This is an ACSI submission in response to the Productivity Commission's consultation on Business reporting requirements
Position summary
ACSI’s contribution to this review reflects our work supporting long-term institutional investors, including extensive engagement with listed companies.
Our focus is on material environment, social and governance risks because of the effect they have on financial returns over the long-term. For our members, disclosures on governance and sustainability-related issues are an important input to investment decision-making, and aid better understanding of the risks and opportunities associated with their investments. These disclosures are used in investment analysis, risk assessment, stewardship activities and investment due diligence.
For investors, the relevant question is whether a risk or opportunity is material to long-term value, not the label attached to it. That includes considering which risks are material, including environment, social or governance related issues. Articulating how the issue might impact across strategy, risk management and performance can be helpful to both the reporting entity and to investors in identifying which risks are material, how they will be managed, and how the opportunities will be realised.
Rather than purely compliance, reporting on environment, social and governance issues should be considered part of a strategic exercise. For investors, information is useful when it provides insight into how issues are managed to maximise value over the long term, alongside the strategic and risk management implications. Appropriate disclosure requirements can be a catalyst, triggering reporting entities to consider their risks and opportunities in an integrated and strategic way, and supporting information disclosure to investors. Therefore, reporting requirements should be assessed by considering the benefits they can drive in practise and that transparency can provide.
Governance and disclosure frameworks are essential tools for those investing on behalf of millions of Australians saving for retirement. They enable investors to assess risk and engage constructively with companies, while supporting decision-making that delivers sustainable value over time.
A distinction between financial risk and so-called ‘non-financial’ risks can be unhelpful where these matters have material financial consequences. All risk is financial. Several prudential and regulatory inquiries have articulated many examples of how risks described as ‘non-financial’ have translated into financial outcomes¹.
Through so-called ‘non-financial’ reporting, investors seek to understand the full range of material risks and opportunities an organisation faces, and how it is managing them.
Reporting is an opportunity to communicate, support efficient capital allocation, help manage financial risks and opportunities, and reinforce trust between companies and their long-term owners. Reporting requirements can also drive efficiency, as investee companies can issue the information publicly once, generally through annual reporting, instead of responding to multiple individual requests for information.
We support the objective of improving the efficiency and value of non-financial business reporting. We also support the pursuit of opportunities to reduce duplication, inconsistency and unnecessary process, while preserving the quality, comparability and accessibility of decision-useful information provided to investors.
Reporting requirements, at a minimum, drive better recognition of risks and opportunities. Given their fiduciary obligation to pursue the best risk-adjusted returns and the real financial consequences of ‘non-financial’ risk, long-term investors use disclosures when making investment decisions and to better understand their investments’ risks and opportunities.
Investors rely on this information and expect useful and meaningful disclosures. Therefore, the priority should be to consider how information is collected, reported and accessed, rather than reduce the quality, comparability or availability of financially material information.
Please click on the resources link to the right for detailed response to the consultation questions.
