ASX200 companies still have much to do on climate impact reporting ahead of the anticipated global first sustainability standard, a KPMG Australia study of company reports has revealed.
The COP26 summit next month is expected to see the launch of the International Sustainability Standards Board (ISSB), a sister body to the long-established International Accounting Standards Board (IASB). The first standard from the new board – being created to drive global consistency in sustainability reporting – is expected to focus on climate reporting.
It is anticipated that the Task Force on Climate-related Financial Disclosures (TCFD) – regarded globally as best practice for reporting on climate impact – will likely form the basis of the standard, expected in 2022.
The KPMG benchmarking review of ASX200 annual reports finds that only 35 percent currently detail their climate impact with reference to the TCFD Recommendations in their annual report. Several more provide TCFD- recommended information in a supplementary report or online rather than in the annual report, while 25 percent do not refer to the TCFD but discuss climate risk in their risk section.
On wider Environmental, Social and Governance (ESG) issues – currently the hottest of all business topics – less than half (47 percent) included material ESG metrics in their discussion on ESG performance.
Nick Ridehalgh, KPMG Australia Head of Better Business Reporting, said: “While the majority of ASX 200 companies are reporting on their climate risk, there are many – around 40 percent – who do not currently follow TCFD practice and this means that when the new climate standard is introduced likely next year, these companies face a considerable amount of work to prepare for it. Those who have already adopted TCFD – and there has been a significant increase in the numbers doing so in the past 2 or 3 years – will be much better placed to cope with the new standard.
“The first International Sustainability Reporting Standard will be a game-changer. It is driven by global investors and is being introduced to give sustainability information the same rigor and comparability that the capital markets expect of financial information. Market transparency requires that companies provide a more complete view of how their long-term value is created, not just short-term financial results. The interconnectivity between sustainability related information and financial information is now being recognized, and effective capital allocation and investment flows in global markets demands ‘investment grade’ sustainability information.
“Our report shows that many still have much to do in terms of understanding their climate risk and opportunity, applying the TCFD Recommendations and then reporting their response and likely impact in their primary report, ahead of the new standard.
“Similarly, on wider ESG reporting, which is the subject of huge interest both from regulators and investors, there is room for improvement. Only around half include meaningful metrics on performance in managing ESG matters for long term value. Organisations should embed ESG in core strategy and report on performance aligned to it.
“Currently many still have a separate section on sustainability, which is not well connected to group strategy and the creation of enterprise value. Interviews with directors and executives in the report explain how adoption of the International Integrated Reporting Framework not only helped them in presenting better how the organisation delivers sustainable enterprise value, but also delivered other market and business benefits.”
Other areas of reporting also need improvement, the KPMG analysis found. While most ASX200 companies now go beyond the financial position and include narrative on how the organisation has performed in achieving its strategic objectives, only 12 percent include performance against targets, budgets, and pre-defined measures (KPIs).
Outlook reporting also continues to be poor with the large majority only providing limited discussion on their future outlook, with most focussing on financial prospects over the next 12 months.
Nick Ridehalgh said: “There is a real opportunity for organisations to share their longer-term plans and aspirations with disclosures on, for example, major external factors, business model changes, future strategy and identified risks and opportunities. This section of the report, done well, can provide the market with significant insights into the quality of the business’s leadership.”
He added: “There was some improvement in the reporting of governance – the ‘G’ in ESG – with more companies providing detail on what the board focused on during the year and the respective actions taken in the primary report to shareholders. This is important as such ‘active’ governance disclosures help the reader understand how the board oversees and supports management implement strategy, manage risk and opportunity and create long-term value.”
