Why ESG reporting in Australia needs to get out of the comfort zone

Despite positive moves in ESG reporting, ASX200 companies need a more mature approach combined with strategic integration and implementation.

In brief

• ESG reporting in Australia has shown only incremental upticks in maturity
• Balance, use of frameworks and assurance are crucial areas of improvement for ASX200 companies
• ESG reporting needs to now drive strategic conversations that lead to real-world outcomes.

When we look at the current state of ESG reporting in Australia, and its impact on tackling pressing global issues, it is clear there is much more work to do. We know that ESG reporting does not on its own embed solutions to global challenges. It is, however, a crucial marker of how advanced we are in addressing huge underlying issues from climate change to modern slavery in supply chains. 

Without regulation or consistent standards, the sophistication and improvements in ESG reports is commendable. However, considering the gravity of the challenges that the reports consider, ESG reporting in Australia is altogether too comfortable. The extent to which ESG reporting is driving actual change and strategic repositioning is also an open question.

ESG reporting has its own suite of challenges: overly optimistic reporting, a lack of credible assurance, a lack of comparability and consistency driven by a plethora of voluntary standards, a lack of sufficient context and of real-time information.  

Despite this, it is the single most important way to express a company’s ESG ambitions, assess the materiality of its sustainability risks, opportunities and impacts, and explain how it addresses them. Crucially, ESG reports demonstrate to both internal and external stakeholders what meaningful change is actually occurring. But how does reporting keep pace with the increasing sophistication and depth of questioning by interested stakeholders, particularly investors?

Over the past three years, EY has assessed the ASX200’s ESG reports against nine criteria (outlined at the end of the story) using the ESG Reporting Maturity Model (‘the assessment’). The assessment found that despite incremental improvement of the average maturity score over the past three years, there is considerable room for improvement across the board.

As the 2021 reporting season approaches, an uptick in reporting maturity and engagement needs to emerge, especially if ambition is to better address the mounting global issues and lead to real, measurable change. Here we have identified some key areas that ESG reporting needs to address.

A question of balance

EY’s assessment revealed a particular gap in balance. Of the nine criteria that EY assessed companies against, balance had the lowest overall score. Balance is a key principle of both the Global Report Initiative (GRI) and the International Integrated Reporting Framework (<IR>). It refers to the appropriate, impartial reporting of both good and bad news, and articulating risks as well as opportunities. 

Lack of balance shows up as everything on the spectrum from greenwashing to cherry-picking data. The assessment also revealed that the higher a company sat on the ASX, the more balanced its disclosures. The ASX20 showed a 38 percent improvement in balance when compared to ASX200 while the ASX50 showed a 22 percent improvement in balance.

There is a natural inclination to want to tell a good story, but avoiding the discomfort of discussing difficult issues can lead to complacency and undermine the ability of that organisation to drive change. We need a more honest conversation within and importantly, between, organisations about where the challenges lie, and what can be learned from failures or missed targets. Balance also means discussing topics in the context of the relevant sustainability challenges, acknowledging that businesses are part of broader systems that they respond to but also help create.

Disclosures you can depend on 

Balance is inherently tied to another key criteria: assurance. 

Assurance supports the robustness of disclosures and underpins the accuracy and completeness of an ESG report. The assessment identified assurance as correlated with a higher level of reporting maturity, yet companies are not pursuing this advantage; our data reveals that 161 of the ASX200 reports had no assurance.

Assurance is far more than a box-ticking exercise. The 2020 EY Climate Change and Sustainability Services (CCaSS) Institutional Investor survey showed that as investors scrutinise ESG data, and do so more formally, assurance will be increasingly driven by the demand for credible data. A good assurance provider will look beyond the data, to the accuracy and completeness of the disclosures that bring context and meaning to the data. They can also bring an independent perspective to overly positive spin, questions of materiality or lack of engagement with the data. 

The key issue in Australia is that, because assurance is not mandated, it's not standardised. And because companies determine the scope of assurance, it can vary widely. Partial assurance of ESG reports remains common and can be confusing to the end reader as well as limiting the level and depth of external challenge.

Assurance is no panacea, but it can be a good lever for change. EY has found that strong relationships with assurance providers allow those challenges to be heard among the C-suite cacophony.

Standards response

There is not yet consensus on a global standard for sustainability reporting. There are, however, a number of well recognised frameworks that support reporting maturity.

The assessment found that over half of the ASX200 are reporting against GRI (107 reporting) and the Taskforce on Climate-related Financial Disclosure (108) frameworks, with a smaller but growing number using the Sustainability Accounting Standards Board (27) and <IR> (11) frameworks. SASB and the International Integrated Reporting Council have recently merged to form the Value Reporting Foundation, and our expectation is that this combined framework will see far more application in the coming years.

The data shows that ESG reports employing at least one framework, or more than one in combination, have consistently higher maturity scores. The assessment found that the use of frameworks dramatically increases maturity, with companies using at least one framework having an average maturity score of 3.01 compared to a score of 1.46 for those that don’t.

Targets and SDGs

EY is also seeing more leading-edge organisations refreshing their strategies to include impact-based targets linked to frameworks such as the UN Sustainable Development Goals (SDGs) and Net Zero. These are in addition to the well-established targets around diversity, particularly gender balance and leadership, and health and safety.

We are seeing increasing alignment to the SDGs. In 2020, 103 companies aligned with the SDGs, compared with 90 in 2019 and 45 in 2018.

The SDGs most commonly identified were SDG 13 Climate Action, SDG 8 Decent Work and Economic Growth, SDG 12 Responsible Consumption and Production and SDG 5 Gender Equality.

SDGs 13 and 12 are also among SDGs for which Australia is noted as having a major challenge in the global Sustainable Development Report 2021. As well as aligning to the most relevant SDGs, companies need to rise to the challenge of moving from high level pronouncements to measuring and communicating their actual impacts at the level of SDG targets.

A recent EY survey revealed that even though climate disclosures are increasing, real action on decarbonisation isn’t accelerating. For reporting to be an effective driver of change, it needs to be understood as a critical part of the business cycle, that runs from strategy to implementation to reporting. Reporting is an important opportunity for companies to reflect on their progress and review and reset strategy.

Reporting also provides a platform for companies to publicly commit to targets that adequately reflect the sustainability context. Companies that set targets have typically developed a strategy behind those targets. If they haven’t, stakeholders will be asking why not. As strategy feeds into implementation and change, progress against those targets can be tracked. By publicly reporting this trend data, not only can investors understand the motivation and movement towards those targets but it’s a signal to internal stakeholders that an organisation is actively engaging with key ESG issues.

Where to from here?

The bottom line for ESG reporting is that we have to do better. Doing better includes:

• Using reporting frameworks
• Applying reporting principles, particularly balance and context
• Obtaining assurance to give confidence on data reported
• Engaging meaningfully with the SDGs and moving towards reporting on impact.

We are seeing signs that reporting is being appropriately elevated to a C-suite level, with CFOs and CEOs increasingly driving the conversation as part of a wider convergence of non-financial and financial issues. We also see more Boards signing off on sustainability reports. For some companies, reporting is finally forming part of a cycle that then feeds back into strategy and implementation. But these changes aren’t being implemented broadly enough across the ASX200, nor is wider change happening fast enough.

The ESG reporting process is a deeply important mechanism that allows companies and boards to understand their current position and chart a path to better ESG performance. As ESG elevates throughout an organisation, asking the uncomfortable questions becomes one of the critical pathways to long-term value creation and sustainability.