ESG Reporting Guide for Australian Companies Building the foundation for meaningful reporting First Edition | june 2011 Financial Services Council (FSC) The Financial Services Council represents Australia’s retail and wholesale funds management businesses, superannuation funds, life insurers and financial advisory networks. The Council has over 130 members who are responsible for investing more than $1.8 trillion on behalf of 11 million Australians. The pool of funds under management is larger than Australia’s GDP and the capitalisation of the Australian Stock Exchange and is the fourth largest pool of managed funds in the world. The Financial Services Council promotes best practice for the financial services industry by setting mandatory Standards for its members and providing Guidance Notes to assist in operational efficiency. The Australian Council of Superannuation Investors (ACSI) The Australian Council of Superannuation Investors (ACSI) represents the interests of 41 ‘profit-for-member’ superannuation funds, who collectively manage over $300 billion in investor funds. ACSI aims to enhance the sustainable long-term value of the retirement savings entrusted to our members as fiduciary institutional investors. ACSI does this by representing the collective rights and interests of members in influencing companies, investors, governments and opinion leaders. Through focussed research and evidence-based policy, communication and advocacy, opportunities to improve ESG practices are identified, and collaborative efforts are made with other institutional investors, to advance our shared goals both in Australia and internationally. Contents Welcome and introduction 2 Background 3 Why Create a Guide? 3 1. Application 7 1.1 Who does this Guide apply to? 7 1.2 How should it be applied? 7 1.3 When do we expect to see this happen? 7 2. Reporting Practices 8 2.1 Boundaries – geographic, corporate and temporal 8 2.2 Determining what is important, and why 8 2.2.1 Materiality 9 3. Reporting Framework 10 3.1 How are ESG issues identified and managed in the company? 10 3.2 How and when should a company report? 10 3.3 Reporting Integrity and transparency 12 4. Application of the Guide 13 Key Reporting Topics 13 Environment 14 Climate change 14 Environmental management systems and compliance 15 Efficiency (waste, water, energy) 16 Other environmental issues (e.g. toxics, biodiversity) etc 17 Social 18 Workplace health & safety 18 Human capital management 21 Corporate conduct (e.g. bribery and corruption) 22 Stakeholder management/license to operate 23 Corporate Governance 24 ESG disclosure 24 5. Conclusion 25 1 Welcome and Introduction The Australian Council of Superannuation Investors (ASCI) and the Financial Services Council (FSC) are delighted to introduce this inaugural ESG Reporting Guide for Australian Companies . Over recent years, investment managers (represented by the FSC) and asset-owners (represented by ACSI) have grown in sophistication in their recognition of the critical importance of environmental, social and governance (ESG) factors to the long-term performance of the companies in which they invest. While the drivers of this trend are many and varied, there is no question that ESG issues will invariably impact the ability of companies and their investors to achieve sustainable growth and prosperity into the future. Thus far, institutional investors and companies have struggled to find common ground in defining the ways ESG factors influence their shared goals to achieve sustainable long-term growth and prosperity. Likewise, there has been relatively little shared understanding of how to report on those factors, and how to reconcile them with financial metrics that have traditionally dominated company reporting and investment analysis processes. The Guide has been prepared to fill precisely that gap. From the investors’ perspective, there is a need for meaningful, accurate, timely and comparable data to help them identify and manage their exposure to ESG investment risks. The provision of this data will assist investment managers in their decisions about selection and holding of stocks in their portfolios. It will also prompt investment managers, broker analysts and asset owners (principally superannuation funds) to constructively engage with companies on these matters. From companies perspective, it is reasonable to expect consistency and predictability in the data requirements being sought by the institutional investor community, and for reporting obligations not to impose undue costs, competitive disadvantages or other commercial burdens. Recognising these goals, the Guide has been prepared jointly by ACSI and the FSC to highlight the minimum information and reasonable data requirements that are needed for our member organisations to successfully price, analyse and manage ESG investment risks. The Guide has been developed to complement reporting requirements spelt out in other best practice guides such as the ASX Corporate Governance Principles and Recommendations, and the existing best practice guides issued by each of our associations. We look forward to the Guide facilitating an improvement in the disclosure levels, consistency and quality of engagement over ESG issues between Australian companies and their institutional investors. Ann Byrne John Brogden CEO, ASIC CEO, FSC 2 BACKGROUND In 2009 the Australian Council of In February 2010 ACSI and the FSC Superannuation Investors (“ACSI”) and announced that they would continue to the Financial Services Council (“FSC”) work together to improve the level of 1 commissioned a joint project to review public company disclosure on material and address an apparent lack of and relevant ESG factors to enable asset integration of environmental, social owners and fund managers to holistically and governance (“ESG”) matters in assess company valuations. mainstream investment management. This research looked at the methods of 1 Why create a guide? ESG integration in current investment The Guide aims to address the market practices and the barriers to wider gaps described above – first, by integration. The research found that providing specific guidance on the the major barriers to integration of ESG information that companies should factors into investment decision-making consider and disclose, and secondly, processes were: by facilitating greater consistency and • Difficulty in quantifying ESG factors; comparability of data across different companies and sectors. • A concern about the quality of information being provided; and The Guide should be seen as a first step • A lack of clear direction from asset towards meaningful disclosure on ESG owners on their ESG requirements. risks and is particularly targeted at companies who do not report ESG risks A subsequent forum of investment or who have begun the process of managers and asset owners was held assessing ESG risks. The Guide does to discuss these barriers and propose not aim to replace more extensive guides solutions to address them. The forum like the Global Reporting Initiative (GRI) identified that a major cause