Environmental, Social and Corporate Governance (ESG) considerations are some of the most important issues impacting contemporary businesses. ESG will continue to be an area of great change and growth over the next decade. It is therefore critical that organisations adopt proactive and robust best practices now.
Increasingly, investors are interested not only in the potential profitability of an investment opportunity, but that the investment aligns with their own personal values, objectives, goals, and concerns. These types of investors are often considered ‘active’ investors who wish to influence a company’s policies and practices and hold the company and its officers to account.
Companies that align to shareholder values are generally seen as better positioned for long term sustainability. Moreover, ESG best practices present benefits including enhanced profitability and reputation, as well as shareholder satisfaction.
ESG is a set of standards for how a company operates in respect of the planet and its people.
The ‘Environment’ criteria focus on an organisation’s efforts to protect the environment, and includes its carbon neutrality targets, environmental stance and footprint, sustainability targets, and use of organic materials.
The ‘Social’ criteria examine an organisation’s business relationships and how it cares for people, including any employee protection and equality schemes, employee satisfaction ratings, actions to ensure that slave labour has been removed from the organisation’s supply chain, and employment of First Nations People.
The ‘Governance’ criteria centre on adherence to good governance principles and includes the diversity of the board, accuracy and transparency in accounting and reporting methods, policies around conflicts of interest and board independence, and the board’s system of risk oversight and internal controls.
ESG metrics do not yet form part of mandatory financial reporting required by Australian Accounting Standards or International Financial Reporting Standards. However, organisations across the world are increasingly making disclosures in annual or standalone sustainability reports. It is possible that these metrics will become mandatory in 20241.
Placing value on certain ESG considerations will not only assist an organisation to make a positive global and local impact, it may also increase an organisation’s share value if ESG considerations resonate with shareholders and investors.
By adopting robust ESG best practices, organisations can avoid unnecessary and expensive exposure to risk. Failure to implement ESG best practices can result in:
Organisations can incorporate strategies to reduce risks associated with ESG issues. These strategies include:
Ensuring the organisation’s board has set realistic ESG strategies and goals, and that the board receives updates on these strategies and goals as a recurring agenda item for each board meeting. This allows the board members to consistently keep ESG considerations at the forefront of their minds and ensures ESG issues do not fall off the organisation’s radar.
Having a strong and robust whistle-blower policy in place and fostering a culture that promotes people speaking up. This allows the organisation’s board to hear about problems, and solve them, at an earlier stage, rather than waiting for the issue to fester and the potential damage to increase.
Having a risk management system, risk management processes, periodic audits, and periodic surveys to identify potential ESG gaps within the organisation. This is critical to ensure that the organisation is better able to detect ESG issues early, and that the organisation is constantly looking for any ESG issues that may potentially be overlooked.
Ensuring documents on the public domain (such as ASX announcements to market, sustainability reports, annual reports, etc.) are properly worded by clearly stating all assumptions, qualifications, and contingencies that apply to ESG claims. Often, it is good practice to have the organisation’s legal advisors review these documents with respect to ESG claims, to ensure that the organisation is not breaching any laws in relation to the Australian Consumer Law, the Corporations Act, the ASX Listing Rules, or any other legal source that may be relevant. Breaching these laws can have serious consequences for organisations and their directors.
Ensuring that there is stakeholder buy-in when developing an ESG strategy, including with the broader stakeholders (where possible) such as regulatory bodies, pressure groups, NGOs, activists, third party funders, etc. It is helpful to form a good relationship with various stakeholders as they may assist in developing a robust ESG strategy. Arrange shareholder consultations through corporate advisors so that shareholders may be more likely to discuss these issues directly with the company rather than issuing proceedings or raising concerns in a public forum.
If you would like to discuss ESG or require advice in relation to the implementation of ESG best practices (or the risks associated with not doing so), please contact Millie Richmond-Scott or Mihali Palassis.
In advising your organisation on ESG and ESG-related risks (including mitigating those risks), we are able to draw on the experience and expertise of our Planning & Environment, Corporate Services, Employment & Safety, and Litigation & Dispute Resolution teams.
[1] In January 2023, the Commonwealth Government released a paper in which it proposed reform to financial reporting from 2024, largely incorporating the ESG principles espoused in this article. A copy can be downloaded here: https://treasury.gov.au/consultation/c2022-314397
[2] ASIC: Speech by Chair Joe Longo, ASIC’s corporate governance priorities and the year ahead, 3 March 2022 (https://asic.gov.au/about-asic/news-centre/speeches/asic-s-corporate-governance-priorities-and-the-year-ahead/) ACCC: Media Release, Compliance and enforcement priorities for 2022/23, 3 March 2022 (https://www.accc.gov.au/media-release/compliance-and-enforcement-priorities-for-2022-23)
[3] Australasian Centre for Corporate Responsibility v Santos Limited (ACN 007 550 923) NSD858/2021.
