More than 57 per cent of ASX-listed companies provided an ESG update, for example, this was up 44 per cent from last year. There is also much more ESG-related information in their slide decks.
We’re seeing companies shifting from simply committing to net zero to providing detailed decarbonisation plans and updates on their progression — and in some cases, have been bringing their targets forward.
Australia’s responsible investment market reached a record $1.5 trillion and represents 43 per cent of total professionally managed funds. The proportion of Australians with responsible investments rose 28 per cent to 17 per cent, driven largely by gen Xers and millennials.
Listed companies are becoming aware of the need to manage ESG risks — it is no longer just a nice to have. It’s a demand from investors and regulation is following. They are becoming very aware that they need to start focusing on ESG or be left behind.
Governance
Data security was in focus on the governance front post the Medibank and Optus breaches, with 42 mentions of data security across the ASX 200, more than double the 20 in the last reporting season in August.
More companies are talking about increasing their defences against cyber attacks through higher cyber spending and employee training. Medibank Private (ASX:MPL) noted $26.2 million in non-recurring cyber crime costs. Seek (ASX:SEK) said it is focused on customers’ privacy protection and ethical use of its data.
Overall, a lack of technology, inflation challenges, and labour shortages are hampering progress.
On the labour front
Cleanaway Waste Management (ASX:CWY) reported 672 vacancies, aiming to reduce these to 300–400; but noted higher labour costs due to greater use of overtime and sub-contractors due to the tight labour market.
Ramsay Health Care (ASX:RHC) noted labour shortages and wage inflation as key headwinds, and also implemented a range of initiatives which are gradually driving down vacancies.
This trend extends to the mining, oil, and gas sectors where there has been a rise in total recordable injury frequency rate.
Investment opportunities
We see opportunities in industries that are exposed to the energy transition particularly in critical minerals like lithium, copper, and nickel.
There is interest in companies that are investing in the development of sustainable products.
Although research tells us that customers aren’t ready to pay a green premium however, there is an opportunity for companies to develop affordable sustainable products and we’ll be looking for opportunities in this space also.
We also see potential to achieve both alpha and ESG impact by identifying not only ESG leaders, but also ESG improvers — those that are showing a positive momentum in their ESG score/improving ESG metrics. This is where engagement comes into play — with boards and management teams to get a forward-looking view on ESG risks and opportunities facing the company.
Link between sustainability and financial performance
Responsible investing is good investing. We have a strong belief at Equity Trustees that companies that do good, do well.
Companies with strong or improving ESG performance tend to have more sustainable business models and tend to be better investments in the long term — which helps to improve financial returns, which is what we’re here to do.
We believe responsible investing (RI) can have a material impact on both the risk and returns of investments.
Responsible investment principles add strength to the investment decision-making process. It is not a movement that is going away.
Outlook for responsible investing
We expect reporting on ESG to move forward — driven by investor demand, with regulation set to follow. We do not have a standardised ESG reporting framework required by law in Australia. We expect sustainability reporting to become mandatory in Australia as we gain pace with regulation in Europe.
By contrast, Rio Tinto (ASX:RIO) was forthcoming that its decarbonisation plans have been slower than expected due to resourcing constraints and construction delays. As a result, Rio Tinto didn’t spend the capex on decarbonisation projects/reduce emissions as much as it thought it would.
BlueScope Steel (ASX:BSL) noted that proposed safeguard reforms could have a material impact on its business, highlighting the lack of scalable technology to meaningfully shift the dial in reducing carbon emissions in the steel making process and making its ability to deliver on proposed emission reductions more challenging.
Dilan Ashton, general manager responsible investing, Equity Trustees Asset Management
