[279]
A number of important trends underlie these findings which are detailed in
the State of Sustainability
Reporting in Australia 2005 report by the Centre
for Australian Ethical Research (the CAER report).
Rate
of reporting
6.119
As mentioned in an earlier chapter of this report,
corporate Australia lags behind many other developed countries
in its rate of sustainability reporting. The CAER report detailed findings from
the KPMG's global survey of sustainability reporting practices of June 2005,
which found that reporting rates in Australia are lower than in most of the
countries surveyed, by percentage of the top 100 publicly listed companies in
each country.[280] The average rate across the 16 countries
was 41 per cent, compared with 23 per cent in Australia (for the S&P/ASX 100). Countries such
as Japan and the United Kingdom have very high rates of sustainability
reporting, with 81 and 71 per cent respectively. Australia ranks 14th of the 16 countries
surveyed.
6.120
Perhaps not surprisingly given this international
comparison, the rate of sustainability reporting by foreign owned companies operating
in Australia is more than twice that of Australian owned
companies. The average production rate for foreign companies operating in Australia is around 43 per cent, whereas the
comparable figure for Australian companies is around 18 per cent.[281]
6.121
Despite being low by international standards, the rate
of sustainability reporting in Australia is increasing rapidly. Data from the CAER
report shows strong growth in sustainability reporting by the top 500 companies
operating in Australia over the past decade. The recent trends are
dominated by an increase in reporting by publicly listed companies. The CAER report
speculates that 'the increase over the past year among the S&P/ASX 300
companies may indicate that Australian listed companies are being influenced by
the activities overseas and by foreign-owned companies in Australia.'[282] If the current growth rates continue, it
could be expected that all of the top 500 companies would be preparing
sustainability reports by around 2035.
6.122
The CAER report also identifies a growing trend of
companies including a sustainability section in their annual report or on the
company's website, although the majority of reports are still issued as
stand-alone documents.[283] The use of annual reports to disclose
sustainability information is the favoured approach of submitters such as CPA
Australia and Professor Deegan.[284]
6.123
Sustainability reporting in Australia is dominated by a number of key sectors
including: manufacturing, mining, wholesale trade, finance and utilities. In a
number of sectors, no companies have prepared a sustainability report
including: hospitalities, health and community services.[285]
The CAER report makes special note of the mining and manufacturing sectors,
which together account for 55 per cent of sustainability reports, and also the
two relevant peak bodies the Plastics and Chemical Industry Association and the
Minerals Council of Australia, which both encourage reporting and engagement
with sustainability more generally. Chapter 8 highlights some of the important
sectoral initiatives that are occurring in Australia.
6.124
According to the CAER report, there has been a dramatic
increase in the use of GRI Framework:
...[sustainability] reports produced 'in
accordance with' the GRI Guidelines increased from five to six, and reports
produced 'with reference to' the GRI Guidelines increased from 35 to 61,
representing an increase from 30 per cent to 51 per cent of reports using the GRI
Guidelines.[286]
6.125
However, as the majority
of companies using the GRI Guidelines in Australia are foreign owned, only
about 20 per cent of the sustainability reports produced by Australian owned
companies are using the GRI, compared with 40 per cent internationally.[287]
Assurance and verification
6.126
Assurance and verification is another area of growing
importance in the area of sustainability reporting. The CAER report states:
[Forty] of the 119 companies producing a sustainability report/section
in Australia in 2004 have their report independently verified, representing
34 per cent of reports, an increase from the 28 per cent independently
verified last year.[288]
6.127
The auditing of sustainability reports was generally
seen by submitters as a positive development in sustainability reporting,
improving their accuracy and credibility. However, two main issues were raised.
