24 December, 2021

ESG takes centre stage for investors in 2021 and beyond


Australia and New Zealand have been behind the rest of the world embracing ESG principles, however this has changed rapidly with investors demanding more and companies expected to produce better results.

Over the past six months, we have hosted more than 35 sessions on ESG with listed and unlisted companies and experts to better understand where Australia and New Zealand sit compared to global leaders, what corporates and investors are focused on and what the listed implications are across the region. Throughout these sessions, five key themes emerged, which we believe will continue to be a focus into 2022.

1. A growing call to action on climate change

The pace and severity of global warming is getting worse, and it has become even more pressing to accelerate our transition to net zero. This is a global problem and requires a global solution.

To date, the call for action on climate change in Australia has been coming from listed companies, not the government, and has been spurred on by investors and activists. Positively, more than 50 per cent of ASX 200 companies are now reporting against Taskforce for Climate-Related Disclosure, particularly those in high emitting sectors, up from around 10 per cent three years ago. The number of ASX 200 companies setting net zero targets has more than tripled this year to 50, representing about half the ASX 200’s total market capitalisation.

Companies have started reducing their own carbon emissions through maximising energy efficiency, minimising environmental impact, divesting high emitting assets and/ or buying carbon offsets in the growing voluntary market. The recent findings of the IPCC report and COP26 summit makes it likely that these targets will need to be brought forward and adds to the risk for high emitting sectors that the action they are taking won’t be seen as enough.

If Australia doesn’t act to bring down emissions sufficiently, there is a risk that the EU Carbon Border Adjustment Mechanism would work against exports if we don’t have a regulated carbon price and/ or global capital drying up for Australian investments.

Research by the Ellen MacArthur foundation highlights the critical role of circular business models – that is, an economy based on three principles: to eliminate waste and pollution, circulate products and materials (at their highest value), and regenerate nature. It shows that renewable energy can help address 55 per cent of emissions, while the circular business model across sectors is critical to helping address the other 45 per cent of emissions.

2. Creating a circular economy

The circular economy can also help companies decarbonise their supply chain and win new business. Officeworks, for example, has a circular economy commitment that includes a zero-waste target. They made good progress this year reducing landfill waste by 32 per cent and recycling 91 per cent of all operational waste. Part of this commitment includes designing out waste and maximising recycling, ensuring the packaging from all products it sells is reusable or recyclable, and helping customers dispose responsibly of products at the end of their life cycle.

3. Embracing issues that matter to customers

Social licence has become increasingly important for companies across all sectors and provides a significant opportunity to build brand loyalty. Consumers want to shop brands they relate to, and which are acting responsibly. By building brand around social licence, we see scope to lift retention and engagement. This is important for return on invested capital.

Our research showed that Australian shoppers are 56 per cent more likely to buy from a brand if it aligns with their views. By embracing social licence, brands can build greater customer loyalty and engagement to drive higher sales/returns and ultimately improve brand value.

While consumers value social licence, ultimately this needs to be balanced against experience and the value proposition. A good example is the removal of single-use plastic bags by Woolworths in the first quarter of 2019, a period when sales slowed as the initiative was brought in too quickly, frustrating shoppers. It is now accepted practice, with more than two billion plastic bags per annum out of circulation for Woolworths.

4. How data is kept and used

We are surprised by the lack of information on data privacy and cyber security in corporate Australia's ESG messaging given this is a material ESG issue for many sectors.

According to a Deloitte study titled Data Privacy as a Strategic Priority, with the value and volume of data growing exponentially, data privacy has emerged as a board-level issue and potential source of competitive advantage. However, without a comprehensive and effective program for information governance, data privacy remains a compliance challenge and a potential reputational time bomb. Companies today face increasing pressure from regulators and the marketplace to improve how they collect, use, store and delete personal information, and how they manage data privacy

5. Implications of the destruction of the world’s biodiversity

Most primary economic activities e.g. mining, agriculture, forestry degrade biodiversity – but biodiversity impacts arise all along the economic value chain. This will require new forms of analysis that go beyond traditional environmental impact assessments. As we are still in the early phase metrics and targets are not common, but companies are starting to try to understand and respond to their impact on biodiversity. 

Nature-based solutions and offsets are generally part of the solution. We are seeing more sophistication in the market, and, in some cases, premiums are being paid for ACCUs or other nature-based credit. Some compliance buyers are seeking high quality credits with a story attached to show investors, customers, employees and willing to pay up to +50 per cent premiums above the spot price.

What’s next for 2022?

Next year, we expect to see investors holding corporates more accountable for targets. We have moved past the point of sustainability simply being a box-ticking exercise to success being measured through tangible action and executives being accountable for implementing sustainability policies.

We expect more companies to conduct materiality assessments to ensure they are responding to ESG issues, risks and opportunities. It is key for companies to understand and focus their resources on the material ESG considerations through both a risk management and opportunity/ value creation lens.

Expect the rise of the ‘S’ in ESG with more ambitious targets and focus on promotion of credentials to build social licence. And finally, we are likely to see further ESG driven M&A activity, as seen in the oil and gas sector this year.

 

Michaela Jamison is Head of ESG Research, Australia, at Jarden. This article reflects the opinions and views at the time of publication, and is not to be relied upon as a basis for making any investment decision. Please seek specific investment advice before making any investment decision. 

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