High rates of adoption but significant scope to improve – key insights from KPMG's analysis
KPMG has released a report analysing the extent to which ASX listed companies have adopted the changes introduced by the 4th Edition of the ASX Corporate Governance Principles and Recommendations (Fourth Edition), together with separate in-depth reports analysing the implementation of Recommendations 1.5 (Diversity) and 7.4 (Environmental and Social Risk). The Fourth Edition took effect for financial years commencing on or after 1 January 2020.
[Note: Our summary of the changes introduced by the Fourth Edition.]
The report builds on a similar 2015 survey tracking the adoption/implementation of the third edition of the Principles and Recommendations.
KPMG's findings are based on analysis of public disclosures by a sample of 600 listed companies during the period 1 January 2021 – December 2021.
The reports aim to provide companies with meaningful insight into how their peers have disclosed against the Fourth Edition, highlight 'good practice' and provide companies with a 'baseline' to assess themselves against.
Overall findings
Overall, KPMG found that adoption of the new and amended recommendations wags high with 95% of companies sampled lodging an Appendix 4G disclosing the extent to which they followed the Fourth Edition.
However, the quantity and quality of disclosure provided beyond this was found to vary significantly. KPMG identifies disclosure under Recommendation 1.5 (Diversity), 7.4 (Social and Environmental Risks), 7.2 (Risk appetite) and 4.3 (Verification of public disclosure) as the areas where this variation in approach was most apparent with some entities providing only very high level information and others providing detailed disclosure.
Below are our key takeaways from KPMG's analysis into the extent to which companies have adopted recommendations 7.4 (E&S Risk) and 1.5 (Diversity) and the approaches they have taken.
You can find a table providing a high level snapshot of KPMG's analysis in relation to the other changes in the Fourth Edition is included in Governance News 6 July 2022.
Reporting of E&S risk
Recommendation 7.4 recommends that listed entities should disclose whether they have any 'material exposure to environmental or social risks' [E&S risks] and if so, how it manages/intends to manage those risks.
Among other things, the accompanying commentary was expanded in the Fourth Edition to encourage companies with exposure to material E&S risks to consider reporting against the Financial Stability Board’s Task Force on Climate Related Financial Disclosures (TCFD) framework.
KPMG's analysis of disclosures against this recommendation highlights among other things, that it is likely that not all listed entities with material exposure are necessarily reporting the fact/reporting on how they are managing the risk. Specifically, KPMG found that 25% of companies reported that they had no material exposure to E&S risk, 4% reported that they had no material exposure to environmental risks and 1% reported they had no material exposure to social risks.
The report comments:
'While acknowledging there is a significant breadth of entities with different circumstances and exposures within the sample, KPMG considers it unlikely that over 25% of the sampled entities did not have any material social or environmental exposures. A review of sector-specific reporting identified some instances of entities reporting no material exposure to environmental and social risks being out of step with same sector peers'.
Adding to this, KPMG Partner Julia Bilyanska said that:
'Investors and regulators are taking a keen interest, and sustainability reporting standards are being developed at a global level - with the prospect of them being made mandatory in Australia – so all ASX-listed entities need to take a fresh look at their reporting in this area. This study suggests that while two-thirds reported material exposure to environmental and social risks, others need to reconsider their assessments in the current climate and look at approaches taken by peers.'
Reporting on E&S Risk: scope for smaller companies in particular to improve
Putting aside this concern, KPMG found that the majority of companies (75%) are providing some level of disclosure around their exposure to and management of material E&S risks.
Most commonly reported risks:
- According to KPMG's analysis, the most commonly reported environmental risks included: climate change and related impacts; biodiversity; water scarcity; environmental incidents; and resource efficiency and management.
- The most commonly reported social risks included: community engagement; diversity and inclusion; health and safety; customer privacy and cyber security; consumer protection; modern slavery; and human rights.
KPMG found that many entities also disclosed the key performance indicators (KPIs) they use to monitor their effectiveness in managing these risks. Page 16 of the report includes a table listing the most commonly identified risks, together with examples of the key performance indicators used to monitor performance around managing each.
KPMG comments that 'mature' reporters also disclosed the processes used to identify their E&S risks/opportunities.
Emerging risks: The report also includes analysis of the extent to which entities are reporting on emerging risks including nature-related risk, circular economy and modern slavery. In terms of reporting on nature-related risk, KPMG found that reporting was patchy across the sampled entities. Some entities made no disclosure at all around this risk, others provided limited disclosure around a specific issue, while others provided detailed disclosure including specific targets and natural capital value conserved or consumed. The report suggests that:
'Given the importance of natural capital to the global economy, listed entities can expect nature and biodiversity-related financial disclosures to be called for in the future in the same way as climate-change disclosures are currently expected by the capital markets, regulators and broader society. To prepare, Australian listed entities are encouraged to proactively identify short, medium and long-term material exposures (where they exist) to nature-related risks in their supply chains and organisational footprints. Additionally, entities are encouraged to consider appropriate metrics to measure performance and demonstrate progress where entities decide to transition towards nature-positive strategies'.
