ESG reporting continues to progress among ASX200, yet disclosure levels still need to improve to meet upcoming ISSB standards

• 13% increase in companies disclosing Net Zero commitment and of those, approximately half of these include discussion on transition plan on how target is intended to be met
• 33% have a reconciliation plan endorsed by Reconciliation Australia, compared to 24% in 2021
• 30% uplift in number of companies disclosing gender diversity policy that includes a target and reports against performance, with 77% now including disclosure in this area
• Currently 25% disclose climate change competencies of the board and only 6% discuss training plans for board members
• 55% identified climate change as a current or emerging risk, yet only 18% discuss how their financial position may change due to climate change-related risks and opportunities
• 57% of companies have targets and demonstrate evidence of monitoring performance against these for the majority of their material ESG topics

Australian entities are making significant advances in their environmental, social and governance (ESG) reporting. There has been a steady increase in the comprehensiveness of ESG reporting across Australia's leading companies over the last three years - according to the latest analysis released today by PwC Australia.

The ESG Reporting in Australia analysis this year revealed a significant uplift in the number of companies reporting on ESG performance. While ASX200* companies across the board have progressed the maturity of their ESG reporting there are compelling reasons for them to accelerate their efforts.

Despite year-on-year improvements in ESG reporting, ASX200 disclosure levels will need to be significantly enhanced to meet the proposed standards of the International Sustainability Standards Board (ISSB), particularly in the area of quantifying the financial impact of risks and opportunities. While the volume of ESG reporting has increased, much of it is focused on the impact the company has on the economy, environment and people rather than financial impact ESG topics may have on a company’s enterprise value.

Kristin Stubbins, Assurance leader at PwC Australia said, “Significant progress has been made in measuring climate and sustainability performance, with half of the companies in our analysis including some disclosure of Scope 3 emissions. However, many organisations still need to improve their financial disclosures of the risks and opportunities that exist.

“Overall, the ASX200 showed year-on-year improvements in reporting on their sustainability strategies and identifying material topics. However, many companies are still working up the maturity curve in setting specific targets in these areas and developing disclosures that measure progress against targets.”

A year of improvements in climate-related disclosures

There continues to be a gradual improvement in disclosures around the risk of climate change to Australian businesses, with over half (55%) identifying climate change as a current or emerging risk that is being considered by the board and management.

More companies are reporting Net Zero targets, with 49% having committed to Net Zero and approximately half of these also including a reasonable level of detail on a transition plan to achieve this target.

There has been an increase in the understanding, measurement and reporting on emissions, including Scope 3, with 49% of companies disclosing Scope 3 emissions in some form. Of these, 14% include emissions from their own operations as well as some inclusion of upstream and downstream through their value chains.

“Material Scope 3 impacts will vary by industry and business model, but for many companies, a large amount of emissions occur upstream via suppliers and raw materials, or downstream through use and disposal of products. Given its far-reaching impact, every area of the business could be affected, from supply chain and product development to reporting, and marketing.

“While companies are making good first efforts in reporting Scope 3 emissions, these are often excluded from the scope of external assurance. We expect this to change over time as the quality and availability of underlying data improves,” said Ms Stubbins.

Key findings in relation to the General Requirements Sustainability Reporting Standard (S1) for the ASX50

Seventy eight percent of the ASX50** provide some level of disclosure on ESG topics relevant to their industry as identified by the Sustainability Accounting Standards Board (SASB) standards being leveraged by the ISSB.

Disclosure has improved regarding how companies identify, prioritise and address ESG topics considered most important to their business. Over 74% of the ASX50 disclosed the process undertaken to identify these topics, with 44% of those companies describing the frequency this process is updated (an improvement over the prior year of approximately 10%). Similarly, we have seen an improvement in the description of engagement with internal and external stakeholders, with 22% of the companies outlining the critical issues relevant for all stakeholder groups and outlining actions in response to these concerns.

Ms Stubbins said companies require more guidance on what constitutes a 'significant' sustainability risk and opportunity under ISSB to meet reporting requirements.

Key findings in relation to the Climate-related Disclosures Sustainability Reporting Standard (S2)

When looking at the bigger cohort of the ASX200, there are consistent gaps in disclosure under the S2 guidance.

For governance, the most significant gap is around disclosure of skills. Only 25% disclose the specific expertise of board members concerning climate change; and only 6% disclose the training the board has undertaken or are about to undertake.

For strategy, the biggest gap is assessing the financial impact of the risks and opportunities, with only one in five companies providing disclosures on performing a scenario analysis; how significant climate-related risks and opportunities affected the most recently-reported financial position, financial performance and cash flows; and how the financial position will change over time for a given strategy to address climate-related risks and opportunities.

“To meet the proposed S2 requirements, companies will need to provide more detailed disclosure of decarbonisation transition plans to address climate risks. For example, disclosures on how decarbonisation transition plans will be resourced are shown for approximately a quarter of companies. Providing a reasonable basis for how a company will achieve emission reduction targets, for instance in the form of a resourced transition plan, provides confidence to stakeholders on the validity and achievability of these ambitions,” said Ms Stubbins.

For risk management, while many companies have identified climate change as a material risk, describing how this assessment fits into their already-established risk assessment framework is only done by approximately one in three companies. Furthermore, clearly sign posting or describing opportunities identified through a transition to a lower carbon economy is limited.

Ms Stubbins said, “This may be driven partly by the fact that companies haven't yet been able to articulate their opportunities in a commercially-sensitive manner. Companies are also grappling with managing the risk of greenwashing, which is now on regulators' radar. ASIC is already undertaking greenwashing investigations according to press reports, and has been proactive in warning companies about making misleading statements and product offerings.”

For metrics and targets, the draft standard requires an extensive range of information relating to metrics and targets that is not currently disclosed by Australian companies such as the amount and percentage of assets or business activities vulnerable to physical and transition risks; the amount and percentage of assets or business activities aligned with climate related-opportunities; the deployment of capital towards financing or investment; the use of internal carbon prices; and a link to remuneration - disclosing how executive management’s KPI’s are aligned to meeting climate related targets.

ESG reporting requirements are driving large-scale shifts in overall business strategies and approaches locally and abroad. Looking at initiatives across the globe, mandatory ESG regulation requirements continue to pick up pace, with Australia undoubtedly to follow suit. Stakeholder activism on ESG topics also continues to gain traction as regulators become increasingly concerned with greenwashing.

All of this points to a clear need for companies to address the proposed reporting requirements sooner rather than later. Alongside complying with ISSB’s sustainability and climate standards, it remains essential that companies maintain momentum in other ESG areas such as modern slavery, First Nations, diversity and privacy.

“Boards and executives are being asked to work towards a ‘no regrets path’. They need to stay on top of the evolving regulatory landscape; ensure a collaborative and holistic view is being formed which considers all stakeholders within their organisation; and prepare for impending ISSB changes. This year’s analysis indicates companies are slowly realising this but that significant work is still required to meet the changes that are coming,” concluded Ms Stubbins.

* 165 companies of the ASX200 are included in the analysis

** 46 companies of the ASX50 are included in the analysis as they had reported results by 14 October