of the which we believe companies should barriers to ESG integration is a lack of aspire to achieve. disclosure by many companies of information that can meaningfully The Guide has been developed by contribute to integration of ESG factors a representative group of investment in investment decision-making and managers and asset owners review processes. (primarily superannuation funds) 2 that in combination represents a wide In separate research , over the last cross-section of Australia’s institutional 4 years ACSI has reviewed the investor community. The information sustainability reporting practices of indicators noted in Chapter 4, have the S&P/ASX 200 companies, ranking been selected by the people who will companies’ sustainability reporting use the data, and therefore have on a scale from no reporting to best direct relevance to the investment practice reporting. decision‑making process. This What is notably apparent in the simplifies the process for companies ACSI research is that, even where there and analysts as each is aware of the is reporting, there is very little consistency reporting expectations of investors, between companies as to what is reported and time and resources are not and how it is structured. Therefore, wasted reporting on irrelevant and much of the information is difficult, unnecessary factors. or even impossible to use in an investment context due to its lack of comparability or investment readiness. 1 ESG integration by mainstream Australian Equity Managers – Research Paper, prepared by Mercer February 2010 2 Sustainability Reporting Practices of S&P/ASX 200 Companies, conducted by ACSI in 2008, 2009 and 2010 3 1.2.1 Investor demand 1.2.2 Simpler analysis Increasingly, investors are recognising A major issue undermining the importance of ESG factors on the effective communication between long-term performance of the companies company directors and investors in which they invest. In order to price regarding long term business success is and manage risk during their analysis of a lack of reliable and comparable an investment, investors need relevant information regarding broader corporate information and companies need to performance. In addition to traditional understand the form that information financial reporting, investors need should take. consistent and comparable data from year to year to facilitate decision-making The importance of the ESG factors on ESG risk. If all companies report extends beyond current liabilities and in accordance with the same framework includes the “externalising” of costs to or guide, then analysis and comparison society at large. Whether direct and becomes much simpler. deliberate, or incidentally and unintentional, externalised costs risk 1.2.3 ASX Corporate Governance being internalised by governments and Principles and Recommendations policy makers and so can represent a material risk to companies. Externalised Corporate Governance is defined by the costs should therefore be minimised ASX Corporate Governance Principles wherever possible. Proactive and Recommendations as “the management and effective self framework of rules, relationships, regulation can reduce the risk of systems and processes by which regulatory intervention and allow authority is exercised and controlled in markets to find efficient solutions while corporations”. Effective corporate protecting investor interests. governance should encompass the means by which those in control The Guide has been put together of companies are held to account, as well to provide companies with the investor as encouraging companies to create community view of the essential value in line with the corporate strategy, information and data that are required whilst maintaining effective risk to price and manage environmental, management systems and processes. social and governance investment risk. The provision of the information will assist investment managers to differentiate stock and prompt analysts and asset owners to engage with companies on these matters. 4 The ASX Corporate Governance This can both help to create shareholder 3 Principles and Recommendations value and to provide for sound include: management of risk. Principle 1: Lay solid foundations ACSI and FSC believe that Principle 7 for management and captures the identification, assessment, oversight. monitoring and management of Principle 2: Structure the board environmental and social issues facing to add value. the company and the community in which it operates. Principle 3: Promote ethical and responsible decision‑making. Both ACSI and FSC recognise that Principle 4: Safeguard integrity there are a significant number of in financial reporting. environmental and social issues that Principle 5: Make timely and will affect different companies at balanced disclosure. different times and over various periods of time. As investors, we expect Principle 6: Respect the rights companies to disclose the process for of shareholders. identifying risk and the processes Principle 7: Recognise and manage risk. involved to manage that risk. Disclosure Principle 8: Remunerate fairly should also include relevant metrics to and responsibly. allow investors to assess how effective those processes are in managing risk. When long-term investors look to invest This document provides guidance on their capital, they must undertake a risk the approach and types of metrics assessment of each company in order to that can be used to provide information determine that company’s suitability on risk management. with respect to the investment principles of the particular investor. Not just another ESG survey Principle 7 of the ASX Corporate ACSI and the FSC are cognisant of the Governance Principles requires listed burden created by numerous, ongoing entities to establish a sound system surveys on ESG risk management and of risk oversight, management and performance. We believe that the internal control. This system should investor views presented in the Guide, be designed to: which have been developed after • Identify, assess, monitor and extensive collaboration and research, manage risk; and will assist companies to streamline their reporting as well as reducing the volume • Inform investors of material changes of ad hoc information requests that are to the company’s risk profile. made by the investor community. 3 Corporate Governance Principles and Recommendations Second Edition August 2007 5 Importantly, the information indicators Critically, unlike other ESG surveys, the in the Guide are drawn from various Guide is intended specifically to facilitate existing sources, including the: the integration of ESG factors into 4 investment decision making processes. • Global Reporting Initiative ; ACSI and the FSC will continue to 5 • Carbon Disclosure Project ; monitor how the Guide is used by • International Corporate investment managers and 6 Governance Network ; superannuation funds to ensure the • Global Framework for Climate Guide delivers on its objectives. It is 7 Risk Disclosure ; and anticipated that the Guide will be raised 8 with companies during analyst briefings • DVFA . and in meetings with institutional These frameworks provide extensive shareholders. information on ESG disclosure. Where appropriate companies should be aiming to report against these frameworks. We recognise that many companies already publicly disclose the data that is within the Guide and that, in some cases, data over and above the minimum are reported. Those companies are not expected to disclose anything more (or less), but we do ask that they confirm that their data is readily accessible. The Guide will also be a useful audit and benchmarking tool for companies in this situation. 