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Potential changes to Environmental, Social and Governance reporting

Environmental, Social and Governance (ESG) isn’t new to Australia, but it’s expected to become a more important aspect of business in the coming years. With shareholders and institutional investors paying close attention to business activities with an ESG lens we can expect more focus on this area. A recent example is the HESTA superannuation fund choosing to very publicly vote against the AGL demerger proposal on ESG grounds.

As in the example of AGL, pressure from investors on ESG issues can not only influence corporate strategy but actually change it completely. Internationally for example, investors have used their influence to require companies to commit to waste reduction and link achievement of reduction targets to executive compensation. 

In Australia, investors can exert their influence by having discussions with management, voting on specific issues at an AGM or even calling a general meeting and instigating resolutions to remove directors of the company. Under the Corporations Act 2001 (Cth), the power to call a general meeting is possible at the request of members who hold at least 5% of the votes. 

Investors are increasingly aware of their potential power and some are actively using it to ensure ESG agendas are paid more than lip service. Companies need to not only be aware of this risk, but actively manage it to ensure that their corporate strategy meets the expectations or requirements of significant shareholders. 

Traditionally an ESG rating system has been used to rank business performance in ESG matters, but there are shortfalls to this method that are increasingly being questioned.  For example, there is no standard international method to calculate ratings that means they can be inconsistent. The ratings often also focus on the financial impact on the individual business rather than the impact on society and the environment as a whole. The International Sustainability Standards Board is currently reviewing standards with a view to establishing general requirements for sustainability and climate-related disclosures. This will build on the Taskforce on Climate-related Financial Disclosures. 

Currently in Australia, the Taskforce on Climate-related Financial Disclosures is voluntary but several countries are introducing mandatory disclosures and it’s expected that this may be considered here as well. While the International Sustainability Standards Board can’t mandate their requirements, the government may very well choose to. This would add to the existing ESG disclosure requirements that currently exist in Australia. 

The current ESG disclosure requirements focus on high profile or high risk issues, such as slavery and gender equality. The ESG Reporting Guide for Australian Companies provides some useful guidance for companies on what information investment analysts require and what indicators may be used to assess business performance against ESG issues. This is a helpful starting point for organisations looking to get ahead of potential changes to ESG reporting and to ensure investors have the information they need to make sound decisions.  

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