Embarking on an ESG Compliance Journey for Financial Institutions

Climate change and increased regulatory compliance requirements are driving financial institutions to reconsider their business strategies around ESG.

With the significant increase in awareness around climate change, investors are inclined to apply non-financial parameters as part of a holistic sustainability analysis to identify material risks and growth opportunities. With that in mind, we look at the Environmental, Social and Governance (ESG) regulatory landscape in Australia, what it means for financial institutions, and how we can help.

What is ESG reporting and why is it important to you?

Although ESG has not yet been mandated in financial reporting in Australia, financial institutions are increasingly taking up the responsibility to disclose such data in their annual report or within a standalone sustainability report. ESG reporting is becoming more important as it sheds light on a company’s ESG activities, improving transparency, and creating value for stakeholders.

A survey[1] conducted in December 2021 stated that 70% of Australian companies have defined or published their ESG strategies. With ESG becoming more quantifiable, incorporating ESG compliance measures into the corporate business strategy is expected to bring higher value for financial institutions.

In addition, several academic research efforts reveal that companies who pay attention to their ESG proposition gain higher equity returns, from both a tilt and momentum perspective.[2] [3] ESG reporting gives transparency for investors and lenders to assess a firm’s risk exposure and determine their possible future financial performance.

Below are some ESG guidelines from Australian regulators:

ASX recommendations on ESG

In the ASX Corporate Governance Council Principles and Recommendations published in 2014, one of the recommendations requires “a listed entity should disclose whether it has any material exposure to economic, environmental, and social sustainability risks and, if it does, how it manages or intends to manage those risks”.4

APRA recommendations on ESG

The Australian Prudential Regulation Authority (APRA) recently conducted a survey[5], with the expectations set out in its Prudential Practice Guide CPG 229 Climate Change Financial Risks (CPG 229).

  • Nearly three-quarters of institutions (73%) said they had one or more climate-related targets in place. However, 23% of institutions do not have any metrics to measure and monitor climate risks.

  • Over two-thirds of institutions (68%) said they have publicly disclosed their approach to measuring and managing climate risks, with 90% of those aligning their disclosure to the Taskforce for Climate-Related Financial Disclosures (TCFD) framework.

What does this mean for your business?

  • Businesses should revisit their sustainable strategic goals and have a standard practice of disclosing the environmental, social, and climate risks to their stakeholders as guided by the CPG 229 guidelines.
  • Institutions should also take a step ahead and build infrastructure (data, evaluating platform) to constantly track their progress towards their ESG objectives.

What are the elements to consider in ESG reporting?

There are major elements to consider in environmental, social, and governance reporting.

1 The Australian Employee Perspective on ESG (BCG, 13 December 2021).
2 Mozaffar Khan, George Serafeim, and Aaron Yoon, Corporate sustainability: First evidence on materiality (The Accounting Review, November 2016).
3 Zoltán Nagy, Altaf Kassam, and Linda-Eling Lee, Can ESG add alpha? An analysis of ESG tilt and momentum strategies (Journal of Investing, Summer 2015).
4 ESG Reporting Guide for Australian Companies (FSC and ACSI, 2015).
5 APRA publishes findings of latest climate risk self-assessment survey (APRA, 4 August 2022).

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