4 GRI Sustainability Reporting Guidelines 3.1 released March 2011 5 https://www.cdproject.net/en-US/Respond/Pages/overview.aspx 6 ICGN Global Corporate Governance Principles Revised (2009) 7 Global Framework for Climate Risk Disclosure: A statement of investor expectations for comprehensive corporate disclosure, Oct 2006 8 DVFA is the Society of Investment Professionals of Germany. The DVFA Committee on Non-Financials has defined topical areas for the reporting of ESG issues, as well as Key Performance Indicators (KPIs) for use in financial analysis of corporate performance. These KPIs have been endorsed by the European Federation of Financial Analysts Societies (EFFAS) and thus gained the status of an official EFFAS Standard. KPI for ESG: A Guide for the integration of ESG into Financial Analysis and Corporate Valuations, published September 2010 6 1 Application 1.1 Who does this Guide • Companies are not expected apply to? to produce a standalone sustainability report – reporting on sustainability The Guide was created to provide in the annual report is acceptable. a reporting guide for all Australian In many cases this is preferable; companies, with emphasis on those • Companies are encouraged to in the S&P/ASX 200. consider what ESG reporting, We recognise that some companies may disclosures and communications find full ESG disclosure to be a challenge may be relevant in terms of at the beginning of their reporting analyst briefings, annual general journey. However, companies also need meetings and other interactions to be aware that the issues raised in the with investors; Guide are the base level of information • Where appropriate companies should that investment analysts require use the metrics identified against to make stock selection decisions. each indicator in the Guide in order to We would encourage these companies ensure consistency and comparability to progressively embrace the principles within and across companies; of risk reporting as they meet their • Companies should use their judgment obligations under Principle 7 of the when applying the guide in order to ASX Corporate Governance Principles ensure the reporting remains relevant and Recommendations as they relate to their specific situation; to ESG risk. • The Guide does not intend to cover every performance criteria that would If not, why not approach be found in other reporting standards, Should a company choose not to and should be considered a minimum report on any ESG related risk, level of ESG reporting. ESG reporting then in accordance with the ASX beyond the scope of the Guide Corporate Governance Principles is encouraged; and Recommendations we would • Reporting on sustainability should be expect appropriate disclosure on released at or around the time that why such reporting is not required the annual report is released; and under the ‘if not, why not’ rule. • We strongly encourage companies to announce the release of their 1.2 How should it be applied? sustainability report to the ASX. The following factors should be taken into consideration when 1.3 When do we expect to see applying the Guide: this happen? • The format of reporting is at We would hope to see reporting against the discretion of the company; the indicators in the Guide as soon as possible. Many companies will already • Any reporting should be easy report on these indicators in their to locate within a company’s existing sustainability reporting, and communications; these companies do not need to report • Reporting should be simple and easily any additional information. We envisage navigated (for example, through the that companies should realistically be use of an index directing the reader able to adopt this reporting Guide for to specific information); their 2011/12 annual reporting. • Any online reporting should be easily searchable; 7 2 Reporting Practices 2.1 Boundaries – geographic, 2.2 Determining what is corporate and temporal important, and why Companies should clearly define their Useful reporting does not equate to reporting boundaries in relation to providing ever-increasing volumes of included and excluded business entities data. Rather than asking companies (e.g. subsidiaries, associates and JVs) to report on every facet of their ESG and activities. In general, more complete performance, we encourage them to: reporting is beneficial to investors. • Consider and assess what ESG issues Considerations should include: are important to their business; • Understand and explain why they • The geographical scope of business are important; and entities and activities; • Provide disclosure and reporting • Inclusion of equity share businesses on these issues annually and those where operational control (including targets and year of a business or entity may be on year performance). materially important; and • The time frame reported against. Like financial statements, ESG issues This should not be limited to the which are important to company year of reporting. performance are considered to be ‘material’ risks or opportunities and Many asset managers and asset owners are therefore captured under the are committed to long term investing, ASX Corporate Governance Council’s consistent with the time horizon of their disclosure requirements for Principle 7. ultimate members. In addition, many ESG issues do not impact a company in Relevance of the indicators the short or medium term. The Guide has been developed Investors have at times identified a by Financial Services industry weakness in the reporting of equity professionals taking into account share businesses. This is where a a number of other reporting reporting company may own a share of frameworks and guidelines. A selection a company but fails to report ESG issues of indicators has been provided for arising from that ownership. This their expected relevance and additional transparency in reporting applicability, which is dependent gives investors a clear picture of ESG on company activity and sector. risks and risk management across the entire business, e.g. a company may be a low carbon emitter, but may be liable to carbon regulation through large carbon emissions in a business for which it is 50% owner. For companies seeking further discussion on reporting boundaries, 9 the Global Reporting Initiative is a source of further detail. 