Firstly, the lack of a standardised framework was seen as problematic to the
effectiveness of carrying out audits on sustainability reports.[289]
Secondly, the financial cost was cited as an impediment to undertaking an audit
by 70 per cent of respondents to the CAER report survey.[290]
6.128
However, independent verification was seen as the most
effective way for companies to address claims of 'green washed' sustainability
reports – that is, reports that painted a company's performance in only a
positive light, and in some cases, being silent in relation to negative
performance. Results from CPA Australia's Confidence
in Corporate Reporting 2005 survey demonstrate that a perception of green
wash is real, with a majority of respondents (54 per cent) agreeing that
sustainability reporting is simply a public relations exercise.[291]
The same survey found that a large majority (83 per cent) agreed that "companies'
social and environmental reporting is only worthwhile if it is subject to
independent audit."[292]
IAG was one of a number of companies which gave evidence that sustainability
reports 'are only worthwhile if you can get that assurance and that assurance
comes with a degree of independence.'[293]
Small-to-medium
enterprises
6.129
The CAER study found that the uptake rate for smaller
corporations is significantly lower. Of the 200 smallest companies in the
S&P/ASX 300 around 8 per cent were found to have prepared a
sustainability report.[294] This is well below the average for the S&P/ASX
300 of around 18 per cent.[295]
6.130
Many submissions recognised that the impediments, both
financial and resource or personnel, faced by small-to-medium enterprises to undertake
sustainability reporting are greater than those faced by large corporations. Mr Cooper of ASIC reminded the committee that:
There are roughly 1.45
million companies in Australia. ASIC's position is that these issues are
relevant only to a very small proportion of those companies. It can be very
difficult to speak with any coherence about these issues when you are talking
about a proprietary company that might own a newsagency and those sorts of
businesses, which make up a very large proportion of the corporate landscape.[296]
6.131
The committee also received evidence that if a general
corporate responsibility requirement were to be introduced, then it should
apply to either all reporting entities or all corporations, not only to large
corporations.[297]
Not-for-profit
organisations
6.132
The committee received a small amount of evidence
regarding the reporting activities of the not-for profit sector. Habitat for
Humanity told the committee that their approach was to report in accordance
with the ASX Council Recommendations, to demonstrate that they conform to the
same governance framework as their major partners, which are typically public
corporations.[298]
6.133
Amnesty International indicated that while they do not
undertake triple bottom line reporting, one of their objectives is to 'ensure
that we meet standards of reporting that match the reporting requirements we
ask of others'.[299]
6.134
Further evidence in relation to the engagement of the
not-for-profit sector with the corporate responsibility agenda in the context
of their own operations is discussed in chapter 8.
Engaging
institutional investors
6.135
In addition to the various aspects of sustainability
reporting outlined in the CAER report, one important theme emerged during the
course of the inquiry, that is, the lack of engagement of mainstream financial markets.
6.136
An officer of the Department of the Environment and
Heritage described the problem as a 'chicken and egg phenomenon' stating:
...financial analysts
do not often use sustainability information because the data is not in a form
that they can use and then companies do not produce sustainability information
because the financial analysts are not demanding it.[300]
6.137
Mr Grey from Sustainable Asset
Management Research gave a colourful account of the lack of interest and
engagement of mainstream financial markets:
The financial markets
are not just not tuned in; they are not turned on—and they are not even plugged
in. The radio is not even in the house. It is somewhere else, down at the shop.
They have not gone down and bought it yet. They do not know where the shop is
and they do not know it exists. If they went past it, they would think it was a
baby-wear shop. So they are seriously not involved.[301]
6.138
Mr Grey went on to say that conversely, many company sustainability
reports and other sources of non-financial information have failed to convey effectively
to investors the ways in which corporate responsibility activities create value
for companies.[302]
6.139
A recent study conducted on behalf of the Australian
Council of Super Investors also found that despite the dramatic improvement in
the rate of sustainability reporting in Australia 'the capacity of superannuation trustees to
undertake enhanced analytics is constrained by the lack of information on
material CSR risks.'[303]
6.140
Other submitters also commented on the paucity of
non-financial information. For example BT Governance Advisory Service (BTGAS)
stated:
The current reporting
requirements for publicly listed companies do not give investors sufficient information
to understand the extent to which companies are managing social and environmental
risks.[304]
6.141
Information provided by BTGAS illustrated how many
companies were not disclosing non-financial information (depending on the
nature of the business). A high proportion of the top 200 Australian companies:
- did not publicly disclose information on their
processes to protect against violations of consumer privacy;
- made no mention of staff or contractor training
with regard to product safety or the handling of materials hazardous to public
health;
- did not publicly disclose policies protecting
whistleblowers; and
- did not publicly disclose their policy and
strategy for workplace safety management.[305]
6.142
Treasury officials also agreed with the proposition
that if an investor in a company wanted to maximise their return over the long
term they would want to know about the company's material sustainability risks.
