Climate change and human rights on ACSI’s radar

Posted by on 12/12/2017

The Australian Council of Superannuation Investors (ACSI) recently released Governance Guidelines providing insights for the first time on how large investors expect climate change and human rights issues to be managed.

ACSI’s Governance Guidelines are updated every two years and outline its members’ expectations of the governance practices of the companies they invest in.

This year, a new chapter on environmental, social and governance (ESG) issues has been added, which covers climate change, labour and human rights, corporate culture and tax disclosure.

‘With AGM season almost over, it’s important to reflect on governance standards for the coming year and to identify issues where change is needed,’ says ACSI CEO Louise Davidson.

According to ACSI, the guidelines are an important resource for companies, asset managers and owners. ‘You don’t have to look much further than Australia’s scandal plagued banking sector to see the impact of governance failures on company sustainability and community sentiment. It’s vital to have a framework for evaluating governance practices and performance.’

ACSI notes that companies are more likely to attract equity finance if they provide investors with accurate, timely and relevant information that demonstrates ESG risks and opportunities material to the business are being well managed.

Climate change

ACSI says the Paris Agreement, signed in late 2015, has resulted in a global focus on reducing the emissions intensity of economic activity to stabilise global warming to less than 2°C and on moving towards a net zero emissions economy by the second half of the century.

When it comes to climate change, ACSI expects to understand whether a company can:

  • successfully identify and manage the climate change risks and opportunities it faces
  • demonstrate future viability and resilience by testing business strategies against a range of plausible but divergent climate futures, including a 2°C scenario
  • achieve cost savings through efficiencies and identify low carbon opportunities.

Where companies identify climate change risks as material, ACSI says disclosures should extend to discussing the strategy, as well as metrics and targets, used to manage the risk.

Over the next few years, it expects companies materially exposed to climate change risk to make substantive improvements in their climate-related reporting. In this regard, it directs them to the risk assessment and reporting framework finalised by the Financial Stability Board’s Taskforce on Climate-related Financial Disclosure in June 2017.

Labour and human rights

ACSI’s members also consider it part of their fiduciary duties to engage with companies to ensure that labour and human rights risks are mitigated, whether in the company’s direct operations or in their supply chains.

‘Traditionally, scrutiny of human rights issues has focused on labour rights abuses such as discrimination, restrictions on freedom of association, slavery, child labour, trafficking, unfair wages or unacceptably poor or dangerous working conditions,’ says ACSI.

‘We encourage companies to recognise other potentially relevant human rights impacts that can arise in complex supply chains such as rights related to displacement and resettlement, the rights of Indigenous peoples, and the right to personal safety and security.’

ACSI expects boards to manage material labour and human rights impacts and to disclose information that answers the following questions, if relevant:

  • How do the company’s policies and procedures identify, prevent, mitigate and account for labour and human rights risks in its operations and supply chains?
  • How are the company’s due diligence processes implemented and tested for effectiveness over time?
  • Does the company incorporate the outcomes of its risk assessment in procurement decisions?
  • Are independent third-party audits conducted and how far down the supply chain?
  • If labour or human rights risks are identified, how does the company respond to address the impacts?
  • What remediation processes are in place?
  • What accountability standards does the company have for employees or contractors that fail to meet company standards on labour and human rights risk management?

ACSI says it does not approach ESG with a ‘one-size-fits-all’ mindset, nor does it regard ESG monitoring as a ‘box ticking’ exercise.

‘We recognise that every company is different, and we expect that each board will have considered and adopted the most appropriate policies and practices for the benefit of all stakeholders – and to have clearly articulated its rationale for doing so. We take a pragmatic and commercial approach that considers the specific circumstances of each company on a case-by-case basis.’

Other new or expanded topics in the guide include:

  • Gender diversity: how ACSI will progress its policy to support a 30 per cent target for women on boards.
  • Shareholder resolutions: factors ACSI takes into account when evaluating shareholder resolutions.
  • Chairperson workload: its expectations for managing the chair’s capacity and other commitments.
  • Remuneration: added factors to consider in the design of remuneration arrangements.

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