ESG a key driver of investment decisions, but scale and speed hampered by roadblocks and uncertainty: survey

Environmental, Social and Governance (ESG) factors feature prominently in investment decisions around Australian boardroom tables, with 9 out of 10 business leaders surveyed in a report released today saying that these outcomes were important, with over half saying they very important or critical, when investing (including capital expenditure and M&A).

However, almost half of business leaders have reported abandoning or delaying ESG related investment proposals in the past two years due to barriers, with regulatory uncertainty being the only barrier cited as being unique to Australia.

The survey of over 100 business leaders, across a multitude of sectors, forms the basis of the report by leading global law firm Herbert Smith Freehills (HSF), Unlocking ESG Investment in Australia, which explores how shifting investor and community expectations are driving companies to adapt their businesses at scale and speed.

This adaption will require mind-blowing levels of investment and unlocking this investment is critical if businesses are to achieve their ESG goals such as energy transition or tackling modern slavery – a key emerging issue identified.

Concerns about regulatory uncertainty and inconsistency were among a complex web of barriers including tenure of investment, legal concerns, tax issues, and predictably, access to capital and apprehension around returns.

Uncertainty holding Australia back

Australian lead for Herbert Smith Freehills’ ESG practice, partner Timothy Stutt explained that “uncertainty is holding back investment, so conversely, building that certainty is key to unlocking ESG investment in Australia.

“ESG-aligned investment decisions are posing a trade-off between immediate financial outflows, versus long-term returns which may be unquantifiable or unclear, and appear risky. Building confidence to bridge this gap will be key for companies to deliver on their ESG ambitions,” Mr Stutt said.

“Increased collaboration within the private sector alongside government directives will give boards the certainty they need to take their next leap of faith. Similarly, placing more trust in their governance processes in the fact of uncertain outcomes will also help take their ESG objectives from theory to implementation.

“In an operating environment where stakeholder expectations can often sit ahead of regulatory frameworks there is a chasm in which we have seen uncertainty grow.

“The positives are that there is agreement on the direction of travel, and we are seeing freshness of approach in tackling some of the complexity across the ESG landscape,” he said.

Probing the survey data with expert interviews from across industry, the report concludes that uncertainty about risk, returns and regulation needs to be addressed in order for business’ ESG aims to be met.

Social issues growing in prominence, modern slavery standing out

While barriers to Australia’s energy transition feature prominently in the report survey and interviews, respondents also highlighted that the ‘S’ in ESG, covering many social factors, was a key emerging issue, with modern slavery one of the issues most identified.

“Although the term ‘social licence’ is sometimes contentious, it is clear that there is a need for business to understand and meet the baseline ESG expectations of a broad set of stakeholders if they want to operate on a sustainable footing long term,” Mr Stutt said.

“ESG is as much about people as it is about energy, technology or supply chains. It was no surprise to me that the S factors featured heavily, but that doesn’t make them any less of a barrier. In many ways, the grand challenge of building certainty is even more pronounced for investment in this area given the difficulty of quantifying social outcomes, whether in companies’ workforce, supply chains or the community in which they operate.”

ESG dimensions can sit over any business, in any sector

“ESG is a lens, not a prescriptive text,” Mr Stutt said. 

“Therefore, ESG dimensions can lay over any business, in any sector, with any multitude of operational practicalities. Advising clients across the breadth of ESG concerns, we work with businesses who have been adapting their operations fundamentally, others who have limited ESG risks or opportunities, and some who are still recovering from the past two years of disruption and are yet to set their strategy on ESG.

“This context was our spark for collating this data and bringing together a team of global ESG experts, both internal and external, who helped us unpack and make sense of the numbers,” Mr Stutt concluded.

Unlocking ESG investment in Australia report findings at a glance:

• 88 per cent of respondents said ESG outcomes are important to investment decisions; 55 per cent went further, deeming ESG as very important or critical.
  • 75 per cent said ESG factors are being used to assess their investment decisions.
  • Almost half of respondents say they have abandoned or delayed ESG-related investment proposals due to barriers in last two years.
  • More than two thirds (66 per cent) of respondents stated that their due diligence processes explicitly include ESG considerations.
  • Less than five per cent rely on rating external agencies to calculate the ESG benefits of an investment.
• 58 per cent say they face barriers to increased ESG-aligned investment. The biggest barriers cited consistently were legal issues, tax issues and tenure of investment. Access to capital, enabling infrastructure and lack of agreed strategy were most selected in the top three.
  • Regulation/policy certainty was most selected in the top three for levers to support greater levels of ESG-aligned investment (followed by enabling infrastructure/ technology and corporate action).
  • Regulatory uncertainty and inconsistency cited as the only barrier unique to Australia.
  • A quarter of respondents say their ESG investment plans have increased following this year’s change in Federal Government.
• More than 80 per cent have reviewed or plan to review their policies and operations for ESG.
  • Issues relating to greenhouse gas emissions reduction and modern slavery were the most commonly cited as arising from these reviews.
  • 60 per cent of respondents say their company has a net zero commitment ranging between now and 2050 but 40 per cent say the net zero commitments don't reflect indirect scope 3 emissions in their value chain – this indicates there is lots of work to be done ahead of new reporting standards which are expected to include scope 3 requirements.
• Over half of all respondents don’t know how much additional ESG-aligned investment budget they will need to achieve net zero but just 15 per cent say it will take no extra investment and 20 per cent say they will need at least 50 per cent to 200 per cent plus in further investment to meet their commitments.

The survey of business leaders was conducted between 10 – 24 August and included 104 responses.