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Small caps ‘on crash course’ with ESG standards

Regulation

Mandatory climate reporting will catch out many companies, says corporate governance specialist.

By Philip King6 minute read

Small businesses need to act quickly on climate change reporting or crash into the upcoming environmental, social and governance regime, says a corporate advisory partner with HLB Mann Judd.

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Katelyn Adams said the days when governance was a “box-ticking exercise” had gone and climate change reporting would be mandatory within two years.

She said an increasing focus on ESG issues was happening at all levels, with an international standards board up and running, ASIC “hot” on it and company directors acutely aware of investor sentiment.

Ms Adams, who sits on the boards of six listed companies across sectors including agriculture, mining and health tech, advises ASX entities on a range of issues from capital raising to employee incentives.

“I can really pick the gaps in corporate governance and the gaps are still there,” she said.

“Up to five years ago, corporate governance was really a set-and-forget type of exercise. It was box-ticking for directors and boards.

“Now governance is very much part of the business. There’s a real heightened focus on not just saying they’ve got their governance procedures in place, but actually living and breathing it.”

She said the International Sustainability Standards Board would change the game around environmental reporting with specific metrics for climate change.

The “E” in ESG was likely to be the frontier for increasing governance with mandatory reporting likely in Australia within two years.

“I think well probably see Australia moving towards mandatory reporting on their ESG credentials, their climate change credentials,” she said. “It will be a matter of time, Im guessing, maybe FY24.”

Some businesses, particularly smaller businesses, were likely to be caught short.

“Theres no obligation to have a climate change policy, per se. So lots of businesses dont even have a position,” she said.

“Small caps are not thinking about this space at all, because maybe theyre too small.

“There are some immature boards on small cap companies that dont have their governance structure in place, dont have their risk management structure in place, dont do an annual review of changes in corporate governance and really rely on ASX recommendations without thinking outside the box to what is next.”

She said it was most evident among junior explorers.

“They live from capital raising to capital raising. They might only have $3 million to $5 million in the bank at any time before they have to go out on a roadshow to raise money. So theyre really focused on drilling programs and just getting to the next capital raising,” she said.

“I think itll sneak up on those size companies.”

She said the corporate regulator was already keen to catch out companies greenwashing.

“ASIC are really hot on corporate governance at the moment. And it’s making sure that businesses are doing what they say. They’re really looking at this greenwashing type focus at the moment – so companies going out with green credentials and not actually having them,” she said.

“There are companies that will go out and say that they are green because they have been mining a certain type of mineral which will be used in electric cars, but with no metrics around whether they are actually green, what impact will it have?”

The trend towards ESG investing would put pressure on the social and governance aspects as well.

“We’re really focused on the environmental side of ESG but the social side or the governance is really still lacking in some of these cases. ASIC are really having a strong focus now on all of their credentials, not just the greenwashing, but the social and the governance credentials and how they tie in and are reported,” she said.

“Investors are really looking for the ESG funds, and they’re not naive on these matters. They truly want to see how a company addresses all three of the pillars of ESG before they’re willing to put their money into a business.”

As well as some corporate appetite for social good, company boards were acutely aware of reputational risk.

“Social licence is one of those non-financial risks that companies really are looking at – so their reputational risk if they don’t do these things,” she said.

“I am seeing these issues hit risk registers at the monthly board meeting, not just on an annual basis anymore – they really are assessing these non-financial risks regularly. These things include reputational risk or social licence to operate. By not doing these ESG focused things, what impact could that have on the company?”

Again, miners were culprits with some “still getting into trouble for exploring on sacred sites”.

While she agreed measuring social good was subjective, it was “about having a good baseline, a good plan in place” and when it came to governance, that had to be correctly set at the top.

“I would say there’ll be a standard paragraph in an annual report on these companies for a while until the focus comes in with investor funding. And then the money hits the pocket. That’s going to be the tipping point,” she said.

Small caps ‘on crash course’ with ESG standards
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Philip King

Philip King

AUTHOR

Philip King is editor of Accountants Daily and SMSF Adviser, the leading sources of news, insight, and educational content for professionals in the accounting and SMSF sectors.

Philip joined the titles in March 2022 and brings extensive experience from a variety of roles at The Australian national broadsheet daily, most recently as motoring editor. His background also takes in spells on diverse consumer and trade magazines.

You can email Philip on: This email address is being protected from spambots. You need JavaScript enabled to view it.

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