The Australian Council of Superannuation Investors (ACSI) have released revised Governance Guidelines: ACSI Governance Guidelines: A guide to investor expectations of listed Australian companies November 2017 which include guidance on environmental, social and governance (ESG) issues for the first time. The guidelines now state that directors should 'monitor, assess their materiality and disclose any financial impacts on the company'.

ACSI CEO Louise Davidson commented that the revised guidelines 'offer a unique insight into the issues of greatest material concern to large investors and how they reach their voting decisions… Companies that are well-governed and that effectively manage their environmental and social impacts are more sustainable over the long term.'

Key revisions to the guidelines

ACSI has provided guidance on four ESG issues that it has identified as impacting the majority of ASX200 companies: climate change, labour and human rights, corporate culture and tax disclosure. The guidelines also include new or expanded guidance on gender diversity; shareholder resolutions; chairperson workload and remuneration. The key points are below.

ESG oversight

The ACSI guidelines have been revised to include a new chapter outlining ACSI's expectations of board oversight of ESG issues generally.

ACSI states that among other things, it expects:

Boards to maintain robust oversight of all ESG issues that materially affect the business. ACSI expect that the board will ensure it receives quality information; regularly assesses the significant of current or emerging ESG issues relevant to the business; ensures there is adequate time to discuss ESG risks and opportunities at board meetings and ensures the company has effective governance.

Provide effective ESG disclosure: ACSI states that ESG disclosure should:

• identify the ESG issues that may have a material impact on the company's value over the short, medium and long term;
• provide both data and supporting narrative explanation as to why the issue is material and where the 'material impact occurs in the value chain';
• describe policies and procedures for managing the ESG impact;
• include information about how the company evaluates its own ESG management.

In addition, ACSI states that companies should update investors regularly throughout the year on material ESG issues in engagement meetings, corporate reporting and on the company's website.

Specific expectations

Climate change

ACSI states it expects to understand from companies whether the company can:

• Successfully identify and manage relevant climate change risks and opportunities.

• Conduct climate stress testing: Demonstrate future viability and resilience by testing business strategy against a range of plausible but divergent climate futures including a 2C scenario.

• Identify efficiencies: Achieve cost savings through efficiencies and identify low carbon opportunities.

• Provide meaningful disclosure on risk processes: Where companies identify climate change risks as material disclosures they should extend to discussing the strategy as well as metrics and targets used to manage risks. ACSI recommends companies use the Financial Stability Board's Taskforce on Climate related Financial Disclosures (TCFD) framework for assessing and managing risk. ACSI adds that '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 TCFD recommended disclosures'.

Labour and Human Rights: ACSI expects companies to:

Actively assess and then avoid causing or contributing to adverse human rights impacts in their own operations and supply chains and to address impacts where they occur. This includes, mitigating the risks of adverse human rights impacts in their supply chains and where possible, using their 'leverage' to address impacts.

ACSI expects the board to manage material labour and human rights impacts and to disclose (to the extent relevant to the particular company):

• Policies and procedures explaining how the company identifies, prevents, mitigates and accounts for labour and human rights risks in its operations and supply chains.
• How the company's due diligence processes are implemented and tested over time to ensure effectiveness.
• How the company responds to address human rights risks where they are identified.
• What accountability standards there are in place for employees or contractors that fail to meet company standards on labour and human rights management.

Corporate culture

ACSI states that corporate culture 'presents a set of unique (often intangible) risks and opportunities which can be challenging to identify, manage and measure' but, argues that failure of corporate culture can lead to loss of shareholder value if left unchecked. Therefore ACSI expects companies to:

• Encourage a 'speak up' culture where boards executives managers and employees raise concerns to inform 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 set the tone from the top and should monitor the drivers that shape culture and seek insights into how culture is aligned to the organisations values.

• When seeking a CEO, sufficient weight should be given to the CEO's capacity to delivery strong culture.

• In addition, ACSI identifies the need for remuneration policies, whistleblowing and bribery and corruption policies as important in influencing culture and as areas where failure of culture, could potentially cause financial and reputational damage.