The Treasury representative went on further to say: 'I think you would be
worried about investing in a corporation that did not have these risk
management plans.'[306]
6.143
What Mr Mather of BTGAS refers to as the 'lack transparency in the interface
between companies and markets' can also be described as a form of market
failure.[307] Due to a lack of information relating to
material non-financial risks (either because companies are choosing not to
provide it or investors are not demanding it), the market is not able to
attribute a proper corresponding financial value to these risks. As a result, the
non-financial risk management activities that companies are undertaking are
currently being undervalued by the market; a distinct disincentive to companies
considering undertaking corporate responsibility activities. It also means that
organisations that have proactively adopted corporate responsibility are not
receiving the appropriate level of financial reward for their actions.
Greenhouse and energy reporting
6.144
The committee notes the current consideration
being given to a national greenhouse and energy reporting framework through the
Joint Environment Protection and
Heritage Council / Ministerial Council on Energy Policy Working Group. This
initiative of the Council of Australian Governments arises from the regulatory
duplication resulting from the large number of government programs which
require (or invite) businesses to report their energy use and greenhouse gas
emissions to Commonwealth, state or territory agencies.
6.145
Because
these programs have nearly all evolved independently they differ greatly with
regard to their fundamental approaches, the conditions and thresholds for
participation, and types of emissions taken into account.
6.146
Many
reporting entities participate in more than one program, with the largest
emitters being required to submit as many as seven reports. Multiple reporting
increases costs and reduces the value of the reporting effort.[308]
6.147
Joint working groups of Commonwealth and
state/territory government officials have developed a proposed national
framework for greenhouse and energy reporting that would rationalise data
requests from government agencies, cut red tape and reduce business costs. The
framework comprises a streamlined data set to reduce duplication of reporting
requirements and a national online reporting tool to provide a single
submission point for greenhouse and energy data.
6.148
As part of the process, officials are examining both
non-mandatory and mandatory options, including the merits, costs and benefits
of these different approaches for business, consumers and government.
6.149
Both Ministerial Councils will consider the working
groups' recommendations by the end of June 2006. COAG will then consider the
Ministerial Councils' finding at its meeting of July 2006.
Committee view
Rate of reporting
6.150
The committee is pleased that the rate of Australian
companies reporting is increasing rapidly. The committee notes that this trend
is occurring without a mandatory reporting requirement. With some additional support
and encouragement from both government and business, the committee believes
that this trend will continue into the future. The committee makes several
recommendations in this regard in chapter 8.
International comparison
6.151
The committee would like to see Australia's
rate of sustainability reporting reach the average OECD level. In this regard, Mr Turner
reminded the committee of its remarks in 2001 in its report in relation to
corporate codes of conduct: that high levels of non-financial disclosure would 'enhance
the reputation of Australia's
corporations, and for that matter, the reputation of Australia
itself.'[309] The
committee reiterates this view.
6.152
The committee notes in relation to Australia's
comparatively low rate of sustainability reporting that it is important to acknowledge
that the reporting rate does not necessarily equate to strong or poor corporate
performance. As Professor Newman recognised, 'in many ways there are
innovations happening on the ground that have not yet been properly written
down or incorporated into ways of thinking and decision making.'[310]
The committee also notes the result from CPA Australia's survey which shows
that twice as many respondents agree than disagree that 'Australian companies
are better corporate citizens than overseas companies.'[311] Conversely,
the committee also notes empirical evidence such as that referred to in chapter
7 which shows that Australia
significantly lags countries in Europe
and the US in
terms of the proportion of the largest companies that have stated policies
which address bribery and corruption amongst their officials.
Global Reporting Initiative
6.153
The committee is strongly supportive of the Global
Reporting Initiative multi-stakeholder process. It acknowledges that it is the
most widely accepted international sustainability framework and commends those
Australian companies which are active contributors to, and participants in the
GRI process. The committee endorses Senator Campbell's
comments: 'I am also pleased to note the increased focus on sustainability
reporting using standardised formats such as the Global Reporting Initiative
(GRI) framework.'[312]
The committee makes recommendations regarding the GRI in chapters 7 and 8 of
this report.
Disclosures in annual reports
6.154
The committee supports the increasing trend of companies
including a sustainability section in their annual reports or on the company's
website. In the committee's view this is a cost-effective approach to
disclosing sustainability information; will prove more accessible to a greater
number of stakeholders; and enables greater comprehensiveness in managing
non-financial risks. The trend also suggests that companies are progressively
integrating sustainability into their core business activities rather than
seeing it as 'side show'.
