The glossy sustainability report with its pretty pictures of trees seedlings could become a thing of the past, as leading companies increasingly incorporate environmental, social and governance matters into mainstream annual reporting.
Sustainable Business Australia chief executive Andrew Petersen said this is because it is increasingly recognised that financial risks are “usually a consequence of non-financial risks.”
A recent example is the scandal engulfing the Commonwealth Bank, where “hubris” resulted in clear financial consequences for the bank, Petersen told The Fifth Estate.
Worldwide, in 2017 34 per cent of World Business Council for Sustainable Development members produced integrated reporting in 2017, up from 28 per cent in 2016.
Climate change is seen as something that can have an impact on the financial balance sheet. It is being seen as a material issue, not a political one, and there is an “interconnectivity” being recognised.
Petersen says the possible introduction of a carbon tax is a top line and external risk for companies, leading many to look at refashioning their materiality.
Companies where carbon emissions are a part of undertaking core business, such as Santos, BHP and AGL are analysing the impact on upstream and downstream supply chains.
They are looking for opportunities to purchase investments that allow them to decarbonise.
Right now, the “world is awash with capital”, Petersen says, and this post-GFC capital boom is active in finding low carbon business models to invest in.
Global companies such as Shell and BP are hedging future risk relating to fossil fuel exposure by investing in EV charging stations, windfarms and other low-carbon assets.
“As the momentum around renewable grows, new business models emerge.”
Petersen says the property investment sector is looking at ESG aspects from a “lifestyle perspective”.
The work of researchers such as Dr Liz Hanna at ANU is paving the way for a growing acceptance of the emerging health and wellbeing aspects of climate change.
“There are generic impacts for regions across the board,” Petersen says. “We are also seeing evidence of immediate health impacts emerge.”
This will see the real estate investment trusts and other property investors bring forward new product and looking to “shore up existing product” in an environment where “health and wellbeing are the next big issue for residential, commercial and retail property.”
Disclosure push factors are also coming from an increasing focus on the sustainability of materials, and also from policy shifts like the introduction of Modern Slavery legislation.
The content of the ESG reporting in mainstream reports is also increasingly required to be metrics-based, rather than relying on motherhood statements and feel-good ambitions.
Investors are now looking at whether goals and policies are aligned with the Sustainable Development Goals, Petersen says.
Overall, there is a need for some form of standardising reporting.
He says organisations such as the Global Reporting Initiative, CDP, OECD and WBCSD are working on harmonisation of reporting to make metric more meaningful.
These types of moves tend to “bubble up among the leading companies and then filter back down.”
Climate change and modern slavery will be two leading issues in terms of the metrics, Petersen says.
He says there are two main types of readers looking at integrated reporting and its ESD component. The first group are the technically-minded professionals doing a deep reading and interested in the data. The second are the consumer investor, government or supplier looking to understand a company and how it is performing and managing risk.
For either group, the level of critical analysis and evidence-based activity reports need to include is the same.
“Increasingly companies can’t obfuscate.
“You can’t have photos to explain the social license to operate. The expectation of stakeholders is much greater than it used to be.”
Goals and outcomes need to be “measureable and quantifiable.”
The new integrated report has a lot in the way of less visuals and more content, so key messages are enunciated, and it includes information to back that up.
“So if you make a statement about a target, it’s a question of have you actually measured it and reported on your impact and performance?”
The same appetite for science-based targets for climate and for water is now applying to non-financial reporting, Petersen says.
The WBSD and the Climate Disclosure Standards Board recently released a new Reporting Exchange case study on Australia that looks at the challenges and opportunities for corporate reporting.
The Sustainability Reporting: Jumping Into the Mainstream report also compares the Australian reporting landscape with that of South Africa and Singapore.
The research found that environmental issues are the dominant ESG factor being addressed, with climate change and water two key areas for reporting. Corporate accountability and governance are also a major focus in Australia, more so than Singapore.
By comparison, South African reporting has a much broader and deeper focus on social issues such as employment conditions and community health, and Singapore’s business community is reporting on a broader range of environmental factors.
Companies in Singapore and South Africa are also subject to more mandatory reporting requirements than Australian ones.
- Read the full report here