Incorporating the Environmental, Social and Governance (ESG) aspects of conducting business into corporate reporting cycles is becoming an essential accompaniment to financial and organisational performance measures. Attention, and pressure from investors, customers, employees and interested stakeholders on ESG issues continues to rise as organisations reassess the way they operate and communicate.
The benefits of developing a strong basis for ESG reporting include boosted customer and employee engagement, attraction and retention of talent, improved social licence, reduced operational risk and, increasingly, enhanced investment return.
ESG reporting frameworks provide structure and a consistent way of challenging organisational initiatives and priorities. It is important to identify the ESG issues material to your organisation and the issues key stakeholders view as important.
Environmental, Social, and Governance (ESG) is a broad term that encompasses a range of factors related to non-financial disclosure. These factors are often used by socially conscious investors to screen potential investments and evaluate a company’s overall performance. ESG incorporates two of the main pillars of sustainability – social and environmental – as well as governance matters that impact a company’s ethical and responsible behavior. Social issues such as labor practices and human rights, governance matters like data privacy and security, and environmental considerations like greenhouse gas emissions are all important factors that fall under the ESG umbrella. By taking a comprehensive approach to ESG, companies can better manage risk, increase stakeholder trust, and achieve long-term sustainability goals.
The disclosure of both risks and opportunities is increasingly seen as a vital part of demonstrating how non-financial information informs business strategy. In fact, the increased disclosure of non-financial information has become an industry standard, with companies recognizing the value of presenting their strategies and proposals of intent alongside financial information. However, while there is no globally established uniform strategy for ESG reporting, it is widely recognized that good ESG reporting is complementary to financial corporate strategy reporting. In 2021, 80% of the ASX 200 companies reported ESG to stakeholders, with many reporting on both risks and opportunities. The key inclusions in ESG reporting are strategy, risks and opportunities, materiality, stakeholder engagement, diversity inclusion, and climate change. By addressing these key areas, companies can provide a more comprehensive picture of their overall performance and sustainability, ultimately increasing stakeholder trust and driving long-term success.
What’s its purpose?
Sustainability reporting is quickly becoming an industry standard due to increasing social and investor pressure, and may soon become mandatory in the near future. While there are currently no strict requirements in Australia, the ASX Corporate Governance Principles and Recommendations 2019 recommend that listed entities disclose material exposure to environmental and social risks and explain how they intend to manage these risks. Additionally, the Australian Securities and Investments Commission (ASIC) has called for the adoption of guidelines set forth by the Task Force on Climate-related Financial Disclosures (TCFDs), which the ASX encourages entities to consider when assessing their exposure to climate change risk. While there are various ESG-related regulations in Australia, no sustainability reporting framework is currently legally required, with the justification being that mandatory reporting would impose additional costs on business and lead to a compliance mentality. Some examples of related regulations include the Corporations Act 2001, Modern Slavery Act 2018, Fair Work Act 2009, Environment Protection and Biodiversity Conservation Act 1999, and Workplace Gender Equality Act 2012, all of which aim to promote corporate governance, workers’ rights, and environmental compliance.
There are numerous reasons why companies are beginning to prepare ESG reports. First and foremost, the market expects it, with many investors now seeking out companies that prioritize environmental, social, and governance issues. Additionally, other companies in the same sector are already starting to prepare ESG reports, and failing to do so could put a company at a competitive disadvantage. ESG reporting also adds to the company and brand story, demonstrating a commitment to sustainability and responsible business practices. Moreover, ESG reports provide investors and other stakeholders with useful and pertinent information, allowing them to better understand the key ESG issues within a certain business. Finally, ESG reporting enables a company to explain its position on sustainability and demonstrate action and performance, promoting greater transparency and accountability. Ultimately, by prioritizing ESG reporting, companies can help build a more sustainable and responsible business ecosystem, which is essential for long-term success.
In today’s society, companies that prioritize transparency and ethical business practices are viewed more favourably by the public. As a result, there has been a growing emphasis on corporate sustainability reporting, with organisations such as the Global Reporting Initiative (GRI) providing guidance on best practices. However, companies must understand that the mere act of reporting is no longer enough, and that they must back up their commitments with tangible action and meaningful results. The trend is moving away from traditional corporate social responsibility (CSR) towards the creation of shared value between businesses and the community, which can lead to positive social and environmental impacts as well as economic benefits. Research has shown that strong non-financial performance in certain ESG areas has a statistically significant positive effect on valuations and margins, further highlighting the importance of ESG reporting. Conversely, failure to properly manage ESG risks can lead to reputational damage, regulatory scrutiny, civil and criminal litigation, profit downgrades, and ultimately poor investment results. Therefore, it is clear that companies that prioritize ESG reporting and management will be better positioned to succeed both financially and in terms of their reputation and societal impact.
There are several Australian companies that are producing high-quality ESG reports, and their reports cover a wide range of topics. Here are some examples:
- BHP Group: BHP’s 2021 Sustainability Report covers a range of ESG topics, including climate change, biodiversity, and social investment. The report highlights BHP’s commitment to achieving net-zero greenhouse gas emissions by 2050 and outlines the company’s progress towards this goal.
- Telstra Corporation: Telstra’s 2021 Sustainability Report focuses on topics such as diversity and inclusion, environmental sustainability, and community engagement. The report provides detailed information on Telstra’s progress in these areas and highlights the company’s achievements, such as being recognized as one of the world’s most sustainable companies by the Dow Jones Sustainability Index.
- Westpac Banking Corporation: Westpac’s 2021 Sustainability Report covers a range of ESG topics, including climate change, responsible lending, and community engagement. The report highlights Westpac’s commitment to achieving net-zero emissions by 2050 and outlines the steps the company is taking to address the risks associated with climate change.
- Commonwealth Bank of Australia: Commonwealth Bank’s 2021 Annual Report and Sustainability Report cover a wide range of ESG topics, including climate change, human rights, and responsible banking. The reports highlight the bank’s commitment to transitioning to a net-zero economy and outline its efforts to support its customers in achieving their sustainability goals.
- Woodside Petroleum: Woodside’s 2020 Sustainability Report covers a range of ESG topics, including climate change, environmental performance, and stakeholder engagement. The report provides detailed information on the company’s efforts to reduce its carbon emissions and highlights its commitment to engaging with stakeholders on sustainability issues.
These are just a few examples of Australian companies that are producing high-quality ESG reports. The topics covered in these reports demonstrate that companies are increasingly recognizing the importance of ESG issues and are taking steps to manage these risks and opportunities.
The Cress approach
To develop an effective ESG strategy, Cress undertakes an ESG factor and materiality assessment to identify the ESG topics that are most likely to impact the business. This assessment will help your company focus on the areas of ESG reporting that are most material to its operations. Cress also assesses issues important to stakeholders, as well as analysis of the ESG performance of industry competitors to benchmark expectations. Cress also analyses the regulatory footprint, considering its activities and operational exposures around the world, including in the supply chain. This will ensure that our client is aware of and in compliance with the various regulations and standards that apply to its operations. Additionally, the company should develop a dedicated ESG model to govern matters such as strategy, governance, and risk management.