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Listed@ASX Winter 2022
Where once environmental, social and governance (ESG) concerns were the province of the big end of town, now it’s expected all listed businesses incorporate ESG risks and thinking into strategy. But big and small ASX companies have very different resources and levels of maturity when it comes to reporting this data. This panel explores where things are for small and mid-cap listed businesses’ ESG skills.
Alexandra Cain, moderator, Listed@ASX: Where should small- and mid-cap listed businesses start when it comes to ESG reporting?
Jun Bei Liu, portfolio manager, Tribeca Investment Partners: Focus on what’s financially material. The Sustainability Accounting Standards Board provides guidance, but the core principle is every sector is different, so there’s no blanket approach. For example, carbon neutrality is very important for commodity and energy businesses, of which there are many in the Australian listed market. Businesses in this area talk about how they achieve their plan to get to carbon neutrality. But carbon neutrality is very different for a tech company. It’s more about cybersecurity. So, it’s really sector-by-sector, but just to be very clear, it’s about what you do. Understand your business model and your operations and align your ESG plan to the business plan.
Emily Whelan, ESG advisory, UBS: In my role, I work with institutional investors and corporates, so I get to see both sides of the coin. The International Sustainability Standards Board (ISSB) recently released S1 and S2, which are designed to be the global standard for ESG reporting. These frameworks urge reporters to sit down as a business and look at what’s material based on the value chain, balance sheet, cash flows and future access to capital.
Alex Macoun, chief of strategic operations, Siteminder: Our perspective as a recently-listed mid cap company, which has just embarked on formalising an ESG statement and a series of objectives, is there’s a temptation, particularly when faced with a lot of benchmarks, to do too much. Aside from the materiality assessment, comment on where you’re putting in effort. Don’t feel like you need to tick all the boxes and have a boilerplate statement on each piece.
Moana Nottage, ESG and sustainability analyst, Alphinity Investment Management: Look for low hanging fruit, such as measuring electricity use and energy efficiency programs, which have a material positive impact on the business in the short to medium term.
Listed@ASX: How do small caps become more mature in their ESG reporting and what does that look like?
Jun Bei: Gradually align yourself to global SASB standards. Even though you may not have resources, you will be still be judged in the public arena against large cap companies. You can differentiate yourself through your disclosures, even on your website. Investors will look for your information on Bloomberg. If you’re not disclosing, you’ll be marked down. So have a clear view about how you become closely aligned to some of those standards.
It’s also important to talk about the information you already have, such as product impact statements and future sales projections. Talk about how your product and business positively contributes to the environment and its social impacts. It’s important to articulate this in the public arena and collate this data.
Moana: Small caps can have a positive influence on their value chain as they grow, as small suppliers might not have the expertise or resourcing to implement an ESG strategy. Listed businesses taking an holistic view through their supply chains show maturity. In strategy setting, explore the ESG aspirations companies want to meet in three to five years. Ensure there is annual reporting against clear targets linked to remuneration across all levels of the company. For example, although it’s a large company, Schneider Electric has ESG targets linked to the performance of 60,000 employees and progress is reported quarterly. That’s a best practice example.
Moana Nottage, ESG and Sustainability Analyst, Alphinity Investment Management
"Look for low-hanging fruit, such as measuring electricity use and energy efficiency programs."
Emily: Adequate resourcing internally is key. It’s really important in a business to have an individual who has ownership for ESG, because that ensures outcomes are achieved.
Alex: It’s my responsibility at the exec team level, but execution and driving programs against ESG goals rests with other people in the business. So, our facilities manager looks at emissions for each of our office sites. Our people and culture team are involved in diversity and inclusion, volunteering and social impact initiatives. We work closely with legal on compliance and governance. ESG is crowdsourced, as opposed to having dedicated teams.
What we have found helpful in these early stages is drawing on external advisers who can help us take those first steps. It’s very easy for a company with good intentions to get it wrong.
Listed@ASX: What’s important to investors?
Jun Bei: We’re interested in how you future proof your business. We want to know what you are investing in and how that will generate revenue in three or five years’ time.
Alex Macoun, Chief of Strategic Operations, Siteminder
"We look at how we can magnify our ESG impact through other businesses we interact with and bring ESG awareness into our networks."
Moana: Data is critical, whether that’s carbon emissions, renewable energy procurement, employee engagement scores or health and safety metrics. Disclose data points, rather than just publishing case studies, good news stories or generic commentary. As investors, we can ask questions from there. Support ESG priorities with interim targets and programs, while disclosing progress, challenges and how improvements can be made. Everyone is on a journey and transparency is key to understanding how companies are really operating in the ESG space.
