Rachel Alembakis – FS Sustainability
Greenhouse gas emissions are once again the top ESG priority for companies, according to the most recent Perennial Better Future ESG survey.
In the fifth edition of the Better Future survey, sent to approximately 200 ASX-listed corporates with responses received in November 2023. Respondents came from a diverse range of industries, with financials and industrials best represented. 13% of respondents with a market cap of less than $200 million, 22% between $200 million – $1 billion, 41% between $1billion -$5billion and the remaining 25% with a greater than $5billion market cap.
Participants listed GHG emissions, cyber security and diversity and inclusion as the top three ESG priorities for the next 12 – 18 months. In last year’s survey, cyber security topped the list.
Perennial observed that there is a difference in the perception of ESG as a driver of profit, with more small cap companies identifying positive impact than large cap companies, and financial and industrial companies that responded to the survey finding ESG significant to profit.
“It could be down to the fact that small caps have lagged on ESG and they’re playing catch up now, or it could be that with larger companies, the focus is on ‘ESG integration,’ whereas for smaller companies, you’re more likely to find strategies that are profit with purpose. However, it’s quite a significant finding,” said Emilie O’Neill, co-head of ESG and equities analyst of the Perennial Better Future Trust
The survey found nearly two thirds of companies believe that ESG and sustainability provided profit opportunities for their business, while 83% say managing ESG and sustainability issues means additional costs.
“We’ve seen an investment in staff, increasing senior or board level accountability, more KPIs introduced, and we’ve seen more interest in how ESG can benefit a business,” O’Neill said. “We asked the question – is there profit opportunity for the business with ESG and we also asked the question around does ESG create extra cost for the business, and that was quite interesting because obviously they’re putting more dedicated resources, but there’s a belief that they don’t mind it being extra cost if it results in more profit.”
When asked how important respondents think ESG and sustainability will be to their business in the next five to ten years, they were ranked 7.5 out of 10.
Perennial observed that there is a difference in the perception of ESG as a driver of profit, with more small cap companies identifying positive impact than large cap companies, and financial and industrial companies that responded to the survey finding ESG significant to profit.
“It could be down to the fact that small caps have lagged on ESG and they’re playing catch up now, or it could be that with larger companies, the focus is on ‘ESG integration,’ whereas for smaller companies, you’re more likely to find strategies that are profit with purpose. However, it’s quite a significant finding,” O’Neill said.
The survey also found more dedicated ESG staff and increasing senior and board level oversight – 75% of companies now have a dedicated ESG/sustainability person or team dedicated to ESG matters, an increase on 49% that reported the same in 2022.
“Equally with ESG and sustainability and regulation, there’s an increase in in reporting burden, and it is still coming through the survey that people are feeling burdened by that cost, but ISSB should hopefully standardize the reporting,” O’Neill added.
Perennial has engaged with portfolio companies through the years on the topic of ESG reporting and in general has advised companies that they should get ahead of mandatory disclosures with voluntary ESG and sustainability reporting, O’Neill noted.
Perennial also asked companies if they audit their ESG reporting, a new question for this survey.
“Increasingly we have seen companies moving from disclosing what they want, at the standards they choose, based on what stakeholders want to hear to having audited ESG information alongside their financial reports. It is going to be increasingly important to make sure ESG information is consistent and accurate and thus we see almost half of the companies have auditors verifying their ESG information,” O’Neill said.
There has also been growth in the number of companies that link ESG performance to KPIs and short and long term incentive. 62% of companies have ESG or sustainability as a specific KPI versus 45% in 2022. But there is a significant size effect in the data, Perennial said, with 63% of smaller companies indicating that they do not have remuneration associated with ESG as a KPI compared with 24% of larger companies
“More companies are linking ESG to KPIs, which is good, but we’re seeing in STIs instead of LTIs,” O’Neill said. “Emissions reductions aligned with Paris is something we’ve been pushing to see integrated into KPIs, and we find that 13% of respondents are doing so.
“The problem with a lot of ESG remuneration and KPIs is that the granularity is not always provided to investors. When we look at remuneration reports, we don’t necessary always get the detail on the hurdle. … I think there’s a tendency in history to put in easy hurdles as a token, but what we want to see is actually improvement here, not just business as usual or baseline. We want to see companies making efforts to improve on ESG issues and sometimes the granularity is important.”
More companies are also committing to Reconciliation Action Plans (RAPs), and O’Neill noted that Perennial is currently working on its second RAP, an Innovate plan.
“We have already seen some of our portfolio companies adopt RAP framework which is great. “There is going to be more nuance around ESG and sustainability and how companies integrate these issues – it’s a lot more focus around making sure ESG is about business resilience and profit opportunities and materiality, not just ESG for the sake of ESG but linking it back to financial materiality.”
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