ESG Reporting improves among the ASX200 - but are we getting the full story, or just the good story?

PwC Australia’s annual analysis of ESG reporting by the ASX200 reveals a substantial improvement in the past 12 months as Australian businesses work to keep pace with changes in global ESG reporting.

A new report - ESG reporting in Australia - the full story, or just the good story? - is an in depth analysis of the maturity of ESG reporting across Australia’s top 200 companies. It identifies a year of robust improvements in ESG reporting, where 87 per cent of the top 200 Australian companies returned substantial ESG reporting - up 29 per cent from last year’s analysis. 

“This is encouraging progress, particularly given the absence of universally-adopted standards and regulatory guidance on ESG reporting. However, alongside notable pockets of excellence among material disclosures, when we dig into the details we see a more nuanced picture where progress in some critical areas could have been better” said PwC Australia ESG Assurance Lead Matthew Lunn.

PwC Australia’s analysis finds:

• 87 per cent of the top 200 Australian companies returned substantial meaningful ESG reporting - up 29 per cent from last year’s analysis.

• Companies disclosing a timeframe around ESG strategies and goals have nearly doubled, with 76 (38 per cent) of the ASX200 providing deadlines for their ESG targets;

• However, 62 per cent of companies still don’t publish an ESG strategy articulating short, medium and long-term goals;

• Only 36 per cent of the ASX200 have a net-zero target, while just four per cent articulate carbon-negative plans and goals;

• Only 47 per cent of the ASX200 have a gender diversity policy with measurable targets and progress metrics against those targets;

• 76 per cent of the ASX200 do not have a Reconciliation Action Plan endorsed by Reconciliation Australia;

• 41 per cent of companies do not have ESG skills as part of their Board matrix, while only 26 per cent of companies have, or are looking to have, more than one ESG-related skill as a requirement for Board membership;

• 66 per cent of companies do not have their ESG reporting externally assured, while only 45 per cent of companies disclose how directors obtain comfort over the veracity of periodic ESG and other non-financial reporting.

“We’re witnessing enormous investor-driven demand for information about a company’s commitment to ESG activities, which provides a significant opportunity to impress capital markets and reap the rewards of doing so by clearly demonstrating goals and commitments - but while we’ve seen improvement in 2021, there’s a long way to go,” said Lunn.

“Our analysis finds setting targets and demonstrating commitment by linking these to executive remuneration is one of the biggest areas for improvement for the ASX200. It’s essential that companies are setting transparent and meaningful targets based on the strategies they disclose - because without measurable and assurable key performance indicators, based on globally recognised taxonomies and science based targets, their ESG statements and sentiment may be seen as ESG washing, or greenwashing.” 

A higher ESG standard is being driven by a radically-changing landscape

The bar for satisfying stakeholder questions and expectations over ESG performance has risen much higher, and faster, than the market anticipated. According to PwC Australia, this is due to three key factors:

• The expectations and education of stakeholders continues to expand significantly driven by global responses to crises such as the COVID-19 pandemic and climate change;

• ESG reporting standards and frameworks are adapting and converging; and

• Capital providers require more information to meet ESG driven investment mandates.

“With stakeholders more attuned than ever to the impacts of climate change, companies have needed to amp up their response. Increased stakeholder activism has meant companies who make such disclosures have to be prepared to back them up with genuine plans to meet their stated targets - and be careful about how they label their operations or products as clean or green,” said Lunn.

“While the Australian regulatory environment might be perceived as one with minimal ESG reporting obligations, changes around the globe are increasingly impacting Australian companies, particularly those who operate in territories with more sophisticated regulatory systems. These developments mean the speed of change to Australia’s own ESG reporting regulatory regime is becoming increasingly irrelevant.

“Finally, financial services institutions are under increasing stakeholder and regulatory pressure to report on the carbon footprint of their financed activities - and in turn, capital providers are increasingly assessing a company’s ESG performance and carbon footprint and looking beyond the metrics for evidence of net-zero commitments.”

The key to improving ESG performance and keeping pace with stakeholder expectations

According to PwC Australia, ASX200 companies can derive long-term value through ESG performance by focusing on their ESG strategy and execution, the quality of their reporting of performance against such a strategy, and their ESG governance overall. 

“There is an important delineation between reporting ESG information and executing on an integrated ESG strategy. While there is a breadth of publicly-reported information in the ASX200, there’s still a big opportunity for companies to integrate more robust ESG strategies into their business,” Lunn said.

“The key is to engage with stakeholders and properly understand the topics that are important to them - and reflect on how the priorities and goals of these stakeholders drive the ESG strategy.

“A strategy without a plan, a timeframe and measurable targets to be held accountable against is not a strategy, but merely a statement of ambition. Short, medium and long-term plans are needed to ensure progress is made against a company’s ESG strategies with targets and KPIs in order to make progress measurable.”

According to PwC Australia’s analysis, more than half of ASX200 companies don’t include a narrative on the negative impacts of their operations .

“Balance is an important concept when it comes to ESG reporting and helps companies avoid the charge of greenwashing. Many companies also exclude information on ESG topics they do not consider material. However, stakeholders may infer different conclusions from these omissions,” said Lunn.

PwC Australia’s report also identifies proper ESG governance as an essential ingredient for capitalising on ESG opportunities, establishing robust ESG strategies and ensuring sound risk management and regulatory compliance.

“With complex and rapidly changing issues under the ESG banner, boards need to be regularly assessing whether their members are suitably skilled to navigate these issues,” said Lunn.

“In our view, quality ESG governance also requires management’s remuneration and long-term incentives to be linked to the achievement of the organisation’s ESG targets, no different to other strategy related metrics built into remuneration frameworks. This ensures clear responsibility and lines of reporting from skilled management to the Board in areas as broad an environmental impact and climate change, risk management, human resources and diversity and inclusion.

“Further, many Boards are asking questions about ESG, but they’re not turning the magnifying glass on themselves to ensure they have the right knowledge and expertise to be able to appropriately manage or provide governance over ESG.”