Twenty years ago, Australia's reporting seasons, annual reports and Annual General Meetings (AGMs) primarily focused on financial reports for investors. Today, the landscape has evolved, and companies now include discussions around sustainability in their reporting. The audience has also expanded beyond investors to include unions, activists, regulators, employees, and consumers.
We have just entered a new financial year. With Australia's bi-annual reporting season commencing in August, the imminent release of annual and sustainability reports, and AGM season coming up in November, we have identified seven key environmental, social and governance (ESG) topics we want to see ASX-listed companies work harder to address in FY25. These are namely climate transition, natural capital, workplace safety, First Nations outcomes, gender diversity, ethical sourcing, and greenwashing.
These topics will guide our investment team’s engagements with boards and management in the coming months, and feature in the important engagements we will have in the post-reporting season one-on-one meetings with companies.
1. Climate transition
Decarbonisation has of course been a significant topic for several years, and reporting is stepping up. As of 1 July 2024, the Government requires mandatory climate disclosures for Scope 1 and 2 emissions from major emitters and large organisations. Next year’s reporting will be even more crucial, as companies must also assure material Scope 3 emissions, scenario analysis, and transition plans. Currently, few companies share their scenario analysis, so this will mark a significant information shift.
In the financial reports provided by companies this reporting season, we will be examining how climate transition costs and revenue opportunities appear in results and how they impact our proprietary ratings, Carbon Value at Risk calculations, and company valuations. We anticipate seeing increased revenue and earnings, growth in capital expenditure and R&D from solution-oriented companies, and significant investments in heavy industrial transitions. Additionally, we expect to observe higher costs and depreciation due to climate change, as well as reduced asset lives and values due to stranded asset risks.
We will utilise new carbon data and insights from these results in our meetings with boards and management. Our goal is to challenge companies if their emissions reduction efforts fall short of our forecasts for 2030 and 2050 or to push companies that are not yet Science Based Targets initiative (SBTi) certified to commit to these rigorous standards.
2. Natural capital
Another critical focus is natural capital and biodiversity, however, with a short implementation timeline to mandatory climate reporting, companies may focus less on nature this year. We are hearing already that many companies are deprioritizing biodiversity policy development, and only five listed Australian companies have committed to early adoption of the Taskforce on Nature-related Financial Disclosures (TFND).
Despite the focus on climate reporting, we will be using our proprietary Natural Capital ‘best practice framework,’ developed from our 2022 survey of ASX-listed companies, to engage with companies we have assessed to significantly impact or depend on nature and to highlight to them the potential long-term impacts of deprioritising biodiversity.
-
These topics will guide our investment team’s engagements with boards and management in the coming months, and feature in the important engagements we will have in the post-reporting season one-on-ones meetings with companies.
3. Workplace safety
Workplace safety concerns have expanded beyond labour-intensive sectors like resources to industrial and consumer sectors, with a rise in injuries and deaths. This spike is linked to increased mechanisation and automation, a growing migrant workforce, and the reliance on imported goods and online retail, which increases warehousing and manual handling. High-quality training and education are crucial in all cases.
We rate companies better when they are transparent about workplace safety. Mining companies have traditionally been very transparent, but now all companies must acknowledge and mitigate the risks. Through our engagements, and also our proxy voting later in the year, we will assess whether workplace safety is appropriately owned at the highest organisational levels. One way to do this is for KPIs to be directly related to safety incidents, and for short-term incentives and remuneration to be impacted by workplace incidents. This accountability is crucial to business culture, ensuring that the health and safety of employees are prioritised alongside business growth and profit.
Australian companies are increasingly focused on improving outcomes for First Nations people. Resource companies have traditionally been leaders in this area, but more companies are expected to report their efforts this year. These efforts are likely to include diversity initiatives, targeting Indigenous employment, training programs, and procurement. According to Supply Nation’s Social Return on Investment (SROI) report1 , for every dollar of revenue earned, Indigenous-owned businesses can create A$4.40 in economic and social value for their communities. More companies are also adopting a Reconciliation Action Plan (RAP)2.
