Environmental, Social and Governance (ESG) investing practices have evolved and grown rapidly over the past five years yet 13 per cent of ASX200 companies currently fail to provide meaningful information on sustainability factors and a further 17 per cent provide only basic information.
This is likely to change, if only because active institutional investors factor risk from ESG performance factors into their investment decisions. This has been observed with, for example, controversial decisions by some superannuation funds to exit investments in some fossil fuel companies.
While investor governance assessments have been traditionally been met through the services or proxy advisers and in-house governance teams, the E&S ratings needed by investors have only recently been relatively catered to. MSCI provides ratings to ISS, while CGI Glass Lewis recently announced that its services too were being enhanced with E&S rating provided by Sustainalytics (see HERE).
Poor levels of disclosure by a company usually do not mean that it will escape assessment. It just means that it will receive a poor assessment from a company that meets disclosure guidelines.
While there is still no mandatory ESG reporting required by listed companies, the ASX Corporate Governance Council recommendations require companies to disclose whether they have material exposure to ESG sustainability risks, and what they are doing to manage the risks (see recommendation 7.4 on p. 30 HERE). The international Integrated Reporting Council has issued a framework for ESG reporting (see HERE); the latest Global Reporting Initiative Guidelines list over 400 indicators on corporate sustainability performance (see HERE); the US Sustainability Accounting Standards Review Board has issued standards for 80 industries in eleven sectors (see HERE); and, the Sustainable Stock Exchanges Initiative has launched its Model Guidance (see HERE) for exchanges to lay out the business case for reporting ESG information and basic principles to guide the reporting process.
And now there is a new set of guidelines.
In recognising the value of transparency and disclosure in reporting on companies’ material risks, the Financial Services Council (FSC) and Australian Council of Superannuation Investors (ACSI) have launched a guide for Australian companies on how to identify and report environmental, social and governance issues.
The guide has been developed to provide Australian companies with a framework to disclose the ESG information that institutional investors would look for when considering their investments. It acknowledges the range of reporting frameworks in existence, and does not aim to recreate these but to provide companies with what Australian institutional investors look for when analysing a company’s material ESG risks.
Institutional investors need to price and evaluate these risks if they’re to protect and manage their investments for the long- term. For that to happen effectively, companies need to not just list those risks, but explain how they’re managing them.
See the FSC and ACSI guidelines HERE.
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