Assurance and verification
6.155
The committee notes the benefits of applying an
assurance and verification process to sustainability reports, especially as
such an approach militates against accusations of 'green washing', where
reports provide only positive information about a company's activities, and are
silent about less-than positive aspects of operations. The committee also
recognises, however, that there are significant cost implications of verifying
sustainability reports. For reasons similar to those outlined for the
continuation of voluntary sustainability reporting, the committee supports the
continuation of voluntary assurance and verification of sustainability reports.
The committee also supports the development, by appropriate industry bodies, of
standard verification techniques relevant to each major sector.
Small-to-medium enterprises
6.156
The committee largely agrees with ASIC's view that
sustainability reporting is only relevant to a proportion of Australia's larger
businesses. In general larger for-profit and not-for-profit organisations will
have greater environmental and social impacts, and a greater capacity to
finance these initiatives than smaller organisations.
Lack of material non-financial information
6.157
The committee expresses its concern over the paucity of
material non-financial information currently being provided to investors. For financial
markets to function effectively and to value properly material non-financial
risks, this information must be provided to the market. In chapter 7 of this
report the committee recommends a flexible and cost-effective approach to
encouraging further disclosure of material non-financial information.
Greenhouse and energy reporting
6.158
A
consistent national approach to greenhouse and energy reporting could address
the current multiple greenhouse and energy reporting requirements, thereby reducing the
cost to business of reporting and increasing its value. A national framework
would also provide a basis for more transparent and comparable public
disclosure of greenhouse emissions and energy use.
6.159
The committee is of the view that establishment of
sectoral benchmarks for greenhouse and energy performance would assist
companies to identify areas in which they could improve their non-financial
performance. The establishment of these benchmarks should be undertaken by
government and industry in collaboration. The committee supports liaison
between government and industry to develop a mechanism for setting benchmarks.
Recommendation 6
6.160
The
committee recommends that the Australian Government, through the Joint Environment Protection and Heritage
Council / Ministerial Council on Energy Policy Working Group process, seek to
rationalise Australia's greenhouse and energy reporting
requirements into a national framework.
Recommendation 7
6.161
The
committee recommends that government and industry should liaise on developing a
mechanism for setting sectoral benchmarks for greenhouse and energy
performance.
Overseas
developments
6.162
Over the last decade, there has been a shift towards
greater disclosure by corporations of their non-financial performance. The committee
was presented with several interesting examples of overseas developments,
several of which were recommended for adoption or rejected in the Australian
context.
United States
6.163
In response to corporate collapses such as Enron and
WorldCom, the United States legislature introduced new corporate
governance disclosure requirements under section 404 of the Sarbanes-Oxley Act 2002. Under these new
rules, listed companies are required to disclose annually whether they have
adopted a code of ethics for the company's CEO, CFO, principal accounting
officer or controller, or persons performing similar functions. If it has not, a
company will be required to explain why it has not.
6.164
The Sarbanes-Oxley approach has been criticised by both
the ASX and ASIC for 'creating a huge compliance burden' and for being
extremely costly.[313]
6.165
Listed US companies are also under an obligation to disclosure
certain aspects of their environmental performance under Securities and
Exchange Commission reporting obligations under Items 101 and 103 of Regulation
S-K. Disclosures under both these items are subject to a restrictive
materiality test that according to CAMAC:
...has in general been
interpreted to limit the disclosure obligation to any information that is
likely to have an immediate effect on the share price of a corporation. This
short-term focus means that the disclosure provisions, outlined below, do not apply
to longer term environmental trends or developments affecting corporations.[314]
6.166
Item 303 of Regulation S-K requires disclosures of forward-looking and non-financial information in
the form of a management discussion and analysis (MD&A). It is similar to operating
and financial review under section 299A of the Corporations Act 2001 (discussed in chapter 7).
European
Union
6.167
Over
the past decade various national European Union countries have introduced
sustainability-related reporting requirements.
6.168
Mr Turner gave
the example of Denmark:
Denmark
mandated public environmental reporting in its 'Green Accounting Law' in 1995,
requiring over 3000 Danish companies to publish a 'Green Account' describing
their impact on the environment and the way in which they manage this impact.