In 2023, we began assessing the status and effectiveness of the RAPs of our investee companies. Through our engagements, we will be continuing our monitoring and evaluations of how these RAPs are being implemented and will seek evidence of their impact, ensuring that companies are not only making commitments but also delivering tangible outcomes for First Nations communities.
5. Gender diversity
Diverse teams lead to better decision-making and business outcomes. While progress has been made on gender, much work remains. Roughly half of the Australian workforce is female, whereas only 34% of board members are female, and 22% of CEOs3 are female.
We are focused on seeing a better gender balance across the full workforce. While improvements are being made at senior management and board levels, we want to better understand the pipeline of talent companies have for succession from the next generation. This will be a key focus of our engagements, as building a diverse and inclusive culture at all levels is crucial for long-term success.
6. Ethical sourcing
Reporting requirements under Australia’s Modern Slavery Act reporting requirements have been in place for several years, and we are starting to see better disclosures from many companies around their related risk factors. However, Australian supply chains weave through the highest risk region in the world. Companies must remain vigilant, as much work is still needed to eliminate modern slavery risk from their supply chains. A key recent change in May 2024 was the federal government's legislation authorising the statutory appointment of an Australian Anti-Slavery Commissioner, who will be tasked with supporting victims and survivors, raising community awareness, and helping business address the risk of modern slavery practices in their operations 4.
We have found that the companies that are more transparent about modern slavery incidents, rather than trying to hide or downplay them, invest most in mitigation and have the most positive impact. Additionally, a company’s approach to modern slavery often reflects its overarching culture and policies around social and governance issues such as worker underpayment and substandard working conditions.
We will be using our engagements to push for positive change where policy and action are deficient versus our proprietary Best Practice Framework, initially built from our 2021 survey of ASX-listed companies.
7. Greenwashing
With an increased sustainability focus expected within company annual reporting, continued scrutiny from both regulators and investors is expected. Sustainability is not just a marketing tool; it requires genuine commitment and action.
We are on the lookout for companies talking about sustainability without real action to back their claims. We seek concrete evidence that a company has implemented strong policies and processes to ensure they are doing what they say and being fully transparent about the associated risks and opportunities. We will engage with boards, management, and sustainability officers of companies making unsubstantiated claims to ensure accountability and integrity in their practices.
Sources
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable.
1 Source: Supply Nation, August 2018. The Sleeping Giant: A Social Return on Investment Report on Supply Nation Certified Suppliers. Available from https://supplynation.org.au/wp-content/uploads/2018/08/Sleeping-Giant-Report.pdf
2 Source: Reconciliation Australia. Who has a RAP? Available from https://www.reconciliation.org.au/reconciliation-action-plans/who-has-a-rap/
3 Source: WGEA, November 2023. WGEA Gender Equality Scorecard 2022-23. Available from https://www.wgea.gov.au/publications/australias-gender-equality-scorecard
4 Source. Attorney General Department, May 2024. Albanese Government establishes Anti-Slavery Commissioner. Available fromhttps://ministers.ag.gov.au/media-centre/albanese-government-establishes-anti-slavery-commissioner-28-05-2024
Important information
This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’), authorised and regulated by the Financial Conduct Authority. It does not constitute investment advice. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The information contained in this document has been compiled with considerable care to ensure its accuracy. However, no representation or warranty, express or implied, is made to its accuracy or completeness. Martin Currie has procured any research or analysis contained in this document for its own use. It is provided to you only incidentally and any opinions expressed are subject to change without notice.
The document does not form the basis of, nor should it be relied upon in connection with, any subsequent contract or agreement. It does not constitute, and may not be used for the purpose of, an offer or invitation to subscribe for or otherwise acquire shares in any of the products mentioned.
Past performance is not a guide to future returns.
The distribution of specific products is restricted in certain jurisdictions, investors should be aware of these restrictions before requesting further specific information.
The views expressed are opinions of the portfolio managers as of the date of this document and are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. These opinions are not intended to be a forecast of future events, research, a guarantee of future results or investment advice.
The analysis of Environmental, Social and Governance (ESG) factors forms an important part of the investment process and helps inform investment decisions. The strategy/ies do not necessarily target particular sustainability outcomes.