Rising pressure from investors, regulators, and society is pushing many ASX 200 companies to improve disclosure on environmental, social and governance (ESG) risks, according to Louise Davidson, the chief executive of the Australian Council of Superannuation Investors (ACSI).
In an interview with Investment Magazine, Davidson said ACSI’s latest survey of ASX 200 companies shows some 140 of the ASX 200 companies are now making detailed reports on ESG issues.
This compares with only 31 Australian listed companies which were reporting on these issues when ACSI began its survey in 2008.
Davidson said it was investor pressure, including those from superannuation funds, which was the initial force pushing companies to be more transparent. “When we first started the survey, the reporting was at pretty low levels, but we have seen a gradual increase over that time,” she said.
“It is something that investors have been pushing companies on for years. They have been sending a very strong message.” But she said now the pressure on companies was coming from a broader range of sources including societal expectations and new laws.
Davidson said Australian companies with international operations were also under pressure to comply with emerging global reporting standards. “There’s a growing demand from companies from a whole range of stakeholders in addition to investors for this information,” she said.
More disclosure requirements
There are now more laws in Australian requiring disclosure such as the Federal Government’s Modern Slavery Act, which came into force in 2019, requiring companies to report on what they are doing in making sure there is no slavery in their operations or their supply chains, according to Davidson.
Both investors and executives now realise ESG issues had potential major implications for a company’s financial performance. “They are financially material issues, so it is appropriate for companies to be reporting in detail on them,” she said.
Providing investors with ESG disclosures is now the norm rather than the exception. “The rise in reporting signals that corporate Australia now recognises that managing material ESG risk is a crucial part of doing business.”
Domestically, Australian listed companies are being encouraged to increase their reporting on ESG issues through the ASX’s corporate governance principles. While these are not mandatory, companies which do not make disclosures on these issues are asked to explain why not.
A new report on some 600 ASX listed companies by accounting firm KPMG said that while reporting levels on ESG issues are increasing, they vary considerably in standards and details. It warned that Australian companies need to be prepared for more mandatory reporting of their environmental, social and climate change issues.
Developing global standards
The accounting and ESG sectors are closely watching work by the Task Force on Climate-Related Financial Disclosures (TCFD) set up in 2015 by the G20 backed Financial Stability Board, and the International Sustainability Standards Board (ISSB) established last year to develop global standards for environmental, climate change related and social reporting.
According to Davidson, the increasing momentum overseas on global reporting standards of ESG issues adds to pressure on top ASX-listed companies to improve disclosure in a way which complied with the emerging new reporting standards. ACSI’s approach in dealing with the ASX200 companies it studies for its annual report was to work cooperatively with them to improve their reporting levels. “For us, it’s not about waving the big stick,” Davidson said.
ACSI offered to meet with companies which were behind in their ESG reporting to help them improve. “We want ESG reporting to be more comprehensive and more useful for investors. We want to be part of the solution driving that,” she said.
Davidson added, while there could be a move towards mandatory reporting on these issues in Australia, it would be preferable if Australian companies were to move towards global reporting standards. It “might be the best outcome” if Australian companies could align their reporting with the work being done by bodies such as the ISSB, Davidson said.
“That will be an international standard. Particularly for companies and investors who are operating globally, it is helpful to have an international standard and for there to be harmonisation between what is reported here and what is reported in other jurisdictions.”
Around 65 per cent of the ASX 200 companies were judging their performance against the UN Sustainable Development Goals. This compares to only 10 per cent of companies reporting against the UN SDG framework five years ago. However, six per cent of ASX listed companies did not disclose any ESG risk to investors. “While not all ESG risks are relevant to all companies, every company faces some ESG risks and they should be reported,” Davidson added.