Warning to prepare for mandatory ESG reporting

Staff Writer

Financial Newswire

2 September 2022

Smaller listed investment companies need to be aware of the possibility of mandatory ESG reporting being imposed on them, according to HLB Mann Judd’s Katelyn Adams.

Adams, a corporate advisory partner, said she believed mandatory ESG reporting was becoming increasingly likely for listed entities with company boards already preparing themselves for the new regulation.

She noted that, in recent months, the Australian Securities and Investments Commission (ASIC) has issued information on the practice of greenwashing, in which a company overstates their green credentials through misleading marketing or advertising.

Adams said she believed such developments could precipitate the introduction of mandatory ESG reporting, with some listed companies – namely those in the small cap sector – ill prepared to adopt such a framework.

“With mandatory ESG reporting no longer a matter of if, but when, many smaller companies are likely to be unprepared for increased ESG regulations,” she said.

While the measuring of ESG had to date been a source of confusion for investors, Adams said the introduction of mandatory ESG reporting could provide more clarity on the ESG credentials of a company.

“Institutional investors in particular are increasingly placing a greater emphasis on ensuring companies are satisfying environmental, social and governance pillars before investing in the stock.

“While many larger cap companies are already reporting on the environmental pillar, it is equally as important for all listed entities to demonstrate their adherence to the social and governance pillars.

“There is a strong desire from company boards to do ‘social good’, an absence of which is increasingly considered a financial and reputational risk. These areas have moved beyond an annual mention at company board meetings, to being a key agenda item each month and also through the formation of ESG and sustainability committees,” she said.

Adams also said the recent underperformance of ESG or impact-based funds shouldn’t deter potential investment in these products, insisting the widespread adoption of ESG funds in the coming years will likely result in improved returns.

“As we see companies transition across to a stronger ESG focus I would expect some performance indicators to take a back step during that transition phase but in the medium to longer term, performance will rebound.

“We’re seeing a lot more impact investing – some investors will only invest in companies that have a strong ESG focus, and its equal parts the environmental, the social and a company’s status in being a good corporate citizen. Company boards therefore have a very important role to play,” she said.