Environmental, Social, and Governance (ESG) Considerations in Corporate Business Transactions

Article Author: Garry Stephensen
Position: Managing Director
Read time: 6 mins

Environmental, Social, and Governance (ESG) Considerations in Corporate Business Transactions: A Growing Trend in Australia

In recent years, a significant shift has occurred in the corporate landscape of Australia. Traditional business practices have evolved, and stakeholders are increasingly emphasizing the integration of Environmental, Social, and Governance (ESG) considerations into corporate decision-making and transactions. As concerns about climate change, social inequality, and corporate accountability have intensified, businesses are recognizing the importance of adopting sustainable and responsible practices. This article explores the growing trend of ESG considerations in corporate business transactions within Australia, shedding light on its impact and potential benefits.

ESG: A New Paradigm

The concept of ESG represents a more holistic approach to assessing the overall performance and sustainable business practices of Aussie companies. ESG factors encompass a wide range of criteria that encompass not only financial aspects but also a company's impact on the environment, its relationship with its stakeholders, and the quality of its governance. The integration of ESG considerations is now viewed as a vital component of corporate decision-making, especially when engaging in business transactions like mergers and acquisitions, partnerships, and investment deals.

Environmental, Social, and Governance (ESG) Considerations in Corporate Business Transactions

The ESG Landscape in Australia

Along with the impact of Artificial Intelligence, ESG is one of a few topics that has profound impact for Aussie businesses. Australia has emerged as a significant player in the global ESG movement. The nation's unique geographical location and its reliance on natural resources have led to an increased awareness of the environmental challenges it faces. According to the Australian Bureau of Statistics (ABS), more than 86% of Australians are concerned about climate change and its impacts on the environment and society.

As seen in the Financial Review and the Courier Mail.

Environmental Challenges in Australia

Australia's vast and diverse ecosystem faces numerous environmental challenges, making the integration of environmental considerations an imperative for businesses. One of the most pressing issues is climate change, which has led to an increase in extreme weather events such as bushfires, droughts, and heatwaves. According to the Bureau of Meteorology, Australia experienced its hottest year on record in 2019, with the average temperature 1.52 degrees Celsius above the long-term average.
These climate-related challenges have far-reaching consequences on various sectors, including agriculture, tourism, and insurance. As a result, businesses operating in Australia are recognizing the need to adapt to a changing climate and adopt practices that mitigate their carbon footprint.
Furthermore, Australia is renowned for its rich biodiversity and unique wildlife. However, habitat destruction, deforestation, and invasive species threaten many native species. The World Wildlife Fund's Living Planet Report highlighted that Australia's wildlife populations declined by an alarming 28% between 1970 and 2016. Businesses that rely on natural resources are under increasing pressure to ensure responsible sourcing and contribute to conservation efforts.

Growing Australian Investor Interest in Responsible Practices

The Australian investment landscape is witnessing a significant surge in interest in ESG-focused investments. Investors are recognizing that incorporating ESG criteria into their portfolios can enhance risk management and potentially lead to better long-term financial performance. According to the Responsible Investment Association Australasia (RIAA) 2021 Benchmark Report, the total value of core responsible investments in Australia reached AUD 1.2 trillion, accounting for 44% of professionally managed assets.
Moreover, the same report indicates that the number of institutional investors considering ESG factors during their investment process has increased from 22% in 2015 to an impressive 81% in 2020. This reflects a growing understanding among institutional investors about the relevance of ESG considerations in making informed investment decisions.
Superannuation funds, which play a vital role in managing Aussies' retirement savings, have also embraced ESG integration. The Australian Council of Superannuation Investors (ACSI) has been actively engaging with companies on ESG issues and encouraging them to adopt sustainable practices. In their 2021 Annual Report, ACSI stated that they conducted over 2,800 company engagements and achieved 1,648 ESG-related outcomes, underscoring the impact of investor advocacy in driving positive change.
Furthermore, shareholder activism has emerged as a powerful force in Australia, with investors increasingly using their influence to hold companies accountable for their ESG performance. Shareholder resolutions on ESG matters, such as climate change and diversity, are becoming more common in annual general meetings, reflecting investors' desire for greater transparency and responsible practices.

Australian Initiatives Promoting ESG Integration

The Australian government has taken notable steps to promote ESG integration across various sectors. One of the significant initiatives is the Task Force on Climate-Related Financial Disclosures (TCFD), established by the Financial Stability Board (FSB). In Australia, the TCFD has gained traction, urging businesses and financial institutions to disclose their climate-related risks and opportunities. This initiative aims to provide investors with more reliable and comparable information to assess climate-related risks in their investment decisions.