Emily: Integrity is critical when you’re looking at metrics and disclosure. If a company is going to put out a metric or goal, investors treat it like a typical financial metric. So the company must be able to demonstrate appropriate modelling behind targets. But, its important not to feel rushed to put out targets, because if the data is not there, if the science is not there, don’t do it. Rather, put out a position statement indicating when the data and targets may be ready.
Alex: Most conversations start with an exploration of what we’re doing now. There are also lots of questions about diversity and inclusion, particularly around gender, and not just from investors, but also from board members. More progressive investors will dig below that into racial and ethnic diversity and disability. What’s important is the relevance of this information to the nature of the company’s operations. For us, it’s primarily about carbon emissions from our data centres and offices. We don’t dig stuff up. We don’t have complex supply chains, but we do have a network of customers that operate all over the world. So, we look at how we can magnify our ESG impact through other small businesses we interact with and help bring ESG awareness to that network of customers and industry partners and multiply our impact that way.
Listed@ASX: Are there key metrics that should form the basis of a company’s ESG reporting?
Emily: There’s a growing set of metrics. Mandatory reporting against the Task Force on Climate-related Financial Disclosures (TCFD) was proposed last year for Australia by the Investor Group on Climate Change and is coming into force for New Zealand at the end of this year. Tracking carbon emissions is key for this framework. Corporate culture metrics are also important such as wellbeing and engagement statistics. Overarchingly though, it is important to focus on metrics that will paint the picture of how your business operates.
Jun Bei: Modern slavery is incredibly important. You need to have clarity and transparency on that front.
Moana: ESG targets should be tied to remuneration and reporting standard operating metrics is a start. ESG should be integrated through the business model. Integrated reporting is something smalland mid-cap companies are going to have to focus on as they get larger.
Listed@ASX: What about the commentary to back this up? What’s the expectation there?
Emily: The ISSB’s draft accounting standards are IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. Qualitative commentary is expected to accompany every metric, and businesses need to explain their modelling and how they got there. Under the ISSB’s draft standards, ESG metrics are treated like financial metrics and if a company can’t back up data with commentary and modelling the information shouldn’t be reported.
Moana: We use the Climate Action 100+ benchmark to assess how actionable a climate target is. Just committing to net zero by 2050 doesn’t cut it anymore. We look at short-, medium- and long-term targets and whether the business has tied these to executive remuneration. We explore offsets because even if a business is climate neutral now, that doesn’t necessarily move the dial when it comes to carbon reduction. Don’t just do something to look good. Work out how relevant it is for your business and whether you can achieve it.
Jun Bei: Context is important for the qualitative side. A lot of businesses, especially smaller ones, shy away from releasing information that doesn’t look great. But it’s so important to disclose when it’s relevant and material and to also talk about context, what you’re doing about it and the action plan. I recently heard a phrase I love that, ‘clear is the new clever’. So businesses should aim to be transparent. Chocolate company Barry Callebaut is an example. It identified child labour in its supply chain, disclosed to investors and then helped the children. Now this is the benchmark. You need to give context and tell the investors how you see things. Bring them along that journey.
Listed@ASX: What else is hard for smaller listed businesses to report and what can they do about that?
Moana: Companies are being more open about their GHG Protocol Corporate Standard scope 1 and 2 emissions. But they are not so open about carbon contributors. Scope 3 emissions reporting on the coroporate value chain is a huge challenge, even for larger companies. Understanding the supply chain and undertaking lifecycle analysis for products is helpful to baseline scope 3 emissions. Improvements can be made from that baseline. So, that’s one example on the environmental side.
In Australia, the Modern Slavery Act has really pushed companies to disclose and go beyond the standard risk assessment of human rights issues. We want to understand what the incidents were and where non-conformance occurs, including identifying high-risk suppliers and high-risk supply chains. It’s still something companies struggle to answer when we ask, because companies have taken a risk map approach, but no detail is not going to cut it long term. Companies need to move into that supply chain and disclose incidents. Audits are going to be a challenge, especially for the smaller companies.
Jun Bei Liu, Portfolio Manager, Tribeca Investment Partners
"Clear is the new clever. Businesses should aim to be transparent."
Emily: A lot of investors I speak to on ESG believe there is some form of modern slavery in every business, it’s just about how deep in the supply chain you go. It’s not just about lifting the lid and leaving it there, a company has got to keep building and growing, becoming more in-depth in analysis. Naturally, as a company continues to report the expectation grows that you as a company, irrespective of your size, becomes more sophisticated in your reporting.
Length of reports is another issue. I’m often asked about how long a sustainability report should be and whether companies should do an individual ESG report or put the information in their annual report. Integrated and purpose-based reporting are two of the most powerful tools for small and midcap companies when it comes to ESG. Why produce a 30-page, glossy ESG report when material, helpful information could be disclosed across three pages in the annual report?
