Seven ESG priorities in the crosshairs of analysts in FY25

With increasing public consciousness around ethical best practice and a corporate regulator appearing to take more decisive enforcement action, listed companies have been put on notice to uphold their environmental, social and governance (ESG) claims and mandated standards.

With reporting season on the near horizon, Will Baylis and Naomi Bant, portfolio managers at specialist Australian equities investment management firm Martin Currie, have outlined seven key ESG priorities they expect ASX-listed companies to address in FY25, noting that sustainability reports now share equal billing with annual reports.

First among these priorities is the listed firms’ climate transition objectives.

“Decarbonisation has of course been a significant topic for several years, and reporting is stepping up,” the pair wrote in a statement.

“As of 1 July 2024, the Government requires mandatory climate disclosures for Scope 1 and 2 emissions from major emitters and large organisations.

“Next year’s reporting will be even more crucial, as companies must also assure material Scope 3 emissions, scenario analysis, and transition plans.”

The pair note that, currently, few companies share their scenario analysis, with the regulatory change marking “a significant information shift” and obligations incumbent upon them.

They note that analysts from the investment firm will be examining how climate transition costs and revenue opportunities appear in their results and how they impact Marin Currie’s proprietary ratings, Carbon Value at Risk calculations, and company valuations.

According to Bayliss and Bant, another critical focus for listed firms will be natural capital and biodiversity, with ASX firms appearing to fall well short of expectations in this area.

“We are hearing already that many companies are deprioritising biodiversity policy development, and only five listed Australian companies have committed to early adoption of the Taskforce on Nature-related Financial Disclosures (TFND),” they wrote.

Martin Currie will use its proprietary Natural Capital ‘best practice framework’ to assess companies’ performance and to highlight potential long-term impacts of deprioritising biodiversity.

Workplace safety concerns will also take precedence in their ESG assessments, with Bayliss and Bant acknowledging the alarming rise in injuries and deaths being recorded outside of traditionally labour-intensive industries, including in the consumer space.

“This spike is linked to increased mechanisation and automation, a growing migrant workforce, and the reliance on imported goods and online retail, which increases warehousing and manual handling,” the pair said.

“Through our engagements, and also our proxy voting later in the year, we will assess whether workplace safety is appropriately owned at the highest organisational levels.”

“One way to do this is for KPIs to be directly related to safety incidents, and for short-term incentives and remuneration to be impacted by workplace incidents.”

Outcomes for first nations peoples will also be assessed, noting a recent push by companies to expand diversity targets, as well as Indigenous employment, training programs, and procurement initiatives.

“In 2023, we began assessing the status and effectiveness of the RAPs [Reconciliation Action Plans] of our investee companies. Through our engagements, we will be continuing our monitoring and evaluations of how these RAPs are being implemented and will seek evidence of their impact, ensuring that companies are not only making commitments but also delivering tangible outcomes for First Nations communities.”

While they note while progress has been made in improving corporates’ gender diversity, “much work remains” in this space.

Citing figures from WGEA, they noted that while roughly half of the Australian workforce is now female, only 34% of board members, on average, and just 22% of CEOs are female.

“We are focused on seeing a better gender balance across the full workforce,” the pair said, with a “better [understanding of] the pipeline of talent companies have for succession from the next generation”.

Ethical sourcing arrangements will also be in the analysts’ crosshairs, with the pair calling for companies to “remain vigilant” to eliminate the still considerable risk of modern slavery within their supply chains.

They note that “Australian supply chains weave through the highest risk region in the world”.

“We will be using our engagements to push for positive change where policy and action are deficient versus our proprietary Best Practice Framework, initially built from our 2021 survey of ASX-listed companies.”

Finally, the Martin Currie team will be examining instances of greenwashing, stepping up their engagement with boards, management, and sustainability officers of companies that make “unsubstantiated claims” around their green credentials.

“Sustainability is not just a marketing tool; it requires genuine commitment and action,” Bayliss and Bant wrote.

“We are on the lookout for companies talking about sustainability without real action to back their claims.

“We seek concrete evidence that a company has implemented strong policies and processes to ensure they are doing what they say and being fully transparent about the associated risks and opportunities.