9 GRI Sustainability Reporting Guidelines. Ob cit 8 2.2.1 Materiality Materiality should not be judged at a single ‘point in time’ but should Importantly, companies should not feel also consider emerging issues and obliged to report on all indicators all trends over different timeframes (short, of the time. The degree to which each medium and long-term). For example; indicator is relevant will vary greatly we would expect to already be seeing between companies, and the materiality disclosure from companies that are likely of each factor should be determined to be directly or indirectly affected by by the board and management of a price on carbon emissions even though the company itself. Therefore, at the time of writing legislation on that companies are only expected to topic has yet to be put in place. report on indicators which are considered to be materially relevant Finally, as a rule of thumb, material ESG to their business and strategy. issues can be described in terms of having significant outcomes or consequences In considering what issues are material which can change depending on how well to their individual circumstances, the issue is managed. Examples are companies are encouraged to refer covered in more detail for specific ESG to the Global Reporting Initiative’s issues later in this document and may definition of materiality, which states: include both financial and non-financial “The information in a report should outcomes including: cover topics and indicators that reflect the organisation’s significant Financial outcomes economic, environmental, and social i.e. increases or decreases in: impacts, or that would substantively influence the assessments and • Cash flows; 10 decisions of stakeholders.” • Cost of capital; or We also recommend that companies • Asset values. consider the broader Global Reporting 11 Initiative (GRI) framework and the Non-financial outcomes AccountAbility guide ‘Redefining 12 i.e. factors that hinder or enhance the Materiality’ . The essence of these ability of the company to: guides is that materiality should be measured against more than just • Implement strategy; short term financial considerations and • Retain key personnel; should also be judged against internal • Remain competitive with peers; or and external factors including: • Retain its social license to operate. • The company’s own policies, statements, goals and strategy; • Peer based (industry) norms and standards; • Stakeholder behaviours and concerns; • Regulatory requirements and other legal obligations; and • Societal norms and expectations e.g. local community or NGOs. 10 Ibid, page 8 11 http://www.globalreporting.org/ReportingFramework/G3Online/DefiningReportContent/LowerBlock/Materiality.htm 12 http://www.accountability.org/about-us/publications/redefining.html 9 3 Reporting Framework The sections below outline a framework • How such risks and opportunities for reporting as part of a company’s are reported to the Board, regular communication to investors. senior management and various internal committees (e.g. Risk 3.1 How are ESG issues Oversight committees); identified and managed within • Decision-making frameworks on how the company? material ESG risks are managed; Investors are interested in • Processes for establishing ESG understanding how material ESG issues related performance targets or goals potentially impact strategy setting and links to overall business strategy (targets etc) and management’s – e.g. reductions in greenhouse gas decision-making within the business. emissions, improved OH&S This is driven by a range of factors performance, diversity targets etc; including emergence of new regulations, • Person(s) responsible or accountable for the ongoing evolution of risk ESG related issues within the business management practices, and further including at the Executive level; developments in mandatory and • Internal capabilities on ESG, and voluntary disclosure frameworks. where such resources are located The way a company approaches the task within the organisational structure; of identifying, assessing, managing and • The nature and scope of any internal reporting on ESG related risks, provides risk reviews on ESG topics; investors valuable information into the • Recognising that ‘what is measured quality of management and oversight of gets managed’, the nature, integrity these issues within the business. and controls over ESG related data reporting systems – e.g. OH&S Understanding a company’s governance incident reporting; and and accountability mechanisms concerning ESG issues helps investors • The nature and scope of reporting determine how well understood such and disclosures the company risks are within the business at the undertakes on ESG matters – senior management level. A lack of e.g. external reporting but also disclosure on ESG issues could for disclosures at AGMs and investor example indicate a lack of resources or meetings (briefings etc.) a lack of understanding or awareness of how material ESG issues could 3.2 How and when should a affect the business. company report? Having established what is material and Such information provides investors therefore what should be reported, with indicators of how well a company companies then need to consider how is positioned to manage issues such to report, and to what degree of detail. as tightening regulatory standards, evolving market trends, product General principles apply with regards development and future growth to how information should be reported opportunities, or changes in stakeholder as follows: expectations – all of which can impact long term business value. 3.2.1 Data quality and, consistency Useful information for investors in this • Investors value good quality, regard includes: accurate, relevant data over volumes of marketing material • Internal processes for identifying therefore data should be and reporting material ESG risks comparable and consistently and opportunities; reported with any changes to the methodologies behind data compilation clearly explained. 10 3.2.2 Data Comparisons 3.2.3 Commentary and Explanation As part of the stock analysis process As previously indicated, the way a investors compare past performance company approaches the task of against expected short, medium and identifying, assessing, managing and long term expectations therefore: reporting on ESG related risks, provides investors valuable information into the • Comparisons should be made against quality of management and oversight of relevant data, which should include the these issues within the business. As such company’s past performance, strategic the commentary and explanation objectives and targets; peers and provided is meaningful to investors. industry statistics and standards; • Future performance objectives in • Reporting should include performance relation to the ESG metrics should be information and reasons for significant clearly stated, ideally include specific variances from expectations, both performance targets, and be positive and negative; consistent with the overall strategy; • Risks to meeting targets should be • Timeframes should align with the articulated where possible; type of issue or metric and its likely • Where financial impacts cannot be time horizon; effectively