Diversity, environmental and social risks in the spotlight but their light dims in reports from ASX listed companies

ESG may be all the rage but a major study KPMG carried out for the ASX shows there is a lot more still to be done.

KPMG was commissioned to produce 3 separate reports – on diversity; environmental and social risks; and on general adherence to the ASX revised 4th edition of its Corporate Governance Principles and recommendations, which came out in 2019.

This was a major piece of work – nearly 600 company reports studied across 3 categories: the ASX 200; 201-500; and the 501+ companies.

Of the three areas, diversity was the only one which we could compare to previous results, as we carried out a similar report for the ASX in 2016.

Disappointingly progress has been minimal to say the least over the past six years. In 2015, 87 percent of ASX-listed companies disclosed a diversity policy – in 2021, this had risen just to 88 percent.

Perhaps surprisingly, there was a regression in disclosures on the proportion of women in at least one of the categories of general workforce, senior executives and board.

Across the spectrum, the proportion of women in senior executive roles, and the workforce generally, has remained largely stagnant, while the number of women on boards has increased by 10 percent across all three categories since 2015.

The top 200 companies were slightly better with a 4 percent rise in terms of senior executive roles and 12 percent on boards, but overall this has to be considered a modest improvement. The ASX 501+ cohort requires the most support and focus to develop and implement diversity initiatives, with the lowest rates of disclosure and proportion of women, and highest use of the ‘if not, why not’ explanation.

Some companies go beyond gender and include a broader definition of diversity in their disclosures. But only a small percentage of entities yet disclose measurable objectives for, or representation of, First Nations Peoples, those who are culturally or linguistically diverse, people with disabilities, or members of the LGBTIQA+ community.

As for environmental and social risks, while adoption of the relevant Recommendation 7.4 was high, we, surprisingly, found that a quarter of companies reported no material exposure to environmental and/or social risks.

While acknowledging there is a significant breadth of entities with different circumstances and exposures within the sample, KPMG considers it unlikely that over 25 percent of the sampled entities do not have any material social or environmental exposures.

Many of the companies using the ‘if not, why not’’ explanations said their sector either has little exposure to material environmental and social risks, or that their company had a diverse portfolio of investments which shielded it from those risks.

Yet a review of sector-specific reporting identified some instances of entities reporting no material exposure to environmental and social risks and being out of step with companies in the same industry.

There were some positive signs – overall, we found a maturing of reporting, especially among the ASX200. Reporting frameworks and standards were referenced to varying degrees. Around half followed at least one internationally recognised framework.

With investors and regulators are taking a keen interest, and sustainability reporting standards are being developed at a global level – with the prospect of them being made mandatory in Australia – all ASX-listed entities need to take a fresh look at their reporting in this area.

As for overall adherence to the ASX Corporate Governance Principles and Recommendations, high levels of adoption were found, with 95 percent of the sampled entities disclosing the extent to which they had adopted the new and revised requirements.

The depth of disclosure varied however, with some entities providing responses that simply restated recommendations without explanation. Just as one example, a majority of the companies reviewed did not specify who conducted verifications of the integrity of periodic corporate reports (that were not audited or reviewed by an external auditor), nor called out how verifications were undertaken.

The exercise was a valuable one, if in some areas results were disappointing. Many examples of good practice were identified, which others could use to advance their own practices and disclosures.

Some good news is that many companies reported benefits to having a strong management approach to and reporting on environmental and social exposures, including diversity. Those entities recognise that benefits for the business included increased talent attraction, appeal to investors and better business performance to name a few. Once again the ASX 501+ cohort requires the most support and focus to develop and implement fit for purpose approaches.

But overall it seems further action is needed to address the more than one in 10 companies that are still not disclosing a diversity policy. The stagnation in the proportion of women in senior executive and board positions, and across the workforce in general is concerning. Although the COVID-19 pandemic is likely a contributing factor, there has been fairly meagre progress over the past six years.

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