ESG

More than three-quarters of Australia’s top 200 companies are undertaking a meaningful level of environment, social and governance (ESG) reporting with an increased focus on conduct and risk-taking by employees, according to a study by the Australian Council of Superannuation Investors.

Companies are increasingly adopting the United Nations Sustainable Development Goals and the Task Force on Climate-related Financial Disclosures framework, but reporting on safety is lagging, the study into ESG reporting by ASX 200 companies found.

Investors favour firms reporting ESG

Overall, there has been a marked improvement from the first analysis 12 years ago, when only 39 of the ASX200 companies provided ‘detailed’ or ‘leading’ ESG reports.

By contrast, in 2018, over half of the ASX200 index – including all of the ASX20 companies – identifies and provides detailed reporting of a range of material ESG risks or of their risks and mitigation strategies.

“Most companies now recognise the need to report on a range of material, non-financial measures,” says ASCI chief executive Louise Davidson.

“Information about ESG practices is a critical piece of business intelligence. Investors need to understand how companies are tackling ESG issues to make their investment decisions,” she says.

The survey, ESG Reporting by the ASX200, found that investors continue to favour companies with high levels of ESG reporting, with 82 cents of every dollar invested in the ASX200 concentrated in companies rated as ‘detailed’ or ‘leading’.

The study identified 16 companies which provided no ESG information, including five “laggards” – companies which have undertaken no ESG reporting for two or more consecutive years. These are ARB Corporation; Domino’s Pizza Enterprises; Regis Resources; Speedcast International; and Washington H. Soul Pattinson and Co.

Safety metrics missing

Despite the overall progress, reporting on workplace safety is lagging.

Some 22 fatalities were reported by 13 different ASX200 companies in 2018, yet there is no requirement to report this information to the market. Instead it is collected by state-based agencies and may vary by sector, making it difficult to locate.

“Safety data is material to our members. We are concerned that the lack of transparency about workplace deaths may mask the extent of this tragedy and slow the identification of systemic risks,” Davidson said. Some 67 companies report no safety data.

More than half the ASX200 report some form of safety metric but few give any insight into the severity of injuries (except fatalities). Lost-time injury frequency rate is the most commonly used metric.

More mature reporters typically disclose forward-looking metrics alongside lagging safety metrics. Only nine companies reported their ‘near misses’.

Disciplinary action

The report identified consequence management as an emerging area of workforce reporting by companies. It demonstrates how companies respond to and manage employee behaviour that is risky or in breach of a code of conduct or compliance standards. The Financial Services Royal Commission highlights its growing importance.

Reporting examples include the number of breaches of the company’s code of conduct, behaviour that resulted in disciplinary action and the number of company-led terminations that resulted.

“This trend has also been confirmed in our company engagement meetings and we are increasingly asking companies to address this issue,” the report stated.

In the 2018 reporting period, each of the ‘big four’ banks and Macquarie Group reported incidents that required consequence management. This behaviour is often uncovered through calls to whistleblower lines, and internal audits. Reporting examples include the number of breaches of the company’s code of conduct, behaviour that resulted in disciplinary action and the number of company-led terminations that resulted.

Climate change

Some 30 per cent of ASX200 companies have adopted and report on sustainable development goals (SGDs), which focus on targets set for 2030 and encourage business to contribute to improvements in key global social and environmental risks.

The number is an improvement from the year before but significantly lags the 83 per cent of companies in Germany, 63 per cent of companies in France and 60 per cent of UK companies which link their corporate reporting with the SDGs.

On climate change reporting, 52 companies have adopted or committed to disclose against Task Force on Climate-related Financial Disclosures (TCFD) – double that of the year before.

“Inconsistent information and a lack of comparable data on climate-change risks and opportunities in the ASX200 continues to be a core area of investor concern and provides a platform for non-government organisations (NGOs) to express discontent,” the report states, noting that six out of eight companies that received a shareholder-proposed resolution in 2018 were asked for improved climate change disclosure and TCFD adoption.

More than half of the companies disclose greenhouse gas emissions data but only six reported long-term emission targets. Investors increasingly stress the need for emissions targets to be longer term.

The report stated ASCI has been engaging with companies on climate change risk for over a decade. “For our members, climate change is, and always has been, distinctly financial in nature. As a result, we have been engaging companies on climate change risk for over a decade.”

In her introduction to the report, Davidson says that for investors and the community, good quality reporting signals that issues are being monitored and managed.

“Conversely, poor quality reporting is a signal of risk and shows a disregard for stakeholders’ needs.”