Is Australia Behind the ESG Curve? 54% of Businesses Say Yes: Herbert Smith Freehills Report

A new report from global law firm Herbert Smith Freehills reveals that over half of Australian businesses believe the country is lagging in its progression towards Environmental, Social, and Governance (ESG) ambitions. 

The report, titled Stuck in the Middle? Unlocking ESG Investment in Australia 2024, provides an in-depth analysis of the rapidly changing ESG landscape and its impact on Australian businesses.

"Most respondents consider Australia to be in the 'late majority' in progressing toward ESG ambitions," says Timothy Stutt, Australian lead for Herbert Smith Freehills’ ESG practice.

"Our survey shows a clear sentiment that Australia remains behind the global frontrunners in regulating and practicing ESG."

The report is based on a survey conducted by Herbert Smith Freehills in early 2024, which aimed to gauge how businesses are grappling with the complexities of ESG considerations. The survey results highlight the increasing importance of ESG factors in investment decisions, driven by growing expectations from customers, employees, shareholders, and a rising tide of domestic and international regulation.

While climate-related concerns continue to top the list of ESG issues, 'S' issues, including workplace safety, gender pay gap, and cultural heritage, are gaining prominence. The report highlights the role of governance in managing a broad range of environmental and social issues and responding to the increasingly complex regulatory landscape.

“The conclusion that Australia is lagging on ESG may seem counterintuitive to Australian companies as many are being buffeted almost weekly by new regulation across a breadth of social and environmental areas. However, the data is clear that Australia is in “catch up” mode – and our longer term trajectory is one of continued, rapid change as we move into global alignment.

“Almost three-quarters of companies have moved to incorporating ESG considerations into their investment and diligence processes. However, only 56% have a human rights risk management system and less than a quarter have integrated broader social matters into their activities.  

“While there’s a lot more work to be done, we do have the opportunity to piggyback off the learnings in other countries, where they are further along the curve of integrating ESG into their businesses. Boards and management teams are looking for guidance, not just on the content of new regulation, but on how to bring it to life within their organisations," concluded Stutt. 

The report combines survey data from 161 business leaders with insights from Herbert Smith Freehills' ESG lawyers, providing a comprehensive overview of the challenges and opportunities Australian businesses face amidst escalating ESG regulations and stakeholder expectations. 

Report findings: 

Social or ‘S’ issues gain momentum

• 70% of respondents state that ‘S’ issues and opportunities are understood and prioritised within their business

• 62% now say their organisation publicly reports on ‘S’ targets and performance in annual or other regular reporting

The social opportunity for businesses

• 79% of respondents believe ‘S’ factors are an opportunity for their business

• Improving the employee value proposition is cited as the top opportunity, followed by customer/brand loyalty and differentiation from competitors

Operationalising ‘S’ commitments

• Among businesses prioritising ‘S’, 84% have specific policies and processes, 71% have integrated activities, 67% have allocated responsibility and 57% are including it in disclosures

• 56% say they have a human rights risk management system in place

Climate still the top ESG dimension 

• Climate change and carbon transition/emissions reduction are cited by 79% of respondents as among the top three issues for consideration in ESG reviews 

• In our 2022 survey greenhouse gas emissions reduction and modern slavery were the most commonly noted issues

‘G’ is the common thread

• 80% of respondents say the board, CEO and executive are responsible for social performance, targets and metrics 

• Good governance frameworks help directors and C-suite executives to discharge this responsibility in practice

• The knowledge and understanding gap between frontline ESG teams and top level decision-makers was specifically identified by multiple respondents as a barrier to ESG investment

What lies ahead for ESG? Rising with the tide

• Most respondents (54%) consider Australia to be in the “late majority” in progressing toward ESG ambitions

• Just 13% say Australia is an “early adopter”, while almost 20% consider Australia a ‘laggard’ and 0% consider Australia an “innovator”