What lies ahead
for ESG?

Antony Crockett, Herbert Smith Freehills Partner and ESG Lead, Asia whose specialisations include business and human rights law, notes that some Australian businesses will need to develop ESG systems and management approaches in response to more stringent regulation in other jurisdictions. This has implications, both for local firms looking to join global value chains, as well as those seeking interest from overseas investors. 

Nonetheless, our survey also uncovers realism about ongoing barriers. Lack of stable financial return, proven technologies and access to capital are all seen to inhibit greater investment. Where regulatory uncertainty was viewed back in 2022 as the primary barrier to entry and a uniquely Australian issue, the main inhibitor now is financial. “The economic return is front and centre for most organisations. Regulatory compliance is obviously part of it but for most that is not what drives investment decisions,” Debenham says.

Longer time horizons and challenges in quantifying impact and return mean that many organisations are evolving how they justify, articulate and measure the benefit of their ESG investment activity. Government partnership and support have a role to play. For example, Herbert Smith Freehills Partner and Head of Finance Lucy McCullagh describes how Commonwealth grants, loans and availability programs are helping make the capital structure attractive for investors and super funds that want to invest in social and affordable housing.

McCullagh, who acts for banks, financiers and investors, believes the gradual evolution of local regulatory requirements – particularly around mandatory sustainability reporting – will give greater confidence to the investor market. So will the development of common environmental taxonomies, likely resulting in a rise in sustainable investments, businesses, products and outcomes. “Banks look at a borrower’s financial reports. And once they become mandatory, sustainability reports will also form part of the investment analysis,” she says.

Above all, where ESG is concerned, the market in Australia is interested in moving from promises and platitudes to real results. As one survey participant observed, “The collective expectation of shareholders, customers, employees and regulators is ‘show me, don’t just tell me’. It all may look great in the company’s annual report, but what have you actually done, how is it tracking and what will it look like in three years’ time? People want to know that your focus on ESG is actually making a difference.”