Investing with a consideration for environmental, social and governance (ESG) impacts and outcomes in mind has become increasingly mainstream. This year is likely to be a watershed for the ESG movement, with the International Sustainability Standards Board’s (ISSB) project to devise a single global framework for disclosing sustainability information through the International Financial Reporting Standards (IFRS) Foundation gaining momentum. 

Meanwhile, the pool of funds invested responsibly continues to grow, with the Responsible Investment Association of Australasia’s data indicating the pool of funds invested responsibly reached $1.54 trillion in 2021 [1], up from $1.28 trillion in 2020. Assets under management that are invested responsibly comprise 43 per cent of the total market, up from 40 per cent in 2020.

While many larger listed businesses have been on an ESG journey for years, mid-sized and smaller listed businesses are often still working through what matters to investors when it comes to their sustainability and ESG performance.

ASX recently held a roundtable to explore mid- and small-cap ESG reporting. Here’s a summary of the well-attended event.

Giri Tenneti, Senior Manager, Listed Company Services, ASX: Why do investors screen for ESG? 

Robyn Parkin, Head of Sustainability, Ethical Partners: It's about risk and opportunity. We see good ESG as a proxy for good management, governance and business strategy. We believe companies that do things better will do better in the long term. Also, our clients want us to prioritise ESG. Billions of dollars of superannuation mandates are increasingly concerned about this.

Daniela Jaramillo, Head of Sustainable Investing Australia, Fidelity International: It's a mix between prioritising the business case for managing risks and understanding multiple stakeholders needs. It’s also important to acknowledge there are multiple levels of ESG screening. You can screen out a specific sector like tobacco. You can also have positive screens to invest in companies that are making a contribution. Or you can look for companies you think will have less risk because they're managing ESG risks better. We have multiple funds and the approach we take is different for each fund.

Also, regulation is emerging that limits what can be called a sustainable fund. For example, in Europe, if an Australian company wants to be part of a fund that is marketed as being sustainable, they need to meet certain requirements. That's an additional reason why we care about this.

Giri: Could you talk about ESG reporting and performance for smaller companies?

Giri: Robyn, could you tell us about the ESG assessment frameworks you use?

Robyn: Our proprietary in-house screen is the EPORA, the Ethical Partners Opportunity and Risk Assessment. It looks at myriad ESG issues and every stock we consider for investment goes through it. It's integral to the way we look at our portfolio impact. If your stock is not assessed by MSCI for its ESG performance, that makes your own disclosure even more crucial. We're also assessed on our portfolio impact. So as much pressure as companies are feeling, investors feel as well. There's a huge focus on greenwashing. We can't make claims we can't back up.

Ethical Partners has 20 per cent, 30 per cent and 50 per cent carbon emission reduction targets and a net zero target. It’s getting harder to put a company that does not have emissions disclosure into our portfolio because it impacts the way we make claims about addressing our targets. So, if you put out ESG information, we can use that to look at how you fit in with our own targets. And then, it's about working together to address double materiality, which is the financial impact a business has, in addition to its effect on the market, people and the environment. 

Giri: Roland, tell us about your business so people can understand where you're coming from?

Roland Hill, managing director, CEO, FYI Resources: We're an ASX-listed small cap. We have spent five years developing a material called high-purity alumina or HPA. It has applications in LED lights and sapphire glass, which is for TV and other screens.

Giri: What's driving your ESG disclosure?

Roland: It’s an integral part of our future, so we made a conscious decision to start the process early. We spent time looking at the landscape, frameworks and reporting formats. We wanted to present ourselves as a credible participant in the market with all the right ESG operating parameters. This was necessary for us as a group and very important for our partner, Alco. 

Giri: Tim, how does a typical small cap report ESG information and why do they report? 

Tim: It differs a lot. Most companies at the smaller end of the market do not disclose ESG metrics. And there’s often question marks about how to get started. But once you get the hang of it, you understand what you need to do. It's not about being perfect. It's about starting the journey.

Giri: How can you make sure your data is not misrepresented by third-party evaluation services and ratings agencies? 

Tim: Be really clear if it's something that you're working on or haven't figured out. Be very explicit about what you're disclosing. If you're committing to a timeline, you have to follow up on that and say why if you don’t achieve it. Make sure it doesn't become a generic report in which you say a lot of motherhood statements. 

As a small cap, it's about being agile and figuring out what works for you. It's not about having one person in your business who manages a consultant and creates a report once a year. 

It's about enduring capacity building, education and embedding ESG into your whole organisation. It flows all the way from governance and the board, to management, to operational decision making. Take small steps, especially if you are a micro or small cap. And if you don't know what to do, get someone to guide you. Collect your data, get it in one place, get it in shape and think about what you can achieve in a year.

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[1] RIAA, Responsible Investment Benchmark Report Australia 2022