The Australian Council of Superannuation Investors (ACSI) has been monitoring sustainability reporting by Australian companies for nearly a decade. When we started, the results weren’t terribly encouraging, with just 18 per cent of the ASX100 reporting meaningfully to a leading standard. Now, happily, nearly 50 per cent of the ASX200 hit that benchmark. Ninety per cent of companies provide some measure of reporting, and while many companies have a long way to go, the picture is looking brighter, for both investors and the companies themselves.
ACSI carries out this yearly review because we believe that environmental, social and governance risks have material effects on the long-term viability of companies. It stands to reason, then, that thorough disclosure of company performance on sustainability risks is integral to investors being able to make quality investment decisions. We are firm believers that what gets measured gets managed.
Sit up and take notice
Something that should make non-reporting companies sit up and take notice is the fact that 71 cents in every dollar invested in the ASX200 is now spent on companies shown as reporting on environmental, social and governance (ESG) to a ‘leading’ standard. Even more encouraging, quality sustainability reporting is no longer limited to the mining and banking sectors, with nearly all Australian industry sectors having at least one ‘leading’ reporter setting the standard for that sector.
The fact there are now leading reporters in almost all sectors is an important development, and negates any argument that some industries don’t have a material exposure to ESG issues. Media and Consumer Services is the only industry sector without a ‘leading’ reporter, and, given the risks revealed in certain sections of the media industry this year, we can only hope that those risks are reported to a better standard next year.
The way in which investors assess listed companies is constantly evolving. In 2015, there were significant advances in corporate reporting requirements which sharpened the focus on companies’ management, and disclosure, of environmental, social and governance risks and opportunities.
Reporting not a ‘box-ticking’ exercise
For the first time, listed companies were required by the ASX to disclose – on an “if not, why not” basis – any material exposures to ESG sustainability risks and how those risks are managed. That probably explains why there has been an increase in reporters this year at the bottom end of the scale, though it was disappointing to see that it seems that some of those treated it as a box-ticking exercise.
We hold out hope, however, that even for these box-tickers, commencing on the path of sustainability reporting will in time lead to better assessment, disclosure and management of ESG risks. Since its inception in 2008, our annual review has had a tangible effect on corporate disclosure practices in Australia.
Each year, ACSI writes to the chair of every company analysed, advising them of their rating and comparisons with sector peers and the overall market. We meet with company chairs and we co-publish, with the Financial Services Council (FSC), an ESG Reporting Guide for Australian Companies. Last year, more than 20 companies directly committed to ACSI to improve their reporting, with others making positive changes following discussions with ACSI: a constructive engagement process that we are confident has contributed to the improvements in disclosure to date, and will continue to do so in the future.
Consider climate risk, for example. There has, at last, been a marked increase in public attention and policy measures aimed at addressing the immense global challenges posed by climate change, following December’s Paris Climate Conference. We know climate risks apply well beyond extractive companies and energy utilities, and are deeply embedded in the financial system as a whole.
Leading reporters tripled since 2009
Against this background, it’s great to see in this year’s research that more companies across a broader range of industries are now demonstrating an increased understanding of the importance to investors of transparency and depth in their disclosure of sustainability risks. The most improved sectors are utilities, gas, and energy distribution companies.
This suggests to me that pressure from investors for companies to be alive to, and transparent about, the economic and environmental risks of climate change is having an impact. The fact that the number of leading reporters has tripled since 2009 appears to bear this out.
Sadly, there are no leaders without laggards, which is what we label companies who have not reported sustainability risks for four or more consecutive years. Last year there were three, this year, just one remains, a stem cell medicines developer.
So we will keep monitoring and reviewing the way Australian listed companies report their risks, because we believe it is critical in enabling investors to make well-informed decisions on where to invest the retirement savings of millions of Australians