The Australian Council of Superannuation Investors (ACSI) recently released its 12th annual assessment of the level and quality of environmental, social and governance (ESG) reporting by ASX200 companies.  

The report assesses and benchmarks all ESG disclosures for the year to 31 March 2019 including annual reports, ASX announcements and corporate reports to determine how well companies are identifying, managing and monitoring a range of material ESG risks and opportunities, including risks posed by climate change, worker safety and workforce metrics.  

A high level overview of some of the key findings is below.

Context: 'Good quality ESG reporting' is crucial maintaining community trust

ACSI draws a link between the quality of reporting and the way in which a company is viewed by society ie good quality reporting signals that issues are being monitored and managed, whereas poor reporting is a signal of risk and shows a 'disregard for stakeholders' needs'.  As such ACSI considers that 'good quality' ESG reporting is also a way for companies to maintain community trust.  'As the Financial Services Royal Commission highlighted, behaving consistently with community expectations is critical. It’s clear the community wants to know more about what companies are doing to manage ESG issues. Boards can meet this obligations through good quality ESG reporting. Those that don’t will face a trust deficit of their own making' the report states.

Some key findings

Overall ESG reporting trends

• ACSI found that the United Nations Sustainable Development Goals (SDGs) are gaining traction with the number of ASX200 companies now using them in their reporting almost doubling since last year (60 ASX200 companies now use them in their reporting, up from 39 last year).
• ACSI found that reporting standards have improved significantly over the past five years, with the number of 'detailed' and 'leading' reporters increasing by 19% over the period.
• Large companies provide the most detailed reporting: all ASX20 companies are now rated as either ‘Detailed’ or ‘Leading’.  By contrast, smaller companies (ASX101-200), make up 80% of 'poorest' reporters.
• One-third of companies are providing investors with comprehensive and transparent ESG disclosures and are rated as ‘Leading’.
• 16 companies provide no ESG information, indicating that they are now 'outliers'.  Of this group, ACSI identifies six as 'laggards' ie companies that have provided no reporting for two or more years of the study).  ACSI has communicated their poor performance rating to them and is engaging further on how they can improve their ranking.

Climate change reporting

• Adoption of the Task Force on Climate-related Financial Disclosures (TCFD) framework has more than doubled from last year, with 26 companies having adopted the framework.
• 18 companies now use scenario analysis to assess the potential impacts of climate change risk on their business.
• 31 different scenarios are being used. Many are based on International Energy Agency guidelines, but there is a wide variation in scenarios and levels of reporting.
• Most companies are not using a 1.5-degree Celsius scenario.  ACSI found that only six companies are using this scenario to assess business resilience.
• Long-term emissions-reduction targets (ie those beyond 2040) are scarce with only six companies disclosing net zero emissions-reduction targets for 2050.

[Note: For expert insights into increased expectations concerning the disclosure of financial impacts associated with climate change see: Heightened expectations of climate-related disclosure and assurance.  For a discussion of the supplementary Hutley Opinion (which concludes that directors' exposure to the risk of climate change litigation has only increased since 2016) see: Governance News 05/04/2019).] 

Improvement area? Safety data

For the first time, the report includes analysis of safety metrics. 

• ACSI found that 22 fatalities were reported in the ASX200 by 13 companies.
• Contractor safety emerged as an area of concern with contractors making up 16 of the reported workplace deaths.  ACSI considers that this may indicate a 'disconnect' between the safety practices and culture of companies’ own workforces, and those of their contractors.
• More than half the ASX200 report some form of safety metric (lost-time injury frequency rate is the most commonly used metric) but disclosure was found to be limited.  For example: few companies give any insight into the severity of injuries (except fatalities) and only nine companies reported their ‘near misses’.  ACSI observed that more 'mature reporters' disclosed forward-looking metrics alongside lagging safety metrics.
• ACSI comments that though executive remuneration outcomes at 85 companies include a safety component, eight of these companies did not report any safety metrics.  ACSI comments that this makes the task of assessing how these metrics were applied to pay outcomes difficult for investors.
• 67% of companies report no safety data, including two companies from the Materials and Energy & Utilities sectors, as well as multiple Retailing companies.   This, ACSI comments, 'does not meet investors' expectations'.

Commenting on these findings ACSI writes that the research highlighted a 'deficiency in regulations surround reporting on safety and a lack of available data on workplace fatalities across the Australian market'.   ACSI goes on to say express concern that it is 'the lack of transparency about workplace fatalities in Australia may mask the extent of this tragedy and slow the identification of systemic risks.

Human capital

• Companies appear to recognise the value of managing and retaining their workforce: disclosures were observed to include employee engagement surveys, voluntary turnover and training, although there was limited standardisation in reporting.  For example, one-quarter of the ASX200 report voluntary turnover but fewer than half of those (22 companies) also provided staff engagement scores, making it difficult to assess how effectively companies engage their workforce.
• Employee training was the most frequently reported workforce metric with ‘leadership’ and ‘safety’ the most commonly cited forms of training.

Consequence management

• Disclosures were observed to include issues that are reported through whistleblower lines, employee outcomes from Code of Conduct breaches and how companies are managing their culture.  ACSI comments that this new emphasis on consequence management in reports reflects the increased interest in the issue in the wake of the Financial Services Royal Commission.

Gender diversity

• ACSI found that gender diversity in executive management teams is still low with only 21% of executive/ leadership roles in ASX200 held by women.  
  All-male executive leadership teams were found to make up 16% of the ASX200 (32 companies). By contrast, every ASX200 company in the Transportation, Banking, and Food and Staples Retailing sectors had gender-diverse leadership teams.

[Note: ACSI announced in June that female board representation on ASX200 boards had reached the 30% target, but that despite this, that gender representation on company to be 'far from equal'.  For example, ACSI found that five ASX200 companies have no women directors (see: Governance News 19/06/2019).  ACSI has also released a policy proposal calling for listed companies to set a ‘reasonable’ timeframe for achieving gender balanced boards (ie a 40% men, 40% women and 20% of either gender:40:20) and advocating regulatory intervention should this not occur by 2025.  Until then, ACSI has said it will continue to advocate for increased female board representation (see: Governance News 08/05/2019.)]

The ACTU reportedly agrees that disclosure of safety data needs improvement

The Australian Council of Trade Unions (ACTU) is reportedly supportive of the ACSI's finding that disclosure of safety data needs improvement.  ACTU assistant secretary Scott Connolly is quoted as commenting that 'reporting of workplace safety incidents, injuries and fatalities is vital to ensuring investors can make informed decisions about material risks.  In order for investors to be able to compare like for like, and for companies to remain accountable for their work health and safety practices, companies should be required to report their rate of injuries and their level of compliance with WHS laws'.

Mr Connolly reportedly went on to say that: a) disclosure requirements should equally apply to gender equity and retention as they exposed companies to 'more frequent hiring cost'; and b) publicly listed companies should also be required to report any potential wage theft or superannuation theft to investors as this represents a clear material risk to investors in that company.

The AFR comments that the inclusion of safety data and workplace metrics in ACSI's report follows pressure from unions on superannuation funds to consider insecure work and underpayments as an investment risk.

[Sources: ACSI Report, ESG Reporting by the ASX 200; [registration required] The Australian 06/08/2019; [registration required] The AFR 06/08/2019]