The rise (and fall) of the ESG cowboy

By Josh Geelan, Partner, Enterprise and Julie Vasadi, Director, Sustainability, KPMG

Contributions by Kate le Roux, KPMG

(Sponsored article)

• ESG is coming, and fast: What is ESG and what does it mean for you?
• The rise (and fall) of the ESG cowboy: ESG isn’t something you do, it’s everything you do.
• A practical guide to starting your ESG journey and positioning for success.

ESG is coming and fast!

ESG reporting isn’t new, even if the acronym is. ESG stands for Environment, Social & Governance and is essentially an extension of the previous Corporate Social Reporting (CSR) or Triple Bottom Line concepts. To put it simply, ESG is about demonstrating the contribution you make to the world in which we live, and the footprint you leave behind.

There have been some wonderful examples of companies embracing ESG, to great success. For example, outdoor clothing and apparel icon Patagonia has long embraced ESG principles as both a strategic and cultural mindset and market differentiator. The #1 brand in market donated 100 per cent of the profits from its record $10m in black Friday sales in 2021 to hundreds of local environmental organisations working around the world.

Mainstream corporate Australia needs to prepare. ESG is coming here and expectations are increasing rapidly.

In December 2021, it was announced that the Singapore Stock Exchange (SGX) would start mandating ESG disclosures by sector from 2022. This places Singapore in line with the Nordic countries as established global ESG leaders, but they are not alone. There are now 59 and counting global stock exchanges with written ESG reporting guidance and requirements.

It’s not just the pack leaders who are making their moves.

In the United States the mighty US Securities and Exchange Commission (SEC) has just released its ‘SEC response to climate and ESG risks and opportunities’. The SEC comments that ‘As investor demand for climate and other environmental, social and governance (ESG) information soars, the SEC is responding with an all-agency approach’. The SEC moving in on this space will not go unnoticed in Australia. The final SEC climate and ESG standard will no doubt help shape the future of Australia’s ESG reporting framework and compliance environment.

Perhaps most significantly of all, the International Sustainability Standards Board (ISSB) was announced in November 2021 at COP26 in Glasgow. This is of great significance as it will likely change the sustainability reporting landscape when their current draft prototype standards start becoming live reporting frameworks. The proposed prototype will effectively sit alongside the existing international financial reporting standards. Think mandated, prescriptive corporate reporting now to include ESG!

Australia is quickly becoming an outlier amongst our peers globally. In the absence of regulatory backed ESG framework we are instead seeing a wave of stakeholder-led ESG momentum which is starting to have significant downstream impacts through the capital markets particularly. Even though you may not see it yet, some Big Four banks are already completing ESG risk assessments on your business every time you apply for an account and analysts like Bloomberg have been rating companies on their ESG credential for years. And in 2021, despite there being no prescribed standard or framework in Australia for ESG reporting, around 2/3 of ASX listed companies reported on ESG in some format.

Many of our clients view ESG as not something they do, but everything they do. Our view is that ESG should be a watermark over your organisation, similar to your culture. ESG is often incorrectly viewed as a silo issue, or an emerging compliance risk to mitigate. However, the latent potential in the rise of ESG represents a genuine opportunity for both your organisation and the world we all live in, if adopted genuinely under a robust framework.

If you don’t find yourself at the downstream end of a supply chain or capital market ESG demand in the coming years, you will almost certainly find yourself at the end of a regulatory reporting requirement. Either way — ESG is here and evolving rapidly.

The rise (and fall) of the ESG ‘cowboy’

The wave of ESG momentum is being ridden by the emergence of ESG ‘cowboys’. Prior to the establishment of the ISSB and in the absence of a single, robust and consistent framework for entities to report against, we inevitably found ourselves in a situation where some entities elected to pick and choose what and how to report. In the most extreme cases this provides an opportunity for greenwashing and PR stunts. Unfortunately, this detracts from the majority of organisations which are seeking to make genuine changes to the way they operate and simply looking for a way to share this narrative.

In the future we expect regulators will make some ESG requirements mandatory, similar to the approach taken in other jurisdictions. This will likely mean a list of core, mandatory disclosures complemented by recommended metrics which the organisation can opt in and out of based on their own materiality assessment and unique operating environment and relevance.

During 2021 in the United States, where the ESG movement has long been in denial (until a recent and rapidly awakening), we saw the SEC take decisive action to establish its ‘Climate and ESG taskforce’. This new enforcement-based task force was tasked with identifying ESG related misconduct. Effectively the SEC postured to square up against the cowboys — all before they even legislate a common framework for what disclosures should be. It’s important to note the SEC is now moving to standardise ESG reporting and has a current standard open for public comment as of December 2021. This finally places the US in line with other ESG leaders globally.