Location of disclosures: Among the companies that adopted Recommendation 7.4 in full, disclosures were most often provided in the corporate governance statement (49%), or in the corporate governance statement with cross references to another report (31%). 19% of sampled entities disclosed in another report (eg sustainability report, but did not provide disclosure in their corporate governance statement).
Sustainability reporting frameworks:
- 44% of sampled entities referenced at least one sustainability reporting framework/standard, with 31% reporting against more than one framework.
- The most commonly referenced standard/framework was the TCFD (63%), followed by the Global Reporting Initiative Standards (55%) and the Sustainability Accounting Standards Board Standards.
KPMG comments that generally it observed that there was a 'maturing of reporting, particularly among the S&P/ASX 200' and called on companies to continue to review their reporting practices with an eye to improve.
Governance and assurance
The report suggests that 'good practice' in this context includes: a) identification of board and management level accountabilities for identification/management of material E&S risks; b) linking ESG performance to remuneration; and c) external assurance over E&S disclosures.
KPMG found that generally ASX 200 companies were more likely to provide some level of disclosure around each of these points than their smaller counterparts. According to KPMG's analysis:
- 43% of entities reported that the board was accountable for material environmental and social exposures and reporting on them. Management accountability for reporting on environmental and social risks was explicitly referenced by 31% of the sampled entities, with 7% of the sampled entities reporting that they have appointed a chief sustainability officer.
- Approximately 20% of the sampled entities disclosed they obtain external assurance over E&S disclosures, jumping to 49% for the ASX 200. The majority of the entities that obtained external assurance over environmental and/ or social disclosures, procured the services of one of the Big4 consultancies (EY, KPMG, PwC and Deloitte). KPMG comments that limited assurance was common.
- KPMG found that 19% of entities linked environmental or social KPIs to executive remuneration, though the report comments that disclosure was often brief/generic without specifying the nature of the KPIs, targets or percentage of remuneration tied to.
- The report notes that some entities have voluntarily adopted an advisory 'say on climate' vote, which KPMG considers signals their 'strong commitment to active shareholder engagement and accountability to commitments'.
Diversity
Broadly, Recommendation 1.5 recommends that: listed entities should have and disclose a diversity policy; that the board/board committee should set measurable objectives for achieving gender diversity at board and senior executive level as well as for the workforce; and disclose progress against these objectives each reporting period.
Recommendation 1.5 also recommends that listed entities disclose either: a) the proportions of men and women on the board, senior executive and across the workforce; or b) where the entity is a 'relevant employer' under the Workplace Gender Equality Act, its most recent Gender Equality Indicators.
KPMG's analysis of diversity disclosures made by listed companies during 1 January 2021 – 31 December 2021 highlights that overall, progress on gender diversity disclosure and representation has stalled. For example, looking at disclosure, KPMG found that:
There has been virtually no progress on the number of companies disclosing a diversity policy over the past six years: 88% of companies disclosed a diversity policy in 2021 vs 87% in 2015.
Drilling down, the report identified what it describes a 'marginal backslide' in disclosure of diversity policies among larger companies, with the number of ASX 200 companies disclosing their policy dropping from 99% in 2015 to 96% in 2021, and from 88% to 86% for ASX 201-500 companies over the same time period.
The report highlights the fact that larger organisations (ASX 200 and ASX 201-500) appear to have 'regressed' in terms of the disclosure provided as cause for concern, commenting that the 'findings point to the need for vigilance to ensure no further backsliding, and the importance of identifying strategic interventions to support and encourage the 12% of ASX listed entities not disclosing diversity policies'.
Commenting on the scope/content of diversity policies, the report also highlights that sexual harassment is not yet routinely addressed within diversity policies and less than a third of entities report measures to address it.
Looking at disclosure of 'measurable objectives' for increasing gender diversity, KPMG found that:
- Disclosure was highest (63%) among ASX 200 companies and lowest among ASX 201-500 companies (17%).
- Of the companies that disclosed measurable objectives 88% reported on progress to the workforce, 84% for senior executive and 82% percent for the board.
Noting that the 'measurable objective' for board gender diversity for ASX 300 entities under recommendation 1.5 is 30% to be achieved within a specified time period, only 50% of ASX 300 entities have disclosed that they have set and achieved the target of not less than 30% of directors of each gender; a further 22% have set the target but not yet met it.
Steps towards increasing diversity beyond gender: KPMG also found that most of the companies sampled had adopted a definition of diversity that was broader than gender diversity often encompassing, face/ethnicity, religion, age, sexual orientation, and disability. However, the report found that this had 'not yet translated to the reporting of measurable objectives or representation of diverse employees', even among larger (ASX 200 and ASX 201-500) companies.
Smaller companies have the most room to improve
KPMG found that smaller companies (ASX 501+) have the most room to improve. For example, these companies were found to have:
- the lowest overall level of disclosure (though the report notes there has been improvement in some areas including an increase in the number of companies disclosing their diversity policy from 75% in 2015 to 84% in 2021)
- the highest use of the 'if not, why not exception' – with having a small workforce/small size being the most common 'if not, why not' explanation given.
Commenting on this, KPMG Partner, Human Rights & Social Impact Dr Meg Brodie suggested that smaller companies look to be in need of additional support to make progress on diversity. The question is what form of support is needed.