- Climate change action and disclosure improved as new reporting standards loom
- Increase in companies adopting science-based targets
- Uptick in employee turnover rates
- Diversity and pay gap measurement improving
Sustainability remained front of mind in the latest round of company profit reporting with many companies showing improvements in their ESG (environmental, social and governance) practices. Some of the key trends we observed from sustainability disclosure this year included progress on climate action, higher rates of employee turnover and better measurement of diversity and pay gaps across organization's.
Climate change
Companies generally showed improvements in their action on climate change with year-on-year emissions reductions seen in many cases. Some companies reported more significant falls than others for example Genesis Energy and Contact Energy both reducing their direct (scope 1 and 2) emissions by 44% and 25% respectively over the year. This was mainly driven by a greater proportion of their energy being generated from renewable sources that lessened the need for fossil fuel-based generation.
The regulatory landscape in terms of climate disclosure continues to evolve with the development of reporting standards by the External Reporting Board (XRB) in progress. We observed an uplift in the reporting of climate risks and opportunities from corporates and recognition that these will become more detailed over time, consistent with the upcoming standards.
There was also a greater focus on metrics and targets with more companies such as Air New Zealand, Chorus, Comvita and Meridian Energy adopting science-based targets, signalling increased ambition and measurability of their climate mitigation plans. Other targets are becoming increasingly progressive and sophisticated such as offsetting embedded carbon in developments and 5-star green star becoming the standard rather than the exception, as evident from Precinct Properties and Goodman Property. Data on climate metrics continues to improve with a higher number of greenhouse gas (GHG) inventories reported, along with assurance conducted to support its integrity.
Turnover
Perhaps reflecting the ‘great resignation’ phenomenon, we found evidence from companies that there was a noticeable increase in the levels of voluntary employee turnover. This is indicative of the tight labour market where, in many cases, it has been difficult to attract the right skilled candidates given COVID-induced border restrictions and the low rate of unemployment. Companies noted a high proportion of vacancies filled by internal candidates, which represents a positive culture of promoting from within but may also reflect the difficulty in finding talent externally.
This trend highlights the importance of company’s management of human capital to both attract and retain skilled and productive employees. This is aided by remunerating people appropriately but also providing a workplace culture that motivates staff. Evidence from companies shows growing flexibility in working remotely, improved parental leave policies and other wellbeing initiatives designed to support staff and encourage positive engagement. For example, Fletcher Building’s new parental leave policy includes six months fully paid leave for primary caregivers and one month for secondary caregivers as well as more return-to-work benefits.
Diversity and pay equity
Company diversity and inclusion programmes continue to extend their scope beyond gender with increased measurement and progress in age and ethnic diversity. For example, Spark has begun measuring their ethnic diversity with a goal to increase the participation rate from employees over time. In addition, Spark, along with other companies is partnering with organisations in the community that support and encourage young women, Māori and Pasifika into their respective industries to promote greater diversity (e.g. Pūhoro STEMM and Innovative Young Minds).
Another related aspect is pay equity between genders and ethnicities, with more companies beginning to measure these pay gaps and attempt to address them. In many cases, this has been catalysed by the ‘Mind the Gap’ initiative to promote more transparency on the issue. Companies such as Auckland Airport and SkyCity Entertainment reported some progress in reducing their gender and ethnic pay gaps over the year but, in general, this tends to be a challenging issue with the lack of female and minority ethnicities in leadership and/or technical roles.
Outlook
Going forward, we are anticipating more attention paid to climate analysis and disclosure from companies, particularly on more technical aspects like scenario analysis as their strategies mature. We also see further traction in initiatives towards preserving biodiversity and natural capital given the development of a new global framework (Taskforce on Nature-related Financial Disclosures, TNFD).
We believe that sustainability disclosure more generally will improve, especially given the emergence of the International Sustainability Standards Board and their mandate to develop both climate and sustainability reporting standards aimed at providing a global baseline of quality disclosure. There will also likely continue to be a positive trend towards more uptake and increasing scores in existing global standards like B Corp and the Global Real Estate Sustainability Benchmark (GRESB) as seen over the past year with companies like Kiwi Property Group.
Harbour’s investment process captures a comprehensive range of ESG factors, and we will continue to favour companies demonstrating leading and improving performance in this space. We believe sustainable businesses are more likely to deliver better outcomes for investors over the long term.
Disclaimer: This article is provided for general information purposes only. The information provided is not intended to be financial advice. The information provided is given in good faith and has been prepared from sources believed to be accurate and complete as at the date of issue, but such information may be subject to change. Harbour Asset Management Limited is the issuer of the Harbour Investment Funds. Our Product Disclosure Statements for each Funds is available on our website. Past performance is not indicative of future results and no representation is made regarding future performance of the Funds. No person guarantees the performance of any funds managed by Harbour Asset Management Limited.