Alex: Risk culture is hard in small, high growth companies. It’s a cultural shift to anticipate what could possibly go wrong, as opposed to assuming your customers are using your products for good. That makes reporting hard. That’s why we support further development of standards that simplify and clarify requirements for small- and mid-cap companies, because that takes a lot of the guesswork out and makes sure expectations are aligned to the capacity of the company to execute, given investor expectations around transparent reporting.
Listed@ASX: Do investors assess existing portfolio companies differently to new companies they may be considering adding to the portfolio?
Jun Bei: It’s really all about the individual company. But there are different approached to screens. And we’ve seen a standardisation of these methods. Negative screens mean investors exclude things like tobacco. But most investors now look at ESG integration, so you’re looking for businesses that have better momentum in this area. Often, the business is improving on its metrics and has plans to improve further and increase engagement.
Other investors are more thematic, and there are funds that focus on specialist areas, such as climate change funds.
Moana: In terms of screening, we exclude thermal coal producers and that’s a decision we’ve made not just because of sustainability but because we genuinely think it’s a business risk. It’s quite interesting to see how the conversation around oil and gas is evolving, so that’s something to watch. Our sustainable funds also exclude activities that are incongruent with the UN’s Sustainable Development Goals, such as all fossil fuels and tobacco.
Emily Whelan, ESG Advisory, UBS
"Investors believe there is some form of modern slavery in every business, it’s just how deep in the supply chain you go."
Listed@ASX: What’s the market’s view on smaller companies’ net zero targets?
Moana: Although smaller companies do have a smaller emissions footprint, they are less likely to measure emissions and be exposed to a carbon cost. But there’s going to be more downward pressure on smaller companies to commit to net zero as their customers and clients set scope 3 targets. As smaller companies are often part of larger supply chains, a commitment to net zero will place them favourably compared to peers.
Alex: I agree. We think it’s important and we know it’s important to our investors. We know it’s important to our people, so that’s a part of it as well.
Listed@ASX: What’s your final piece of advice for small- and mid-cap listed companies?
Emily: I want to touch on the question of whether climate takes precedence over other ESG criteria, given the urgency for change. ESG is a movement, there are social and governance considerations intertwined within the environment; all considerations are interrelated. We just saw the Intergovernmental Panel on Climate Change come out with a report on the impact of climate on human health, demonstrating you can’t focus on one area without considering the other.
I know the assumption is climate takes precedence because we so regularly speak about numbers and dates such as 2030 and 2050. Also, the ability to quantify and measure climate change means changes are reported. We also have more standards on climate reporting than we do for any other ESG factor.
On urgency, I would argue social impacts have shorter time frames. For example, many businesses have set gender diversity targets well before 2050. Sophistication in all these areas comes with time. You can’t have one without the other and they are all part of just doing good business.
June Bei: Listed companies are making great progress and ESG has changed and evolved over a long period. It’s important for companies to gradually broaden out the ESG focus. The market will also focus on different topics. A few years before COVID, it was about waste management. When COVID came, it was all about social impacts and this year, modern slavery is all very important. Companies need to be mindful of this, rather than chasing what’s hot. Clearly identify a strategic vision about who you are, what you do, how you can make an impact and what you’re doing.
For small- to medium-sized businesses, there’s plenty of information available and you can easily disclose on publicly-available sites so investors can find your information. Don’t hold the information to yourself when it’s material. Talk about it, because ultimately, every company will be judged in the same way. We’re making great progress, but there’s a long way to go.
Moana: Baselining ESG data and reporting for a number of topics is a first step. Be aware of gaps and acknowledge them, where you can improve and challenges. Investors, and especially ESG and sustainability specialists, understand it’s not an easy road. Year-on-year improvements are not always consistent and you will face challenges. We’ve seen that through COVID as well, especially on the health and safety side. What’s important is to step back and create an ESG strategy based on materiality, with stakeholder input, integrated from the top down with consensus on the focus topics.
Underpin your strategy with targets and report on progress. Rather than just thinking about ESG as risk, there’s also huge opportunities on which businesses can capitalise. Small-caps and mid-caps can differentiate themselves through ESG, which sets the framework and platform for them to evolve as regulations become tighter, as we are seeing in the modern slavery space.
Alex: The move towards standardisation and clarity of expectations is helpful for everybody. There’s now a greater sense of urgency on climate. I hope that is used to lift all boats in the ESG realm. But smaller companies are on a journey and can’t be expected to solve everything in their first year. It’s about continuing to be transparent and make consistent progress towards goals.
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