ACSI Ranks each ASX company on ESG Disclosure – not pretty but improving

The Australian Council of Superannuation investors (ACSI) has released a report evaluating and ranking ASX 200 company sustainability disclosures.

ACSI has assessed the sustainability disclosure of this group of companies since 2008. It is important to understand that the ACSI report judges disclosures, not performance. So ACSI is judging companies on its disclosure of processes, strategies and targets surrounding ESG risks without any assessment of whether they are meeting any of those targets or there is merit in the strategies employed.

Over the last decade, the numbers of companies making comprehensive disclosures on matters such as greenhouse emissions, climate change and diversity have improved.

Based on 2017 disclosures, 104 ASX 200 companies disclosed at a level the ASCI considered ‘leading’ or ‘detailed’ (where companies identify a range of sustainability risks, the process for identifying such risks and disclose targets regarding the risks).

Twenty companies made no disclosures at all.

The remainder made basic or moderate disclosures.

This compares to 2008, when only 39 disclosed at the ASCI’s detailed or leading standard, 31 did not report at all and the remainder made basic/moderate disclosures. The best ESG reporters on a sector basis were banks, energy and utilities. The worst were retail, media, telecommunications, software and services, and healthcare.

The decade’s improvement in disclosures has come despite the goalposts being moved, and the expected standards of reporting becoming tougher. ASCI acknowledges that it raised the bar for companies to be considered to report at a “basic” or better level over the time period.

There have also been a number of developments during the last decade that change the context of ESG disclosures. These are based on the Global Reporting Initiative’s (GRI) Guidelines (see HERE). The first version of the GRI Guidelines, which assist companies to communicate their impact on critical sustainability issues such as climate change, human rights, governance and social well-being, was released in 2000. They were updated in 2002, 2006, 2011, 2013, and 2016 (when the current GRI Sustainability Standards were launched).

The Integrated Reporting framework was released in 2013 (see HERE). Integrated Reporting encourages companies to present a wholistic view of the company and its strategy in reports rather than a backward looking, short-term financial view. This involves the consideration of non-financial resources such as human, social, natural and intellectual capital and their impact on the business. Feedback from a large institutional investor which has assessed ASX 200 take-up of the framework indicates that it has been slow.

More recently the Financial Stability Board created a Taskforce on Climate-related Financial Disclosures (TCFD) (see HERE), which developed a framework for consistent voluntary climate-related financial risk disclosures.

The standard requires companies to assess the risk and opportunities associated with climate change and review findings at board level. Where there are issues that are found to be material, they should be considered in setting strategy including considering the strategy’s performance given climate change scenarios such as a 2 degree change, with relevant targets and metrics developed and disclosed.

The final version of this was released in June 2017.

Unsurprisingly given the timing, only 22 companies from the ASX 200 had adopted or committed to this standard based on 2017 disclosures. Another ten were reviewing it. The ACSI is encouraging companies to commit to the standard for 2018. Despite this, Guerdon Associates’ own reviews, as well as feedback from others, indicates that board chairmen are far more aware of the requirements and implications for their MSCI and Sustainalytics ESG index ratings (these two are predominant sources for fund managers and owners).

A sign that this number might improve with time can be found in the adoption of GRI. Seventy-two companies from the ASX 200 reported against some form of GRI guidelines, although the majority were still reporting against the older G4 guidelines rather than the GRI sustainability standards released in 2016. (38 versus 33 companies respectively.)

On the other hand, only four companies reported against or are moving towards Integrated Reporting, despite the fact that this framework has been in place since 2013.

Companies committing to the TCFD framework already outnumber those who have committed to integrated reporting. Of the 22 who have adopted the TCFD framework, eight are in the ASX 20 (and most are banks or energy/utilities companies). Since the take-up of governance measures tends to trickle down from large companies, we may see more smaller companies committing to the framework in 2018.

If more companies do adopt the TCFD framework, we would expect to see more climate-change related targets disclosed in reports. In the 2017 disclosures, 79 companies disclosed no ESG targets. Forty-five companies disclosed one target and 76 disclosed two or more.

Fifty-three companies disclosed climate-change targets, about a quarter of the sample of companies one might be expected to be affected by the future effects of climate change.

Diversity (read gender) targets were the most common (69 companies). These included the percentage of women in senior management, the board and other levels of the organisation as well as a commitment to have a woman included on the short list for every hire. There was no mention of any pay gap targets – these would likely feature more heavily if Australia had similar pay gap reporting requirements as in the UK (See HERE). Gender percentages within senior management would also be more comparable across companies if Australia had standardised definitions for what senior management actually is, as there is in the UK.

There have been various calls for ESG target setting within executive incentive metrics. While enhanced disclosure of ESG targets may further raise expectations that they feature as part of executive incentive plans, the likelihood is that they will be subsumed into senior executives’ “come to work” fixed pay expectations. That is, like “motherhood and apple pie”, executives will be expected to meet a minimum sustainability standard, albeit the standard may progressively increase each year.

To see how your ASX 200 company ranks, see the ASCI report can be found HERE.



© Guerdon Associates 2024
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