ESG is the most pressing question facing our industry, but how do we bring it all together?
Insight | 8 MINUTE READ
Environmental, social and governance (ESG) reporting is increasingly used by investors and other stakeholders to track an organisation’s ESG activities and keep it accountable for it's actions.
Terminology such as sustainability, corporate social responsibility or triple bottom line have been varyingly used for decades to describe nonfinancial performance and disclosure. The term ESG itself was first mentioned in the United Nation’s Principles for Responsible Investment and ESG criteria in 2005, and has now become synonymous with the ability to demonstrate good corporate citizenship.
An EY 2020 Institutional Investor Survey1 confirmed that investors are also increasingly applying a more disciplined and rigorous approach to evaluating a company’s nonfinancial performance, with 72% of investors surveyed indicating they conduct a structured, methodical evaluation, up from 32% in 2018.
Sustainability Reports are a key source of ESG performance information relied on by investors and stakeholders to make informed decisions about an organisation’s sustainability impacts. Investor and stakeholder expectations around ESG disclosure are increasing and reporting standards are rising to respond to that expectation.
These days, a company’s risk profile is raised in the eyes of investors if it fails to consider ESG risks adequately and disclose its approach to them. Among other things, this makes it difficult for a company to access capital and can over time, render it ‘un-investable’ to investors, many of whom now have ESG or green mandates.
Cromwell is recognised as a ‘Leader’ in ESG reporting by Australian Council of Superannuation Investors (ACSI)
Each year, acsi identifies companies that have consistently outperformed others in their esg reporting.
ESG Reporting Trends in the ASX200 highlighted that the number of ‘Detailed’ and ‘Leading’ reporters have tripled since 2008.
ACSI have again assessed Cromwell at a ‘Leading’2 rating. ‘Leaders’ have reported at a ‘Leading’ level for the last four or more consecutive years.
Cromwell has been disclosing ESG performance in annual Sustainability Reports since 2009 and to achieve leading ESG disclosure, Cromwell reports in accordance with the Global Reporting Initiative (GRI) Standards.
The GRI Standards is the most widely adopted framework for sustainability reporting, covering topics from anti-corruption measures to water, biodiversity to health and safety, tax transparency to emissions.
GRI’s Reporting Principles are fundamental to achieving high quality sustainability reporting. These principles are:
Principles for defining report content
Principles for defining report quality
A key principle for good reporting is balance. Balance refers to reporting both favourable and unfavourable results and topics, articulating risks and opportunities, and presenting information in a format that allows stakeholders to see year-on-year performance trends. It also includes presenting any information that could influence the decisions of stakeholders.
Balance is cited as a core principle of disclosure across multiple ESG reporting frameworks, yet it is one of the more difficult principles to get right. There is a tendency to avoid disclosing failure to meet targets, or to redefine targets that prove difficult to achieve.
EY’s assessment of ESG Reporting Maturity3 identified that the larger a company’s market capitalisation, the more balanced its disclosures, but that a lack of balance is still affecting the maturity of ESG reporting in Australia.
Meanwhile, frameworks continue to be established to provide investors with consistency and comparability in ESG reporting. The Financial Stability Board established the Task Force on Climate-related Financial Disclosures (TCFD) to develop recommendations for more effective climate-related disclosures. The recommendations are structured around four thematic areas:
3. Risk management and metrics; and
Disclosure of climate-related risks and opportunities under the TCFD framework promotes transparency and allows investors and other stakeholders to make more informed investment decisions. As understanding the financial implications associated with climate change grows, markets are already channelling investment into organisations considered more sustainable.
In 2020, New Zealand became the first country to implement mandatory TCFD reporting for publicly listed companies and large insurers, banks and investment managers, with the UK also adopting a “comply or explain” approach for premium listed companies in the same year. It is anticipated that other governments will do the same.
Similarly, the European Commission’s Sustainable Finance Disclosure Regulation (SFDR) came into effect on 10 March 2021. The legislation applies to asset managers and financial advisers, and requires them to provide:
The impact of SFDR will be to make the sustainability profile of funds more comparable and better understood by investors. This will inevitably lead to more ‘sustainable’ funds attracting more capital investment.
The ASX Corporate Governance Council’s (CGC) Principles and Recommendations 4th Edition took effect for the FY21 reporting period and acknowledges that investors are not just relying on financial reports to inform investment decisions.
Principle 4: ‘Safeguarding the integrity of corporate reports’ covers sustainability reports and where a report is not subject to audit, the organisation should satisfy itself that the report is materiality accurate, balanced and provides investors with appropriate information to make informed investment decisions.
Without disclosure of the process to verify the integrity of any report, Boards will be required to explain why the recommendation has not been adopted.
The Cromwell Board is committed to Cromwell meeting securityholders’ and stakeholders’ expectations of good corporate governance. Each year, Cromwell publishes its Corporate Governance Statement, which reports on how Cromwell complied with the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations. Cromwell’s Corporate Governance Statement for the 2020 financial year is available on Cromwell’s website at: www.cromwellpropertygroup.com/securityholder-centre/corporate-governance and the Corporate Governance Statement for the 2021 financial year will be released in September 2021. A combination of assurance over material ESG disclosures and testing against the GRI framework provides investors with confidence that disclosures are reliable, accurate and complete and meet the reasonable expectations for disclosure.
To read more on Cromwell’s performance visit www.cromwellpropertygroup.com/sustainability.