- 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
Build resilience: Tips for CFOs planning to future-proof a private business
Tsae Liew, PwC Private Tax Partner
The exact origin of the phrase “May you live in interesting times” is not known but one thing is for sure: Australia’s finance leaders are steering private businesses through interesting times right now.
To name just a few of the headwinds in the global economy: Supply chain pressure. Labour market shortages. Weather-related disruptions. Rising energy costs. Geopolitical tensions. The push towards decarbonisation.
But while CFOs could be forgiven for feeling daunted by these headwinds, Australian private businesses are uniquely placed to come through all this in a remarkably healthy position. That message came through loud and clear when finance leaders discussed the economic outlook at our recent Private Business CFO Connect webinar. In fact, reading between the lines, there are ample reasons for optimism in the months ahead.
Glass half empty or half full?
Despite consecutive interest rate rises and the increased cost of capital, Australia is currently enjoying a period of relative liquidity in the market – due in no small part to Australia’s strong economic response to COVID-19. With GDP growth remaining positive throughout the pandemic, healthy fiscal resilience and improved income equity, the prospects for Australia’s private businesses are more rosy than they might first appear.
This is not to say it will be all smooth sailing. The question CFOs and finance leaders need to answer now is, what can be done to ensure your business will succeed, and even thrive, in this increasingly volatile market?
Power of planning: The key to organisational resilience
Not just a buzz word, resilience (or lack of it) can make or break a business; particularly in these “interesting times” of uncertainty. As our expert panel shared during the webinar, there are practical measures finance leaders can take now to ensure a private business is agile enough to weather the ups and downs – and be prepared enough to capitalise on the opportunities that may arise just as unexpectedly.
Consider worst-case scenarios
It can be uncomfortable for any private business to explore worst-case scenarios. However, carrying out a full, hypothetical analysis of potential crises such as a weather-related disruptions, or unexpected income losses before they arise offers CFOs and finance leaders the opportunity to future-proof operations as much as possible.
Consider, for example, the following. Would your organisation pay ransom in the event of a cyber attack? What processes are in place in the event of flood-related transport disruptions? How would your business respond if sales dropped by 10% and what measures could you take to ensure your business still thrives? What if sales dropped by 20%? Or 30%?
These are complex questions, and paper is cheap, as the saying goes. Taking the time to explore operational risks and the full range of responses for theoretical (albeit possible) crises not only highlights weaknesses, but also identifies solutions ahead of time. Pre-planning provides a clear, well-considered course of action in the event of such a crisis unfolding, allowing finance leaders the ability to approach future challenges with confidence, clarity, and rational decision-making paths when most needed.
Focus on financier relationships
While there is a large amount of liquidity in the market right now, we can expect to see a much more judicious allocation of capital across companies and sectors as banks work to ensure their credit risk is managed. By asking more ‘what ifs…?’ CFOs can not only build more organisational resilience but simultaneously strengthen the relationship with their financiers.
First though, private businesses must be willing to stress-test their financial forecast. Consider possibilities such as your bank wanting to shift towards a mix of fixed versus floating interest rates, stricter covenants, or increased margins for credit risk. How will your organisation respond? Asking these questions demonstrates a willingness to be proactive and minimises the risk attached to your private business from funding risk – both valuable traits at a time when financiers are having to assess the risk and return of every customer ever more carefully.
In addition to planning, work to establish and maintain positive, open channels of communication with your bank. This is not so much an obligation as it is smart business practice. Inviting financiers to understand, in detail, your current performance, business strategies and challenges helps to create a mutually beneficial commercial relationship predicated on trust. While nothing can completely negate uncertainty present in the current lending landscape; trust, openness, and willingness to work in partnership will hold businesses in very good stead with their bank, and the wider business landscape.
Step boldly into the future
In short, whilst these may be interesting times, there are many reasons for optimism in the months ahead. With some bold forward-thinking, finance leaders can put private businesses in a strong position to meet the challenges and opportunities head-on.
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Check out the Private Business CFO Connect page for latest relevant articles and insights.
Read how Private businesses can create and retain value now, an article by Australian Private Leader, Martina Crowley
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