quantified, inclusion of • Thought should be given to reporting a description of the material issue a range of possible data outcomes and facts is appropriate; and and associated probabilities where • In setting targets and objectives, a future single target or metric may key assumptions and aspects of the not be appropriate; reporting methodologies should • Where possible, the financial impacts be reported. of ESG issues or of meeting or not The level of detail to report is impacted meeting targets should be reported; by the priority of the ESG issue. • Information to support relative For example, a relatively low priority comparisons may be sourced from issue for the company may be reported authoritative research and forecasts, in accordance with regulatory national and international policy requirements alone, whereas it would be targets. Where possible comparison expected that a high priority issue would data should consider location specific be reported in greater depth and detail. data; and Further guidance as to how to report can • Report time series data rather than be found in the reporting framework isolated items for the period reported. documents – including: As many ESG issues evolve over longer time horizons, as much • Global Reporting Initiative (GRI) G3 , 13 historical data as possible should be 14 • GRI Sector profiles , reported. For example, a trend in 15 • GRI Technical Protocol , improved safety may take some years 16 to become evident in reported figures; • Carbon Disclosure Project ; or as such a 5 year plus time frame for • Integrated Reporting of South Africa 17 reporting would be more appropriate Discussion Paper (Jan 11) than just the prior 12 months. 13 http://www.globalreporting.org/ReportingFramework/ReportingFrameworkOverview/ 14 Ibid 15 Ibid 16 https://www.cdproject.net/en-US/Respond/Pages/overview.aspx 17 Framework for Integrated Reporting and the Integrated Report – Discussion Paper, January 2011, Integrated Reporting Committee (IRC) of South Africa 11 3.2.4 Where and How to Report • Australian Petroleum Production and Exploration Association Limited Preferably communication of ESG Key (APPEA) Safety Incident Reporting Performance Indicators (targets and 18 Guidelines . achievements) and metrics should be synchronised with financial reporting Companies should describe to investors periods and to the extent possible, any standards that they have applied in included in the financial statements of the preparation of key ESG metrics. This the company where they are relevant for should be supplemented with details of an understanding of the company’s key definitions and assumptions used in performance and financial position. the calculation of metrics where an external standard does not exist or has 3.3 Reporting integrity and not been applied. transparency To facilitate ease of use by investors, 3.3.1  Disclosure of the basis upon it is preferable that a brief ‘basis which metrics have been prepared of preparation’ explanation or document is made available either within the The absence of a generally accepted company’s report itself or on its website. accounting standards for measuring and presenting environmental, social and 3.3.2 Assurance governance metrics creates challenges for investors in interpreting performance. Obtaining independent assurance over ESG disclosures provides investors with By way of example, one company may a greater degree of comfort over their include stress related incidents in integrity. However, investors recognise calculating and reporting on new cases that independent assurance comes at of occupational illness whereas another a cost that needs to be managed. company may exclude stress related incidents from its calculation and only Where companies seek assurance over focus on musculoskeletal illnesses. In their ESG disclosures it is recommended this example, simply comparing the that it be conducted in accordance with headline metric of “New Cases standards of the Australian Auditing of Occupational Illnesses per and Assurance Standards Board or its 1000 employees” between the international equivalent. Within the two companies is unlikely to provide a framework established under these like-for-like comparison of underlying standards, companies can then focus the performance. scope of assurance on the most material claims or performance metrics reported Where they exist, companies should rather than disclosures that are less follow generally accepted standards material in nature. for measuring and presenting metrics. Examples include: • Measurement of greenhouse and energy data should occur in accordance with the Measurement Determination under the National Greenhouse and Energy Reporting Act 2007 or methods of the Intergovernmental Panel on Climate Change (IPCC); and 18 Australian Petroleum Production and Exploration Association Limited Safety Incident Reporting Guideline 2005 (these guidelines are currently under review for release in 2011/12) 12 4 Application of the Guide The Guide broadly divides each of environmental and social issues into four separate themes, for ease of illustrating the issues that may be important for a company and on which to report. The descriptions of these themes and the metrics suggested for their assessment are not intended to be exhaustive, or to represent a checklist to be simply “ticked off” by companies. Rather, they represent a foundation for the identification and disclosure of ESG issues, upon which companies can build on to develop a report that suits their own particular circumstances. Companies reporting against each environmental or social issue may wish to report some or all of the “commonly reported indicators”, although they do not represent an exhaustive list of indicators for each issue. Relevance of indicators will vary between sectors and materiality will vary by company. Governance is just as critical as the environmental and social issues. However, as investors’ expectations with respect to Corporate Governance have already been comprehensively documented elsewhere, this Guide refers to and incorporates current best practice guidelines under the Governance heading. Environment • Climate change • Environmental management systems and compliance • Efficiency (waste, water, energy) • Other environmental issues (e.g. toxics, biodiversity) etc Social • Workplaces H&S • Human capital management • Corporate conduct (e.g. bribery and corruption) • Stakeholder management/license to operate Corporate Governance • Corporate Governance 13 Environment Why is it important to investors? Climate change Climate change regulation, and in particular putting a price on carbon, imposes costs on companies that produce and consume carbon-intensive goods and services. Over time, consumption patterns will change in favour of low-carbon goods and services, leading to significant changes in industry structure. In the long term, the physical effects of climate change such as changes in weather patterns, storm intensity and sea level may put assets at risk. A company that fails to understand its carbon emissions, reduce