The age of ESG: Why corporate responsibility matters

Corporate responsibility beyond profit

At its core, ESG encourages corporations and other businesses and not for profit entities to be better corporate citizens and expand their focus beyond financial performance. Traditionally corporations were focused on financial aspects of their business, such as profitability, EBIT, dividend yields to name a few and reporting on the financial performance and activities of their operations. Annual reports did not go beyond these boundaries.

ESG urges corporations to think more broadly about their activities and the contributions they are making to the community. We are now starting to see increased awareness in the way corporations are engaging with their natural habitat, the contribution they are making to their local communities and the way they govern themselves.

The introduction of ESG reporting is a framework for corporations, directors and those charged with governance to be held accountable to the community for their sustainability efforts. The need for greater corporate responsibility and accountability has been a subject of considerable debate for a generation and the age of ESG is now with us all. Corporations can no longer focus solely on profit.

Environmental impact: A critical responsibility

The environmental aspect of ESG emphasizes that organisations will need to be mindful of their carbon emissions, waste management processes, water management, energy usage, conservation of the environment and specifically what they are doing to protect the environment. Recently, the Australian government has introduced mandatory sustainability reporting standards:

• AASB S1 – General Requirements for Disclosure of Sustainability related Financial Information and
• AASB S2 – Climate Related Disclosures

This will require mandatory sustainability reporting by corporations in a phased-in approach for financial years commencing on 1 January 2025.

A three-tier approach to sustainability reporting has been adopted based on certain criteria. The timeline for reporting is tabled below.

Social responsibility: The growing expectation

Although not yet mandatory, corporations are being asked to be more responsive to the social needs of the community and to clearly demonstrate how they are being socially responsible by disclosing this information in their annual report. Social responsibility includes a broad spectrum of issues, including diversity, equity, inclusion, employee welfare, engagement with the community and ethical behavior. There is an expectation that regulators will mandate responsibilities and reporting for all corporations, ensuring greater transparency and accountability across the board.

Governance: Ensuring accountability and transparency

Corporate governance is not a new concept. It refers to the way corporations govern themselves. ESG highlights the need to adopt strong governance principles. Key principles include board composition, executive remuneration, shareholder rights, leadership qualities and best practice behavior. Since 2003, ASX listed corporations have been required to report on their governance and to adopt the corporate governance principles mandated by the ASX. There is an expectation that regulators will expand the scope of corporate governance reporting for all corporations.

It is important that those charged with governance start preparing for the impact of ESG adoption and reporting.

Preparing for the future

As ESG adoption continues to evolve, it’s essential that all orgainsations prepare accordingly. ESG is shaping the future of business, not just in terms of profitability, but in how companies serve their communities and protect the planet. Senior leaders must act now to ensure that their business is ready to meet emerging standards and expectations.

PKF is working closely with clients to support them with mandatory reporting requirements and help integrate sustainable practices into their operations. 

For any further guidance on ESG matters, please do not hesitate to contact your local PKF team.