Australia will likely be watching with interest these developments globally. When this regulation inevitably happens in Australia this will reduce the current ESG flexibility and herald the end of the ESG cowboy. It will also likely mean ESG applies to a larger cohort of the Australian reporting landscape.

This should be seen as an opportunity. For the first time, stakeholders will be able to better compare your genuine performance against your peers. This will create an environment where the most successful organisations under the ESG reporting lens will stand to benefit in the markets and communities they operate in. For Australia, this gives us a genuine opportunity to do and be better.

A practical guide to starting your ESG journey

We get asked a lot by clients about the best time to start their ESG journey. The simple response is, ‘there is never a perfect time, but you do need to start’.

We have illustrated below a ‘roadmap’ of a typical ESG journey. The best way to approach your ESG journey is by determining where on the continuum you are right now, starting there, then progressing to the right.

Practical first steps

Depending on your current level of ESG maturity a great place to start your ESG journey is with an ESG Diagnostic. A good ESG diagnostic should not just regurgitate what you told it, but help you identify practical pathways forward, opportunities and risks specifically tailored to your organisation and personalised feedback from ESG experts.

The digital twin concept is gaining momentum in ESG. In short, a digital twin is a digital copy of your organisation. Having a digital twin allows you to model strategic and operational ESG cause and effect and align your ESG and strategic performance. Using powerful AI insights, a digital twin also allows you to ‘wargame’ ESG initiatives and model the impact and organisational performance.

ESG, when viewed as a strategic overlay, can provide your organisation with tangible benefits and opportunities, whilst concurrently sharing your narrative with your stakeholders. If ignored, ESG represents an emerging compliance, reputational and performance risk for your organisation.

Josh Geelan can be contacted on 03 6230 4000 or by email at jgeelan@kpmg.com.au. Julie Vasadi can be contacted on 02 9335 7353 or by email at jvasadi@kpmg.com.au

Further ESG information:

KPMG’s ESG hub: https://home.kpmg/au/en/home/topics/esg.html

Material published in Governance Directions is copyright and may not be reproduced without permission. The views expressed therein are those of the author and not of Governance Institute of Australia. All views and opinions are p

ESG is coming and fast!

ESG reporting isn’t new, even if the acronym is. ESG stands for Environment, Social & Governance and is essentially an extension of the previous Corporate Social Reporting (CSR) or Triple Bottom Line concepts. To put it simply, ESG is about demonstrating the contribution you make to the world in which we live, and the footprint you leave behind.

There have been some wonderful examples of companies embracing ESG, to great success. For example, outdoor clothing and apparel icon Patagonia has long embraced ESG principles as both a strategic and cultural mindset and market differentiator. The #1 brand in market donated 100 per cent of the profits from its record $10m in black Friday sales in 2021 to hundreds of local environmental organisations working around the world.

Mainstream corporate Australia needs to prepare. ESG is coming here and expectations are increasing rapidly.

In December 2021, it was announced that the Singapore Stock Exchange (SGX) would start mandating ESG disclosures by sector from 2022. This places Singapore in line with the Nordic countries as established global ESG leaders, but they are not alone. There are now 59 and counting global stock exchanges with written ESG reporting guidance and requirements.

It’s not just the pack leaders who are making their moves.

In the United States the mighty US Securities and Exchange Commission (SEC) has just released its ‘SEC response to climate and ESG risks and opportunities’. The SEC comments that ‘As investor demand for climate and other environmental, social and governance (ESG) information soars, the SEC is responding with an all-agency approach’. The SEC moving in on this space will not go unnoticed in Australia. The final SEC climate and ESG standard will no doubt help shape the future of Australia’s ESG reporting framework and compliance environment.

Perhaps most significantly of all, the International Sustainability Standards Board (ISSB) was announced in November 2021 at COP26 in Glasgow. This is of great significance as it will likely change the sustainability reporting landscape when their current draft prototype standards start becoming live reporting frameworks. The proposed prototype will effectively sit alongside the existing international financial reporting standards. Think mandated, prescriptive corporate reporting now to include ESG!

