives outlining the company’s approach to taxation and how this approach is aligned with its business and sustainability strategy.
  • Evidence of tax governance as part of the risk oversight mandate of the board and management of the tax policy and related risks.
  • An overview of tax strategies, tax-related risks, inter-company debt balances, material tax incentives, country-by-country activities and current disputes with tax authorities.