DAN JONES, Manager Shareholder Analytics
As institutional investors increasingly demand more accountability for Environmental, Social and Governance (ESG) performance, companies face pressure to improve their standards of ESG reporting. However, unlike financial data, ESG information has no legislated or regulatory reporting guidelines or formats so the mechanism for delivery and any adoption of a reporting standard is at the discretion of the company.
This has created a variety of reporting practices for ASX companies, ranging from those that have not yet commenced ESG Reporting in earnest, to those with integrated ESG-aligned webpages and multiple sites, with data reported in line with one of the major international standards. Within this range, a clear benchmark has emerged for companies to produce a dedicated standalone ESG Report.
With this in mind, FIRST Advisers completed a stocktake of ESG Reporting for ASX300 companies and found that since 2019, approximately 50% of ASX300 companies produced a standalone ESG Report.
For the purposes of this research, a Corporate Governance report (which companies are required to produce) was not considered a standalone ESG Report despite it addressing the governance aspect of ESG. It was considered an ESG report only when elements of Social and Environmental performance were also taken into consideration. (Companies referred to their ESG Report using different terminology, most commonly sustainability or corporate (social) responsibility, which were all considered as achieving this benchmark).
Larger companies responding to shareholders advocating for ESG transparency
Our research indicated larger companies are more likely to produce a standalone ESG Report with more than 80% of ASX100 constituents achieving this, including every member of the ASX20. Of note here is that passive (index) funds and Superannuation funds, which by definition hold a proportionally greater share of top-ranked companies, historically have been among the most prominent advocates for greater ESG transparency.
By comparison, standalone ESG Reports were produced by 47% of Mid-Cap Companies (ASX200 ex-100) and 24% of Small Cap companies (Ex-200). Small-cap companies were also less ESG orientated within their annual report, with 32% having no dedicated ESG/Sustainability section, compared to 23% of Mid-Caps and just 17% of Large-Caps.
GRI is the most widely used ESG Reporting Framework
Globally there are four organisations that are generally acknowledged as setting the standard in ESG Reporting: Global Reporting Initiative (GRI), Sustainable Accounting Standards Board (SASB), Task-Force on Climate-related Financial Disclosures (TCFD) and United Nation Global Compact (UNGC), which encompasses the United Nations Sustainable Development Goals (SDGs). In addition, there are numerous industry-specific frameworks
Our analysis found 51% of all ASX300 companies reported to at least one of these major frameworks. For Companies that produced a standalone ESG Report, the adoption rate of at least one of these standards was 85%.
GRI was the most widely used framework, as 60% of companies that produced a standalone ESG Report did so with specific mention of it as an adopted methodology. TCFD and UNGC were chosen by 40% and 37% of reporting companies, respectively, while SASB as the newest framework was specifically mentioned by 7% of companies.
Companies are adopting multiple frameworks
60% of companies that produced an ESG report did so with reference to two or more of the major frameworks.
GRI, the most widely adopted framework, was supplemented with another, 58% of the time. Most commonly it was paired with UNCG (25%) and TCFD (22%). All companies that employed SASB also integrated one (or more) of the other frameworks.
GRI, SASB, TCFD and UNGC were more widely adopted by Large-Caps, as 80% of all ASX100 companies, including 92% of those that produced a Standalone ESG Report, referenced at least one of these frameworks. By contrast just over one third (37%) of Ex-100 companies reported in line with at least one of these four standards, however those that produced standalone reports were more likely to reference these frameworks (76%).
In addition to the four major approaches mentioned above, there are numerous frameworks designed for specific industries, or ones that focus on particular elements within ESG. Our research showed about 12% of companies referenced at least one of these other approaches, the most common being International Council of Metals and Mining (ICMM), IPIECA, LBG (London Benchmarking Group), B Corp certification and the United Nations Principals for Responsible Investment.
ESG Reporting led by Environmentally Sensitive Sectors
Sectors often viewed as environmentally sensitive had the highest proportion of standalone ESG Reporters, with more than 60% representation across Energy (69%), Industrials (64%) and Materials (63%).
Sectors where Sustainability has a more dominant influence than Environmental factors were less likely to produce a standalone ESG report, including Consumer Discretionary (33%), Consumer Services (44%), Healthcare (44%) and Financials (49%).
The lowest proportion of standalone ESG Reports was from the Information Technology sector (17%).
Choose your framework carefully
The clear takeout from this analysis is that the first task for companies starting down the ESG reporting path is to thoroughly research the different frameworks including those most commonly adopted by the peer group. It is also important to be open to the possibility that more than one may be the optimal solution in order to effectively address all the issues that need to be reported on. Finally, as new frameworks emerge and gain prominence within the investment community, remain flexible and be open to incorporating or changing the methodology being used.
If companies want to access the capital distributed by fund managers, we are rapidly approaching the point where it is not enough to simply demonstrate that they can be trusted to generate a superior return on that capital. Boards and management teams must also make the case that they are also mindful of the impact their business has on the community, the environment and the future of the planet.