Tax practices

 ACSI identifies 'aggressive corporate approach to tax planning' as a concern for long term investors who view it as a potential risk. ACSI states that it expects comprehensive disclosure about tax practices. This includes:

• Disclosure of a board endorsed, tax policy outlining the company's approach to taxation and how the approach is aligned with its business and sustainability strategy.

• Evidence of tax governance as part of the oversight mandate of the board and management of the tax policy and related risks.

• An overview of tax strategies, tax related risks, intercompany debt balances, material tax incentives, country by country activities and current disputes with tax authorities.

Shareholder resolutions

• Though supportive of shareholders' ability to propose resolutions company meetings, ACSI states that 'binding constitutional amendments are not considered the most effective means for shareholders to comment on a range of matters including governance or ESG issues.' Rather, ACSI support the 'potential development of non-binding shareholder proposals in the Australian market subject to appropriate regulatory oversight'. This is consistent with the findings and recommendations in ACSI's report: Shareholder Resolutions in Australia: Is there a better way? October 2017.  

• ACSI states that it will assess shareholder resolutions on a case by case basis in the context of how they support value creation over the long term. Generally, ACSI 'will favour proposals that result in the disclosure of information which is useful to shareholders and not overly prejudicial to their commercial interests'. ACSI adds that it expects boards to reasonably 'consider the substance of shareholder resolutions and to offer to engage with their proponents'. In circumstances where the board recommends shareholders vote against a resolution, and adds that it expects the board to publicly explain 'why its position better serves shareholders' long term interests'.

• Glass Lewis have also recently released revised their Guidelines on shareholder initiatives (outlined in a separate post). They state that they will generally vote against Australian shareholder resolutions seeking constitutional amendments to enable shareholders to bring non-binding shareholder resolutions. Glass Lewis argue that a regulatory approach, that would afford protection for companies (from 'distracting' shareholder proposals not in the interests of the broader shareholder base) is preferable to the alternative.

Other changes

Core principles

 ACSI have refreshed the core principles underpinning the guidelines to better reflect the concepts of active ownership transparency and license to operate.

The revised principles are as follows:

• Active ownership: Alongside other risk and return factors, governance considerations form part of ACSI's member' analysis in deciding whether to invest in a company and when deciding how to exercise their engagement and voting rights.

• Transparency: ACSI states companies are more likely to attract long term capital if they disclose sufficient information to give investors confidence in the identification and management of key ESG risks. On this basis, ACSI views it as critical that companies properly disclose their performance in relation to material ESG factors which could impact shareholder value.

• Licence to operate: ACSI states that maintaining a 'licence to operate' enables companies to succeed. ACSI considers that effectively engaging with governments, employees, communities, investors, consumers and suppliers (with stakeholders) is key to maintaining this license.

• Board Oversight and material risks: ACSI states that good governance 'requires boards to consider and manage all material risks facing their company, including ESG risks'.

• Sustainable long term value creation: ACSI states that effective board governance contributes to shareholder value and creates the conditions in which sustainable long term investment can prosper.

Gender diversity

ACSI states that members have endorsed a diversity target and expect that at least 30% of the board positions in ASX listed companies be occupied by women. ACSI states that it will work with companies to understand their plans to meet this target. 'Our preference is for companies to reform their board's composition in line with the target on a voluntary basis. We recognise the value of quantitative targets to drive change. However, our members are also taking action by voting against companies that have made no progress to improve board gender diversity'.

Remuneration

 ACSI has added new factors to guide companies on ACSI expectations for the design of remuneration arrangements.  ACSI will consider whether remuneration practices are designed to reward sustainable long-term performance and shareholder value creation.  ACSI states that it 'encourages companies to ensure quantum is fair and reasonable having regard to factors such as the complexity of the organisation and to internal pay relativities'.

ACSI comments

'The Guidelines are an important resource for companies, asset managers and owners. You don't have to look much further than Australia's scandal plagued banking sector to see the impact of governance failures on company sustainability and community sentiment. It's vital to have a framework for evaluating governance practices and performance'.

About the guidelines

ACSI has been publishing the Governance Guidelines since 2003. They are revised every two years, following consultation with members.