The Australian Sustainable Finance Initiative (ASFI) has also played a crucial role in advancing the ESG agenda. ASFI is a collaborative initiative comprising leaders from the finance, business, and academic sectors. The ASFI roadmap, released in 2020, sets out a framework to integrate ESG considerations across Australia's financial system. The roadmap proposes measures such as standardized ESG disclosures, climate stress tests, and support for sustainable investment products.

Furthermore, the United Nations-supported Principles for Responsible Investment (PRI) is actively encouraging investors in Australia to commit to six principles that promote responsible investment practices. As of 2020, more than 400 Australian signatories, representing over AUD 3.4 trillion in assets under management, have committed to the PRI's principles.

In addition to these initiatives, several Australian stock exchanges are taking significant steps to promote ESG reporting. The Australian Securities Exchange (ASX) has developed guidelines for listed companies to enhance their ESG disclosures. Moreover, the ASX Corporate Governance Council released a revised Corporate Governance Principles and Recommendations in 2020, emphasizing the role of boards in overseeing and reporting on ESG matters.

The ESG landscape in Australia has undergone a remarkable transformation, with businesses, investors, and regulators embracing sustainability and responsibility as core components of corporate decision-making. Climate change, biodiversity loss, and other environmental challenges have heightened the urgency to adopt ESG considerations.

Investors in Australia are increasingly integrating ESG criteria into their decision-making processes, recognizing the potential benefits of responsible investments. Shareholder activism and engagement by institutional investors, along with the growing value of core responsible investments, highlight the growing demand for ESG-focused businesses.

Initiatives such as the TCFD, ASFI, and PRI, along with regulatory guidelines, are propelling ESG integration and disclosure to new heights. Companies that proactively address ESG concerns are likely to benefit from enhanced reputation, better access to capital, and a positive impact on the environment and society.

Benefits of Embracing ESG Considerations

Experienced business brokers such as Lloyds, will help any seller or acquiring business navigate the implications of ESG for a transaction. Consider the pros and cons of selling your business with or without a business broker.

Integrating ESG considerations into corporate business transactions can yield numerous benefits for Aussie companies. Consider the following...

Enhanced Reputation and Stakeholder Trust
Companies that prioritize ESG factors tend to enjoy improved reputation and earn trust from their stakeholders, including customers, investors, employees, and communities. This trust translates into long-term loyalty and a positive public image for the company.
Access to Capital and Funding Opportunities
ESG-focused businesses often find it easier to access capital and funding as more investors are seeking sustainable investment options. An increasing number of fund managers and financial institutions in Australia are incorporating ESG criteria into their investment decisions, creating a higher demand for businesses that meet these criteria.
Risk Mitigation
By addressing ESG concerns, companies can proactively identify and mitigate potential risks. For instance, businesses that prioritize environmental sustainability are better equipped to adapt to regulations and policies aimed at reducing carbon emissions and protecting natural resources.
Attraction and Retention of Talent
The modern workforce, especially younger generations, values working for companies that have a positive impact on society and the environment. Emphasizing ESG considerations can attract and retain top talent, boosting employee engagement and productivity

Environmental, Social, and Governance (ESG) Considerations in Corporate Business Transactions

Regulatory Landscape and ESG Reporting

The Australian government has also taken significant steps to promote ESG integration and reporting. The Australian Securities and Investments Commission (ASIC) has released guidelines that emphasize the importance of ESG disclosures, encouraging companies to provide transparent and accurate information regarding their ESG performance. This push for greater transparency aligns with the global trend of increased ESG reporting and disclosure requirements.

The Australian Prudential Regulation Authority (APRA) has also been active in advocating for ESG considerations in the financial sector. They have stressed the significance of addressing climate-related risks and encouraged financial institutions to develop stress tests to assess their exposure to climate-related events.

Moreover, the Australian Council of Superannuation Investors (ACSI) has been actively promoting ESG integration in the investment space. ACSI's research reveals that ASX200 companies with strong ESG performance have outperformed those with weaker ESG practices over the long term.

The incorporation of ESG considerations in corporate business transactions is undeniably a growing trend in Australia. As the country grapples with the challenges posed by climate change and social issues, companies are increasingly recognizing the value of adopting sustainable and responsible practices. The benefits of integrating ESG considerations are far-reaching, ranging from improved reputation and stakeholder trust to better access to capital and talent attraction.

While the journey towards comprehensive ESG integration may present challenges, the changing regulatory landscape and the support of investors and stakeholders create an opportune environment for businesses to align their operations with sustainable principles. As the ESG movement continues to gain momentum, businesses that embrace these considerations are likely to emerge as leaders in their respective industries, driving positive change in Australia's corporate landscape and making meaningful contributions to a more sustainable and equitable future.