Trends and predictions in ESG

Jane Rennie:
Welcome to CPA Australia's With Interest Podcast, bringing you this week's need to know information for businesses and accounting professionals. Hello, I'm Dr. Jane Rennie, General Manager, External Affairs at CPA Australia.

Patrick Viljoen:
And I'm Patrick Viljoen, Senior Manager, ESG at CPA Australia.

Jane Rennie:
It's Monday the 24th of January. Today, we're going talk about trends and predictions on environmental, social and governance issues in the year ahead. Patrick, 2022 has all the ingredients for a very interesting period. It is an election year, I think it's fair to say that over the last election period, there hasn't been that much movement politically on ESG and in particular environmental issues. But how do you see the upcoming federal election as impacting the pace of what we might expect on climate action in Australia?

Patrick Viljoen:
Yeah, Jane, I think we underestimate the importance of this upcoming federal election. If we look at the Coalition they've held fast on their 26 to 28% carbon emission reduction by 2030. Comparing that with Labour, which has come forward with a 43% emissions reduction by 2030, obviously that's a little bit more ambitious. Either which way whoever wins this election, I think what we'll need to see as action. I think the time for talking about change as pretty much gone. So from my perspective, what I would like is a very good and robust roadmap in terms of how we get to 2030 in order to position us to get to carbon neutrality by 2050.

Jane Rennie:
Patrick, certainly among the electorate climate change has become much more important, hasn't it?

Patrick Viljoen:
Yeah, definitely. Definitely. And I think there's a lot more advocacy happening in that space. And as we look at our electorate and we'll talk about business in a minute, but I think we're seeing a lot more discerning decisions being made in terms of where people place their vote and in terms of which parties could support that particular vote that they're casting. So definitely I think if you're banking on the fact that because people have voted for you in the past, they will do so again, I would seriously second guess myself in that sense.

Jane Rennie:
And I feel like there is a sense among people that these next four years are critical that we can't continue to go at the same pace on climate action. Would you agree with that?

Patrick Viljoen:
100% and I think we've shifted our focus to 2030 and away from 2050, which is I think far too long in the future for people to actually realise the importance of getting to a point of our carbon emissions being where they should be. But I think over the next four years, if we don't see a proper action plan at this point, the likelihood of us going completely off the rails and missing that 2030 target is probably quite high. So I think looking at 2030, that's great because we are looking in the more medium term, but in the next four years, it's very important for us to get to a point of formulating a roadmap, which will get us to 2030. If we miss that mark now, we'll definitely go off the rails by 2030.

Jane Rennie:
That said irrespective of the outcome of the election, there has for some time been a growing disconnect between government action and between action by financial regulators. So I'm imagining that irrespective of who wins, we are going to see more action by our financial regulators.

Patrick Viljoen:
Definitely. And I think that's the difference in between the two. If you look in terms of political parties, obviously that's wrapped up in politics in terms of messaging and positioning. The regulators have been taking a risk based approach, realising that if they don't act in terms of climate change and sustainability more broadly, they will fall by the wayside. I don't think we should underestimate the fact that Australia should remain internationally competitive and our regulators are very aware of that. So I think the work that they've done in as much as embedding sustainability and climate change, more specifically in terms of their own sets of regulations and reporting requirements will increase and that'll become more stringent as we go throughout the year. But definitely from the regulator perspective, I think we'll see more work being done in that space and making sure that constituents businesses, organisations are reporting more. And I think in more depth in terms of their sustainability approach and the way that they embed that risk management within their organisations.

Jane Rennie:
Now just when you were talking then you mentioned what's happening internationally. And I think that's a really interesting context to put it in because our financial regulators, ASIC, APRA and the RBA. We're not just in a domestic context, are we? It's what's happening, they need to keep up with what's happening internationally.

Patrick Viljoen:
Yeah. 100%. And I think Australia, even though we tend to forget that we are the biggest continent out there, inhabited continent. But I think we also need to realise that we can't operate in a bubble. We are part of the international community, and if you think about cash flows and investment cash flows, obviously, we need to remain competitive. If we can't evidence that obviously cash will flow somewhere else. So from an investor perspective, you might have a situation of people looking at Australia in terms of how we approach sustainability, compare us to other comparable investment jurisdictions. And you might find that money flow somewhere else, if we don't actually are competitive and we can benchmark ourselves against what's happening internationally.