its emissions, cost-effectively manage its carbon liability and understand its physical exposure to climate change will risk: • Higher costs as the cost of complying with carbon regulation increases; • Loss of market share as customers move to low-emissions suppliers; and • Damage to assets as the physical impacts of climate change increase. Companies that produce low-carbon good and services, reduce their carbon emissions and energy use and manage their carbon liability effectively will see benefits flow directly to profits. Commonly reported indicators Investors look for: • Direct (scope 1) emissions by facility or process, including those occurring in equity stakes. • Indirect (scope 2) emissions associated with purchased electricity. • Supply-chain carbon emissions (scope 3). • Opportunities to pass carbon costs on to customers. • Opportunities to reduce carbon emissions and energy use. • Targets for reducing carbon emissions and improving energy efficiency. • Effective carbon liability management, including ways to reduce emissions or meet carbon liabilities at low cost. • An assessment of the physical risks from climate change. • Business opportunities that climate change regulation presents. Resources Leading reporter The Carbon Disclosure Project AGL Energy 2010 Sustainability provides an excellent framework for Report publishes extensive reporting carbon emissions and equity‑accounted data on its climate change risk: carbon emissions. www.cdproject.net The US Securities and Exchange Commission has published guidance on climate change disclosure: http://www.sec.gov/rules/ interp/2010/33-9106.pdf The Global Reporting Initiative is a widely-used framework for sustainability reporting: www.globalreporting.org 14 Environment Why is it important to investors? Environmental management systems and compliance Operational incidents which impact on the environment within a company’s supply chain, direct operations or products can have far reaching implications on shareholder value including: • Production disruptions as the incident is investigated and new safeguards are put in place; • Capital costs associated with remediation; • Compensation costs to affected communities, business partners and employees; and • The impact on the company’s regulatory and/or social license to operate. A company that can demonstrate a superior commitment, capacity and track record to its peers in the management of environmental risks, may present a lower risk for investors. Commonly reported indicators Incidents with a severe environmental impact will often be associated with a health and safety impact. As such, a number of metrics that provide investors with insight over environmental performance may also provide insights into safety performance (and vice versa). Investors look for: • Monetary values of fines and number of non-monetary sanctions for non- compliance with environmental laws and regulations. • Environmental provisions as reported on the balance sheet. • Number and severity of transgressions of environmental license conditions. • Losses of containment (number and severity). • Proportion of operations that are certified under the ISO 14001 Environmental Management Systems Standard. • Total count of process safety incidents. • Process safety total incident rate. • Process safety incident severity rate. Resources Leading reporter ISO 14001 Environmental Orica’s 2010 Sustainability Report Management System Standard: provides investors with details www.iso.org relating to: Process Safety Leading and Lagging • Instances of non-compliance with Metrics published by the Centre for environmental license conditions Chemical Process Safety provides an • Containment losses experienced excellent overview of metrics related • Number of process safety incidents. to process safety: http://www.aiche.org/uploadedFiles/ CCPS/Metrics/CCPS_ProcessSafety_ Metrics_2011_FINAL.pdf 15 Environment Why is it important to investors? Environment efficiency – Waste, Water, Energy The rapid growth of the global economy and most recently, the emerging economies, has focused the attention of investors on the issue of waste as well as the finite nature of resources, particularly clean water and energy. In order to support continued global growth and allow for the prosperity of future generations, as well as reduce rising resource costs, companies should minimise waste produced by their operations and manage their demand for fresh water and energy. Failure to achieve efficiencies in this area can lead to: • Indiscriminate disposal of waste products which might have re‑use application; • Limited waste disposal sites becoming overwhelmed with risk of contamination into surrounding areas; • Fines for disposal which does not meet environmental regulations; • Depletion of fresh water resources; • Loss of arable land; • Unreliable supply of water and energy; • Need for high cost alternative sources of fresh water; • Rising energy and water prices due to scarcity; and • Higher costs to industry as a result of the additional infrastructure required. Companies which minimise the creation of waste in their manufacturing process and find ways to reduce their demand for water and energy will see benefits flow directly to the bottom line of their profits. Commonly reported indicators Investors look for • Type of waste produced by product and volume. • Targets for the reduction of waste. • % of waste re-used in the manufacturing process. • Water consumed (by quality/source) and targets for reduction. • % water recycled compared with base year. • Breakdown of energy used by source and comparison with base year. • Efforts to introduce energy efficient or renewable energy resources. • Energy saved due to conservation and initiatives to reduce energy consumption. Resources Leading reporter The Australian Government publishes BHP Billiton 2010 Sustainability a range of reports on water use and Report provides details of waste conservation initiatives at http:// produced, recycled or sent to land fill. www.environment.gov.au/water/ They also provide information on including the Oct 2006 Water water recycled and re-used including Efficiency Guide for use in building targets for the future. management. http://www.environment.gov.au/ settlements/chemicals/hazardous- waste/index.html has more information on waste and recycling. 