Chief operating officer of PwC Australia and New Zealand Liza Maimone said there are “too few of our largest companies robustly reporting on the right things at the core of their strategy” – a risky failure in an era where investors have ethics and sustainability issues front of mind.
“It’s not about ESG just sitting on the side,” she says. “It will destroy value if you don’t focus on it.”
More than half of the companies in PwC’s analysis did not share medium or long term goals for ESG challenges that were linked to their long term strategy.
Even fewer publicly reported how their goals related to key performance indicators or bonuses for staff: only one in five with a climate target linked this goal to executive remuneration, for example.
Phines Glover, who oversees ESG research at Credit Suisse Australia, said determining minimum standards of ethics and governance reporting was a challenge among listed companies because unlike financial information, each business has a different set of risks to focus on.
Increasing demand for transparency from across the globe on issues including climate change effects and treatment of workers will have an impact on Australia, however.
We need to move to a position where there are minimum mandatory disclosures across all sectors.
Credit Suisse Australia’s Phines Glover
“My view on this is we need to move to a position where there are minimum mandatory disclosures across all sectors. For example, staff turnover is relevant for any company, as is safety data,” he says.
“We’re only moving in one direction here on this, and I think the government’s role is to work out what’s mandatory.”
Australian Council of Superannuation Investors chief executive Louise Davidson believes one of the challenges for investors is that promises of ESG-related targets and goals are not scrutinised as closely as balance sheets.
“I think one of the problems for reporting ESG issues is there is not usually much assurance of those issues. There is not the same level of rigour or scrutiny on the ESG messages reported,” Davidson says.
That level of scrutiny may well change in 2021, however, with high-profile corporate stories such as Rio Tinto’s destruction of the 46,000-year-old Juukan Gorge rock shelters raising questions about companies’ social licences and how that interacts with “social heritage”, she says.
The federal government’s continued focus on combating modern slavery will also flow through to listed companies, with investors demanding businesses properly scope out their risks of using dodgy suppliers and subcontractors, she says.
“As investors, we really want them to report the failures they find in terms of modern slavery. That means they’ve looked properly.”
‘Age of transparency’
Glover says in the “age of transparency”, listed companies must come clean about ESG risks and issues that affect them – or investors and analysts will find out on their own.
“For companies, if they don’t own the narrative on their ESG performance, that vacuum will be filled,” he says.
“Unless a company becomes relatively forthcoming, people are going to find out that information anyway. I can work out what the drought and water deficit exposure is of a mine, for example. The same with modern slavery, there are tools I can use to determine modern slavery risks.”
Maimone says while investors are highly motivated to invest in line with their values heading into 2021, they must keep in mind that non-financial issues often lack the standardised and detailed reporting found on balance sheets.
“I’d point to the gap between the robustness of financial and non-financial reporting and the importance of that into the future,” she says.
When looking at ESG promises, she recommends investors “look at the robustness of the data and the linkage to core strategy” — making sure the goals proclaimed by a company are actually linked to its long term growth plans and operations, rather than just being a PR bullet point on the side.
Emma reports on healthcare companies for The Age and Sydney Morning Herald. She is based in Melbourne.