Jane Rennie:
And certainly in terms of access to capital companies have recognised this for some time and more and more companies are all so taking their own actions to manage risks and opportunities. What are you expecting companies to do this year on ESG issues?

Patrick Viljoen:
Well, look, I think a lot of companies have made commitments in as much as things like net zero, how they will roll out modern slavery or considerations around modern slavery in terms of their supply chains. And that's the first step is making those commitments. What I do think will happen in this year will be the second component to that. How do we actually have a roadmap that we can evidence in terms of how we're getting to that point? So I think the big speeches are probably over. But what we will see this year is those roadmaps being disclosed in terms of the broader set of financial reporting and non-financial reporting that organisations are doing and how they have set out that roadmap to get to the targets and the metrics that they've set for themselves. Which is really important because that level of announcement with our proper backing action, that's tantamount to greenwashing if you think about it.

Jane Rennie:
I was just going to ask you about that. Because with increasing numbers of companies making net zero commitments and the like, what are regulators doing? Or what do you think they might do to ensure those commitments are upheld?

Patrick Viljoen:
I think, again, it comes down to the scrutiny that's placed by regulators in terms of how you need to disclose. So even if you don't disclose that as part of your comprehensive set of financial reports that you produce for the market more broadly. Regulators are moving to a space of saying you need to think about climate change in terms of the impact it could have on your business model, your risk exposure, your strategy, and to report on that in terms of your approach and how you're flexing your business model to adapt to the risks that are posed through the organisation. So I think regulators will push for that more in as much as making sure that organisations are doing the right thing, as they should do. Because again, coming from an angle of risk management perspective, organisations need to start shifting and making sure that they address the risks of climate change, but then also exploit the opportunities that they could potentially [inaudible 00:07:55] from that.

Jane Rennie:
Patrick, just before you mentioned modern slavery reports. And this, I understand early this year might be, I think it's the second time that under the legislation, certain companies will have to report their modern slavery statements. What was the report card like for last year with that first set of legislated modern slavery statements?

Patrick Viljoen:
Yeah, look, I think a lot of companies have started doing disclosure in terms of how their supply chains are impacted. And I think we've done pretty well in that sense. Look, we're also aware that the Modern Slavery Act is coming up for review this year. And that'll take the form in terms of saying, what's worked well, where can we improve upon it? Do we not need to make any changes going forward? And that's just a honing exercise and making sure that it is fit for purpose and that it does fit the business models that various corporations are running. But I think again, it's probably a first stab at it and making sure that that becomes part of your reporting. But similar to other sustainability disclosures that organisations make, we will probably see a dipping happening in as much as the physical impacts that organisations need to face in terms of their supply chains, and how they make sure that the metrics and the targets that they've set for themselves are attainable and giving that performance measurement in terms of their progress.

Jane Rennie:
Somewhere else that we've seen that sort of iterative growing of recognition of ESG considerations has been the ASX Corporate Governance Principles and Recommendations. They're coming up for review this year. I remember last time, a couple of years ago when they were reviewed, there was a lot of talk and a lot of friction in fact about what should be put in, in relation to ESG. What are you expecting? Do you think we might get a bit of a harder edge on the requirements for listed companies?

Patrick Viljoen:
Yeah, Jane, a 100%. It is coming up for review. And I think one of the things that came up was, the principles and recommendations are just that, their recommendations. And they do follow if not, why not disclosure approach. But I do think from a perspective, if we look at the regulators again as a benchmark, it is becoming incumbent upon organisations to update game in terms of the reporting requirements. And from an ASX perspective, I think to a certain degree, there seems to be a disconnect and as much as you've got a recommended approach from the ASX. But then from the regulators perspective, you've got this, you have to approach. So I think closer alignment in between those two, so in between the ASX and the regulators is probably a very good thing. And look, I'm not going to advocate for having punitive measures put in place in this particular space, but that level of connectivity in between what the ASX is doing and then the regulatory space in terms of what the likes of ASIC, APRA and the RBA is doing, obviously there needs to be alignment in between the two.