16 Environment Why is it important to investors? Other toxics, biodiversity, etc... Under this category investors will seek to gain an understanding of other environmental risks and impacts relevant to the company. This could include a company’s toxic emissions, its reliance or impact on ecosystem services and biodiversity, and its dependence or impact on other natural resources such as fisheries or forestry. These issues are important because a company may rely on the environment for low cost environmental inputs or services. Failure of management to address these issues can: • Inflate project costs and reduce profitability; • Create or perpetuate health and safety issues; • Increase risks and costs resulting from fines or sanctions; • Create brand damage; • Erode corporate culture; • Inflict permanent damage on biodiversity; and • Lead to accidents which may take many years to overcome. Awareness of the need to handle dangerous materials appropriately and to avoid sanctions and fines is a useful indicator of the quality of management and the prospects of the company in years to come. Commonly reported indicators Investors look for: • Hazardous waste emissions and reduction. • NOx, SOx and particulate emissions. • Emissions of ozone depleting substances by weight. • Total water discharge by quality and destination. • Details of toxic materials used in the manufacturing process. • Strategies for managing impacts on biodiversity. • Location and size of land use in or adjacent to areas of high biodiversity. • Description of significant impacts of activities, products and services on biodiversity in protected areas. • Habitats protected or restored. Resources Leading reporter The Australian Department of the The Orica website’s Sustainability Environment publishes materials section contains details of programs and regulations on hazardous to reduce toxic emissions and waste and its transportation: progress to date. BHP Billiton also http://www.environment.gov.au/ includes useful information in its settlements/chemicals/hazardous- Sustainability Report. waste/ The Department of the Environment also has extensive information on biodiversity management: http://www.environment.gov.au/ biodiversity/strategy/index.html 17 Social Why is it important to investors? Workplace health and safety Workplace health and safety is a relevant investment risk because poorly managed it can: • Create unnecessary costs for a business; • Contribute to business disruption; • Hinder staff attraction and retention in a tight labour market; • Breach workplace regulation, and basic human rights; and • Encourage increased regulation or regulator action. High risk sectors often have a higher cost base in workers compensation premiums, safety equipment, and safety processes. Good performance can reflect an efficient operation and quality management. Govt. Regulators co an e m m tiv pl d ai de llec nt co s higher OH&S Hurdles and compliance in act an or du io Unions Society br eri st n d ria f in l ed rn st is te co complaints al COMPANY demand ex action demand action ed dr re sh rn st is op pr te co a al in ice ex wa are ity tiv r sh uc ve nt ho od no to lde pr tur in r cr va w gh ea lu Employees Shareholders lo hi er se e THE PRESSURES OF POOR OH&S PERFORMANCE Source: AMP Capital Investors 2005 18 Social Commonly reported indicators Workplace health and safety Investors look for both process safety and safety culture commentary and indicators. These should cover governance, process and performance. Lead indicators Lag indicators Topic (number or rate of…) (number or rate of…) Risk management and process indicators OHS Training Training courses Employees successfully trained offered or held OHS Audit Audits actually Audit (non-) conformances conducted detected Exposure Monitoring Above limit exposures detected monitoring conducted Incident Incidents analysed Risk controls implemented analysis Performance indicators Incidents / Number of near • Lost time injury frequency rate injuries misses reported (LTIFR) i.e. lost time injuries per million man hours • Total recordable Injury frequency rate recordable (TRIFR): i.e. total recordable injuries per million man • Fatalities • Severity rate: the number of lost days experienced as compared to the number of incidents experienced. Post incident % of hazards management rectified Sources: O’Neill, S, (2009), CFS GAM 19 Social Resources Leading reporter Workplace health and safety O’Neill, S, (2009) Best Practice Downer EDI Ltd reports year on OHS Reporting: year indicator data, along with the http://goo.gl/lccDw absence of fines or prosecutions. Commentary provides insight into AS/NZS 4801 is the Australian (and safety governance to enhance risk NZ) Standard for Occupational Health management, and the responsibilities and Safety Management Systems: of business leaders. Performance http://goo.gl/yGUOa and the area for performance Safe Work Australia has many free improvements going forward is resources and tools: discussed, along with initiatives http://www.safeworkaustralia.gov.au implemented which enhance business-specific risk management. Safe work Australia provides guidance on reporting: http://goo.gl/JpdPl Australian Petroleum Production and Exploration Association Limited Safety Incident Reporting Guideline 2005 (these guidelines are currently under review for release in 2011/12): http://www.appea.com.au/ images/stories/Statistics/safety_ incident_reporting_guidelines_ -_march_2005_doc.pdf 20 Social Why is it important to investors? Human capital management Human capital management (HCM) is central to execution of business strategy, expansion, innovation, and business continuity, and is therefore a key area for investor attention. The quality of HCM controls are particularly important for companies with significant intangible assets or in situations where skills shortages and competition for labour are clear risks. For all companies, strong HCM controls and practices contribute to employee productivity and loyalty. Poorly managed HCM can lead to: • Failure to meet strategic objectives and project targets; • Poor morale and sub-optimal productivity; • Inability to attract skills in tight labour markets / loss of key talent; • Industrial disputation and poor employee relations; and • Reputation damage Commonly reported indicators Investors look for both qualitative and quantitative indicators Qualitative indicators: • Board oversight of HCM. • Integration of HCM and people risks into risk management processes. • Executive remuneration linked to achievement of HCM objectives. • Employee Diversity / anti-discrimination policies. • Processes to monitor and address discrimination. • Monitoring of employee satisfaction / engagement. Quantitative indicators: • Voluntary turnover rates • Employee engagement / satisfaction (preferably externally measured with standardised framework). • Rate of return from maternity/parental leave. • Professional development training hours/employee. • % women at Board and Senior management levels. • Remuneration levels for male and female employees. Resources Leading reporter Global Reporting Initiative (Labour National Australia Bank. Refer Practices and Decent Work): to NAB’s 2010 Corporate http://www.globalreporting.org Responsibility Annual review. 