Similar legislation has been enacted in the Netherlands
affecting over 300 of the nations largest companies.[315]
6.169
In 2001 the French legislature enacted a disclosure
framework for sustainability information as part of the Nouvelles Rgulations
conomiques (NRE). The NRE requires French listed companies to disclose information
with respect to corporate governance, social and community impacts,
environmental management and workplace practices, which are set out under nine
social and nine environmental indicators. The French requirements go beyond
what is required by the EU Accounts Modernisation Directive which is described
below.
6.170
The
European Union has also been actively pursuing greater disclosure of
sustainability information. In June 2003, it adopted EU Accounts Modernisation Directive (the Directive) which requires European
Community corporations to include certain non-financial information in their annual
reports.[316]
6.171
The
Directive establishes a 'fair review' requirement for large and medium EU companies
to provide the following information in their annual reports. It states:
The annual report shall include at least a fair review of the
development and performance of the company's business and of its position,
together with a description of the principal risks and uncertainties that it
faces.
The review shall be a balanced and comprehensive analysis of the
development and performance of the company's business and of its position,
consistent with the size and complexity of the business.
To the extent necessary for an understanding of the company's
development, performance or position, the analysis shall include both financial
and, where appropriate, non-financial key performance indicators relevant to
the particular business, including information relating to environmental and
employee matters.[317]
6.172
The
Directive's preamble notes that:
The information [to be included in the annual report] should not be restricted
to the financial aspects of the company's business. It is expected that, where
appropriate, this should lead to an analysis of environmental and social aspects
necessary for an understanding of the company's development, performance or
position.[318]
6.173
The Directive sets minimum mandatory
standards, which have been implemented by EU countries such as Germany.
6.174
In the United Kingdom a statutory Operating and Financial Review (OFR)
came into force in March 2005, providing a framework for the disclosure of
sustainability information. The OFR introduced more rigorous requirements than
the Directive in relation to forward-looking information, such as information
on strategies and longer term policies. Many submitters recommended that the
OFR be adopted as the sustainability reporting framework in Australia. During the course of the inquiry however,
the UK Government decided to remove the statutory requirement on listed
companies to publish OFRs. In January 2006 the relevant legislation was amended,
reverting the OFR to a voluntary mechanism.
6.175
Concurrent with the introduction of the statutory OFR, a
'Business Review', consistent with the Directive was introduced. Despite the
repeal of the statutory OFR, the new requirement to include a Business
Review in UK Directors' Report remains, thus bringing the UK sustainability reporting requirements in line with the Directive.
6.176
Another recent development that is likely to promote
further sustainability reporting in Europe
is the announcement in March 2006 of the European Alliance on CSR. The Alliance is a broad partnership between the European
Commission and the European business community. According to the communication
from the European Commission one of Alliance's three key areas of activities is
'raising awareness and improving knowledge on CSR and reporting on its
achievements.'[319] This initiative is discussed further in chapter
8.
South Africa
6.177
Since September 2003, all companies listed on the Johannesburg
Securities Exchange (JSE) must now comply with a Code of Corporate Practices and Conduct. The Code requires each
entity to issue an annual sustainability report, detailing the nature and
extent of its social, transformation, ethical, safety, health and environmental
management policies and practices. According to paragraph 5.1.3 of the Code:
...disclosure of non
financial material [in the report] should be governed by the principles of
reliability, relevance, clarity, timeliness and verifiability with reference to
the Global Reporting Initiative (GRI) Sustainability Reporting Guidelines.[320]
6.178
In a similar fashion to the ASX Corporate Governance
Council's Principles of Good Corporate
Governance and Best Practice Recommendations (discussed below), the JSE
listing rules require annual disclosure of the extent of a listed company's
compliance with the Code of Corporate Practices and Conduct and the reasons,
where relevant, for non compliance.
Committee
view
6.179
In the committee's view there is a range of interesting
sustainability reporting developments occurring overseas. Although these
initiatives have been designed to suit the particular market requirements and
community expectations of each country they may be applicable, to varying
degrees, to the composition and circumstances of the Australian market. However
given the relatively immature state of evolution of sustainability reporting in
Australia, that international models are still being developed, and that some
degree of rationalisation may be required amongst the various Australian and
overseas reporting frameworks, the committee believes it would be inappropriate
and premature to adopt an overseas approach.
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