Patrick Viljoen:
And I also think the ASX needs to also be mindful of the fact that from an investment perspective, unless organisations are evidencing that ESG perspective, we know that investors are growing more discerning in terms of where their money is actually being invested. So it's in the best interest of organisations on the ASX to make sure that they're reporting in a consistent and a comparable way to ensure that money still flows into them. Because that's what they're there for is raising equity on the stock exchange. So it's good for them to have that level of connectivity.

Jane Rennie:
Patrick, looking for a moment at the international, the global framework for sustainability. Out of COP26 last year, the International Sustainability Standards Board was launched. What do you expect to see in terms of setting up the framework for the ISSB?

Patrick Viljoen:
Look, obviously the ISSB is probably one of the more exciting thing or most exciting things that have happened within the sustainability space in recent history. And again, it's been set up as a standalone body next to the IASB, and that was due to a change in the constitution of the IFRS Foundation. And it's the first time that we've seen sustainability standards being set forward. And I think it also reduces the amount of frameworks out there, which is really good for us in terms of getting a very short, succinct set of standards being produced. From an Australian perspective obviously, I think the biggest concern that we'll see in this year is in terms of structurally, how we flex in terms of the composition of the FRC, the AASB, AUASB in making sure that we've got a structure in place that can probably replicate what's happening in the international space. And then also when the interpretation and the applicability of those sustainability standards for Australia needs to be reviewed, who is best placed to do that and how it should take that entrance.

Jane Rennie:
Patrick, in real terms for the accounting profession, when I hear about the ISSB being set up, what I think this sounds like more work, more to get across four accountants. But we're aware there's a shortage of accounting professionals and more than that, there's an acute shortage of accounting professionals with sustainability skills and knowledge. What's happening in that area to build that skillset?

Patrick Viljoen:
Yeah. Look, I think indeed the fact that we've had borderer restrictions and boarder closures across the world, as a result of the pandemic is definitely not helping. And you have to think about it. There is a global shortage of accountants. We are very aware of that. And then on top of that, you've got a very niche area within sustainability, which actually, hems it in even more. I do think in the future it will be... Well, near future. It would be incumbent upon professional bodies, including ourselves and others, to make sure that we do that capacity planning properly. So that could be products that we put forward in the PD space, or even in terms of our academic programmes to make sure that our members are fully aware and across what's happening in the sustainability space to also future proof their careers. But it's making sure that our members can act in that space and have the confidence to act in that space and have the technical skill to act in that space. And I think that's something which is really important for professional bodies to get right.

Jane Rennie:
And just on this, CPA Australia has launched our creating value through sustainability micro-credential. And you can find information about that on the CPA Australia website, that's open for members and non-members and people not in the accounting profession to take that micro-credential. Just to finish up Patrick, a lot of what we've talked about seems aimed at the larger end of town, listed companies and the like. But that doesn't mean that smaller companies shouldn't be taking action now. So what and very practical level should an SME be doing now for instance, on climate change?

Patrick Viljoen:
Yeah, definitely. And I think from an SME perspective, let's not lose sight of the fact that there's much less separation in between the client and the business from an SME perspective than there would be for bigger organisations. So in practical terms for an SME, so let's take for example, a coffee producing organisation, right? So how can that practically work for them? And I think if you think about your supply chain, in terms of your carbon footprint, are you sourcing responsibly? So if you think about your coffee beans coming in, is that fair trade? Do you know what the carbon emissions of that particular supplier is? And then also looking at waste. So if somebody purchases coffee from you, how do they dispose off cups and various other things? And it sounds trivial, but these are the small steps that we can take in making sure that our business models, even from an SME perspective are actually sustainable for the future.

Jane Rennie:
Thank you, Patrick. And thank you to our audience for listening to, With Interest. If you've got a question about any of the topics we've discussed today, or any of CPA Australia's policy and advocacy work, please email us at [email protected]. We'd also be very keen to hear from you, if you have a suggestion about a topic you'd like us to explore. If you've enjoyed what you've heard, please tune in again next week and tell your friends. From all of us here at CPA Australia. Thanks for listening.