21 Social Why is it important to investors? Corporate conduct Corporate conduct covers the manner in which the Board, management and employees of a company deal with each other, business partners, suppliers, customers, shareholders and the community. An example of poor corporate conduct is involvement in bribery and corruption. The standard of corporate conduct is a relevant investment risk as poor corporate conduct can: • Inflate projects costs and hence reduce profitability; • Distort competition; • Increase risks and costs resulting from prosecution; • Create brand damage; • Erode corporate culture; • Distort allocation of capital across the broader market; and • Restrict economic growth by perpetuating poverty. Awareness of corporate conduct standards throughout the company’s supply chain is also integral in understanding the associated investment risks. High standards of corporate conduct can increase shareholder value as they reflect an organisation operating with integrity and transparency, consistent with high quality management. Commonly reported indicators Investors look for • Corporate codes of conduct , the extent of their application and associated training. • Responsibility within the organisation for the code of conduct. • Linkages between remuneration policies and code of conduct. • Commitments to external initiatives, how they compare with industry standards and whether these are voluntary or obligatory. • Whistleblower policies. • Procedures for monitoring and following up any breaches of the conduct code. • Records of code breaches and the associated costs. Resources Leading reporter Transparency International publishes RIO and BHP have published a range of reports on corruption in extensive code of conduct documents private and government sectors: outlining their standards, who they http://www.transparency.org/ apply to, membership of global transparency initiatives, Extractive Industries Transparency whistleblower policy, staff training, Initiative (EITI) aims for natural reporting of breaches, etc. resources to benefit all people: http://www.eiti.org 22 Social Why is it important to investors? Stakeholder engagement The extent to which a company engages with and accounts for its various stakeholder groups is a key factor in its overall performance from a sustainability perspective. ‘Stakeholders’ in this context include the company’s shareholders and providers of capital, employees, suppliers, customers, public sector and regulatory bodies as well as the broader community. Engagement and communication with these stakeholder groups can deepen those relationships and reinforce the stability and value of a company. Where companies gain stakeholder support through these methods, business success can be founded on an implicit community-approval of the company’s operations, otherwise referred to as a ‘licence to operate’. Companies which effectively engage with their stakeholder groups stand to gain in the following ways: • Improved reputation and brand support; • Ability to attract and retain high quality staff; • Differentiation in the market place; • Improved access to in-bound investment, particularly investors with an ESG focus; • Ability to identify costs savings through understanding how resources are used; and • Better understanding of market trends and business opportunities. Disclosure of a company’s stakeholder engagement process is a means through which the company can inform its stakeholders and the broader investment community as to how they take into account stakeholder concerns in the core strategic management of the organisation. Commonly reported indicators Investors look for: • Basis for identifying the key stakeholders with which to engage. • Frequency of key stakeholder engagement. • Engagement mechanisms e.g. meetings, surveys, briefings, use of on‑line media. • Main issues arising from stakeholder engagement. • Steps taken to respond to stakeholder feedback. Resources Leading reporter The Global Reporting Initiative Westpac Banking Corporation is is a widely-used framework recognised by the Group of 100 as for sustainability reporting: a leading practice reporter in the www.globalreporting.org Financial Services industry sector. Group of 100, “Sustainability: a guide Westpac has reported on stakeholder to triple bottom line reporting” (2003) engagement in its 2010 Annual www.group100.com.au Review and Sustainability Report. 23 Governance Why is it important to investors? Under this category investors will seek to gain an understanding of the company’s governance practices. These practices provide insight into the quality of management in the company, and the quality of risk oversight by the board who are the representatives of shareholders. Failure of the board to address these issues has contributed to many of the high profile corporate collapses over the past decade. Investors require reporting on corporate governance to better understand the framework, policies, and incentives in place to ensure best performance by the company. Failure to report this information increases the risk of a company to investors. Commonly reported indicators Investors look for detailed discussion of: • Risk management policies and implementation • The Boards’s assessment of related party issues. • Director selection and board succession planning process. • Information on board evaluation practices and director independence. • The link between remuneration structures and company strategy. • The link between remuneration structures and shareholder returns. Resources Leading reporters The ASX Corporate Governance 2010 – Remuneration reports – Principles and Recommendations Caltex Limited, QBE Insurance and supplement black letter law in the Tassal Group Limited Corporations Act in Australia : 2010 – Risk and financial disclosures http://www.asx.com.au/governance/ – Rio Tinto second-edition-revised-corporate- governance-principles- recommendations.htm The Australian Council of Superannuation Investors publish Governance guidelines for listed company boards: http://www.acsi.org.au/corporate- governance-guidelines.html The Financial Services Council also publishes a governance guide in relations to matters of Corporate Governance called Guidance Note No.2: Corporate Governance. A Guide for Fund Managers and Corporations: http://www.fsc.org.au/standards- guidance/financial-services-council- guidance-notes.aspx 24 5 Conclusion The management of risk is an essential Research on Sustainability Reporting ingredient for the establishment of long Practices shows that more than half of term sustainable returns. The Global the ASX 200 fail to provide meaningful Financial Crisis, along with a number information on their ESG risks. This of recent individual company Guide aims to assist these companies environmental and social events, to begin their ESG reporting journey. once again reminded investors that The Financial Services Council and the investment risk covers a broad range Australian Council of Superannuation of risk that effect the value of Investors thanks the many individual, companies beyond financial risk. industry association and institutions This Guide aims to assist these that provided input into this guide. companies with the view of investors on the information we need that will allow us to assess the company ESG risk which can then be used in short, medium and long term valuation processes. To date many companies have not disclosed this data so investors have had to make an assessment without the company view. This is not a satisfactory situation and we encourage all companies to look to their ESG risk disclosure. www.acsi.org.au www.ifsa.com.au