Tony Featherstone explains how new regulations are lifting the bar on “we’re too small” excuses.

    The governance gap between large and smaller listed companies is widening in too many areas. Sustainability reporting is an example. As large companies disclose more information on their sustainability risks, too many small companies are ignoring or underestimating the issue.

    The gap was evident in the Australian Council of Superannuation Investors’ (ACSI’s) latest report on disclosure of sustainability risks among S&P/ASX 200 companies. ACSI found 62 per cent of ASX 50 companies reported at a “comprehensive” level on sustainability risks (the highest score). Only nine per cent of companies ranked 101 to 200 had comprehensive sustainability reporting. Worryingly, 43 per cent of ASX 200 companies had no, or only basic, reporting of sustainability risks. “While there are signs of improvement, a number of companies are yet to show visible commitment to sustainability reporting,” ACSI says.

    If four in every 10 companies in the ASX 200 barely report their sustainability risks, such as environmental exposures, human resource or safety data, what hope is there for the rest of the market? How can investors make informed decisions on the other 1,850 ASX-listed entities that mostly do not disclose sustainability risks to the market? I am surprised so many listed companies have been so slow to embrace sustainability reporting comprehensively and that the investment community is not pressuring them to change.

    There are too many excuses. A common one is companies not wanting to report on unnecessary sustainability risks for reporting’s sake and be exposed to potential litigation, or to activists who pick up this information and use it to cause trouble. I understand the concern, but exemplars on sustainability reporting, such as BHP Billiton and Westpac Banking Group, have shown it is possible to provide more information to help investors make informed decisions, without exacerbating risk.

    Another excuse, that company size directly affects the depth of reporting and that small companies have fewer resources than large ones, is just as tired. For one thing, two-thirds of the ASX 200 are billion-dollar companies by market capitalisation. Yes, a junior mining company with $5 million in the bank might overlook detailed sustainability reporting, but a large organisation with global operations? Several of the laggards named in the ACSI report are highly successful, billion-dollar companies.

    ACSI is correct when it says size should not be a barrier to providing meaningful information on sustainability risks. It notes that the specifics of sustainability reporting will be different for each company and industry and companies should only report on factors relevant to their environment. Even so, listed companies need to assess these risks and report on them as needed.

    Regulatory changes have also lifted the sustainability reporting bar for companies and boards. Listed companies are expected to consider sustainability risks in their reporting from 1 July 2014 under the recently revised ASX Corporate Governance Council’s Principles and Recommendations. The new Principle 7 (Recommendation 7.4) says: “A listed entity should disclose whether it has any material exposure to economic, environmental and social sustainability risks and, if it does, how it manages or intends to manage those risks.”

    The Australian Securities and Investments Commission’s Regulatory Guide 247, issued last year, also contains recommendations on sustainability reporting. It suggests that the Operating and Financial Review in the Director’s Report in the annual report discuss sustainability risks, “where those risks could affect the entity’s achievement of its financial performance or outcome disclosed”.

    Then there is the global push towards integrated financial reporting, which looks beyond traditional financial metrics and encourages organisations to report on a broader suite of material factors. At the same time, global institutional investors are showing more interest in assessing sustainability risks. It is no secret that giant US pension funds, for example, are putting more weight on sustainability practices in their investment decisions.

    The sustainability reporting laggards on ASX have been saved, somewhat, by the local investment community’s slower response to this issue. The much-needed push by industry super funds to focus on sustainability reporting has not filtered quickly enough to other parts of the investment community.

    Rarely do fund managers comment publicly on corporate sustainability issues or analysts factor these risks into their valuation methodologies. Not many financial advisers consider corporate sustainability risks when making recommendations to clients on what to buy and sell. It is still mostly about earnings.

    That has to change as more institutional investors take an active, if not “activist” approach, to their portfolios and quiz companies about issues beyond earnings. As super funds push for greater information on corporate sustainability, fund managers, analysts and eventually advisers will have to respond. When the “tipping point” arrives, the 43 per cent of ASX 200 companies that have barely begun their sustainability reporting journey will be left behind. It is time for smaller companies and their boards to catch up to Australia’s largest listed companies that are setting the pace on this issue.

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