Originally published in Investment Magazine (August 2019)
Last year a record number of listed companies received shareholder resolutions seeking increased disclosure. Most of these concerned climate-change and they attracted unprecedented levels of investor support. It’s clear there is growing demand for information about ESG risks and opportunities. Our latest review of ESG reporting shows that companies are responding, but investors still face issues with the availability and comparability of data.
We first began evaluating ESG reporting by the ASX200 in 2007. Back then, only 39 companies disclosed enough information to enable investors to price and evaluate ESG risks effectively. Based on our latest analysis, 76 per cent of the market now undertakes meaningful reporting (rated ‘Moderate’ or higher). Meanwhile, the proportion of companies undertaking no ESG reporting has shrunk to one of the lowest levels on record.
While substantial, this improvement is unlikely to satisfy investors for long. Investors are under pressure to incorporate a growing list of ESG considerations into their investment decisions and need access to an increasingly broad range of metrics. What this means is that ESG reporting is constantly evolving and a dynamic approach is required, by companies and investors alike.
In preparation for our research, we asked ACSI members what metrics they would like to see more of from companies. They cited safety and workforce indicators (including employee diversity, turnover, engagement and training). Along with climate-related information, these remain some of the most valuable yet problematic inputs for investors.
A significant, ongoing issue is the lack of standardization. For example, although more companies are using scenario analysis to assess climate risk, the proliferation of scenarios makes comparisons difficult. Inadequate reporting is another bugbear. To this end, there is no requirement for companies to disclose workplace fatalities to the market, notwithstanding that this is critical business information for investors.
Another issue is that most ESG reporting focuses on lagging metrics, yet leading indicators may provide a better gauge of a company’s ability to outperform the market. For example, employee engagement is a leading indicator of staff retention but relatively few companies report this metric. A greater focus on forward-looking information would assist investors.
Where to next for ESG reporting?
It is widely accepted that poor culture is a key contributor to major behavioural and governance failings. Investors don’t currently know enough about how boards oversee culture, and the data on this issue is often incomplete or scattered across an ESG report. This lack of transparency makes it hard for investors to assess culture from the outside looking in.
ACSI has proposed that all listed entities should be required to regularly conduct culture assessments and disclose any action taken. Assessing and reporting on culture would focus companies on the risks and opportunities associated with their corporate culture.
Improving the reporting of culture data will take time. However, we encourage investors to press for increased disclosure. Demand for information about culture risks may increase the likelihood of disclosure, as it has with other aspects of ESG reporting.
To download a copy of ‘ESG Reporting by the ASX200’ (2019), go to www.acsi.org.au.
Louise Davidson, CEO, Australian Council of Superannuation Investors