Australia is quickly becoming an outlier amongst our peers globally. In the absence of regulatory backed ESG framework we are instead seeing a wave of stakeholder-led ESG momentum which is starting to have significant downstream impacts through the capital markets particularly. Even though you may not see it yet, some Big Four banks are already completing ESG risk assessments on your business every time you apply for an account and analysts like Bloomberg have been rating companies on their ESG credential for years. And in 2021, despite there being no prescribed standard or framework in Australia for ESG reporting, around 2/3 of ASX listed companies reported on ESG in some format.

Many of our clients view ESG as not something they do, but everything they do. Our view is that ESG should be a watermark over your organisation, similar to your culture. ESG is often incorrectly viewed as a silo issue, or an emerging compliance risk to mitigate. However, the latent potential in the rise of ESG represents a genuine opportunity for both your organisation and the world we all live in, if adopted genuinely under a robust framework.

If you don’t find yourself at the downstream end of a supply chain or capital market ESG demand in the coming years, you will almost certainly find yourself at the end of a regulatory reporting requirement. Either way — ESG is here and evolving rapidly.

The rise (and fall) of the ESG ‘cowboy’

The wave of ESG momentum is being ridden by the emergence of ESG ‘cowboys’. Prior to the establishment of the ISSB and in the absence of a single, robust and consistent framework for entities to report against, we inevitably found ourselves in a situation where some entities elected to pick and choose what and how to report. In the most extreme cases this provides an opportunity for greenwashing and PR stunts. Unfortunately, this detracts from the majority of organisations which are seeking to make genuine changes to the way they operate and simply looking for a way to share this narrative.

In the future we expect regulators will make some ESG requirements mandatory, similar to the approach taken in other jurisdictions. This will likely mean a list of core, mandatory disclosures complemented by recommended metrics which the organisation can opt in and out of based on their own materiality assessment and unique operating environment and relevance.

During 2021 in the United States, where the ESG movement has long been in denial (until a recent and rapidly awakening), we saw the SEC take decisive action to establish its ‘Climate and ESG taskforce’. This new enforcement-based task force was tasked with identifying ESG related misconduct. Effectively the SEC postured to square up against the cowboys — all before they even legislate a common framework for what disclosures should be. It’s important to note the SEC is now moving to standardise ESG reporting and has a current standard open for public comment as of December 2021. This finally places the US in line with other ESG leaders globally.

Australia will likely be watching with interest these developments globally. When this regulation inevitably happens in Australia this will reduce the current ESG flexibility and herald the end of the ESG cowboy. It will also likely mean ESG applies to a larger cohort of the Australian reporting landscape.

This should be seen as an opportunity. For the first time, stakeholders will be able to better compare your genuine performance against your peers. This will create an environment where the most successful organisations under the ESG reporting lens will stand to benefit in the markets and communities they operate in. For Australia, this gives us a genuine opportunity to do and be better.

A practical guide to starting your ESG journey

We get asked a lot by clients about the best time to start their ESG journey. The simple response is, ‘there is never a perfect time, but you do need to start’.

We have illustrated below a ‘roadmap’ of a typical ESG journey. The best way to approach your ESG journey is by determining where on the continuum you are right now, starting there, then progressing to the right.

Practical first steps

Depending on your current level of ESG maturity a great place to start your ESG journey is with an ESG Diagnostic. A good ESG diagnostic should not just regurgitate what you told it, but help you identify practical pathways forward, opportunities and risks specifically tailored to your organisation and personalised feedback from ESG experts.

The digital twin concept is gaining momentum in ESG. In short, a digital twin is a digital copy of your organisation. Having a digital twin allows you to model strategic and operational ESG cause and effect and align your ESG and strategic performance. Using powerful AI insights, a digital twin also allows you to ‘wargame’ ESG initiatives and model the impact and organisational performance.

ESG, when viewed as a strategic overlay, can provide your organisation with tangible benefits and opportunities, whilst concurrently sharing your narrative with your stakeholders. If ignored, ESG represents an emerging compliance, reputational and performance risk for your organisation.

Josh Geelan can be contacted on 03 6230 4000 or by email at jgeelan@kpmg.com.au. Julie Vasadi can be contacted on 02 9335 7353 or by email at jvasadi@kpmg.com.au

Further ESG information:

KPMG’s ESG hub: https://home.kpmg/au/en/home/topics/esg.html

Material published in Governance Directions is copyright and may not be reproduced without permission. The views expressed therein are those of the author and not of Governance Institute of Australia. All views and opinions are provided as general commentary only and should not be relied upon in place of specific accounting, legal or other professional advice.

rovided as general commentary only and should not be relied upon in place of specific accounting, legal or other professional advice.