Originally published in Investment Magazine (September 2017)
We recently published the 10th edition of our sustainability report. This report assesses disclosure performance among the ASX200, rating companies individually and by sector. This year, for the first time, we assessed climate-related disclosure by the ASX200 in our report. This was a direct response to increased interest from our members in climate-related risk, mirrored in the wider investment community.
The same demand for climate-related disclosure is evident globally. In May, shareholders in ExxonMobil, the world’s biggest publicly listed energy company, voted to require the company to disclose climate change impacts.
As fiduciaries, our members are required to maximise long-term investment returns for their beneficiaries. They have a legitimate need to effectively price climate risk into their investment decisions.
Currently, the level of climate-related disclosure by the ASX200 trails sustainability reporting. Seventy ASX200 companies did not make any climate-related risk disclosure in 2016. Fewer than half of Australia’s largest listed companies have a climate change policy or an emissions reduction target.
Improving the level of climate-related disclosure is now a focus for ACSI. Companies need to rapidly adjust their reporting practices to demonstrate to investors that they have identified and are managing climate risks.
We have identified 16 companies with whom we will engage directly on climate change disclosure this year. They include some companies that rank as “Leading” for their sustainability reporting. Given their material exposures to climate-related risks, we believe they need to do more to improve their disclosure in this area. We will be encouraging all of them to adopt the best practice framework developed by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD).
The final TCDF framework was published in June 2017. This framework recommends all companies disclose their governance process and risk assessment related to climate. For companies with material risks, it suggests that scenario analysis be incorporated into their strategy and that metrics and targets be established and disclosed.
We consider that adoption of this standard will improve the availability, reliability and comparability of climate-related disclosure, and should be considered by all ASX200 companies.
Sustainability disclosure improving … but some still don’t ‘get it’
Sustainability disclosure which prioritises material risks is vitally important to companies and investors. For companies, it ensures they recognise, manage and monitor key risks to their business. For investors, it enables them to make informed investment decisions.
Over the past ten years, we have observed significant improvements in sustainability disclosure. Most companies now understand the value of sustainability disclosure; almost all undertake some sustainability disclosure (92% of the ASX200 in 2016).
Superficially at least, it seems our battle to embed sustainability disclosure within the reporting practices of the ASX200 is nearly won. However, the depth of disclosure by many companies remains sub-optimal, with 42% achieving a “Basic” or “Moderate” rating.
For us, the ongoing challenge is to embed greater meaning into companies’ sustainability disclosure. Beyond acknowledging the material sustainability risks they face, we want companies to articulate the steps they are taking to address them.
There are, however, some high performers. Half of ASX200 companies report to a “Leading” or “Detailed” standard. Thirty companies have achieved a “Leading” rating for four or more years.
So, what is it that differentiates these companies from the poor performers? It’s difficult to generalise, although there are some commonalities.
We know that larger companies tend to be better at sustainability disclosure than smaller ones. Also, companies that are more highly exposed to risks tend to disclose better. That said, there are poor performers among the biggest and most exposed sectors and leaders who fit neither description.
Ultimately, companies that get sustainability disclosure right demonstrate two key features:
- they recognise the potential impact (risks and opportunities) to their business, and
- they prioritise the need of shareholders for disclosure.
Laggards should sit up and take note. Eighty-five cents in every dollar invested in the ASX200 is invested in companies that report to a “Leading” or “Detailed” standard. Investors, including our members, clearly value companies that do sustainability disclosure well.
Want to know more?
Download the report: Corporate Sustainability Disclosure in Australia (July 2017)
Louise Davidson, CEO, Australian Council of Superannuation Investors