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ESG Focus: ASX300 Rated On Modern Slavery

ESG Focus | Dec 23 2021

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ESG Focus: Ranking ASX300 On Modern Slavery

As big capital’s focus homes in on modern slavery, Monash University has taken steps to rank the ASX300 on disclosure, applying an A-F performance rating, perhaps providing early insight into ESG winners and losers.

-Headline findings
-Vulnerable sectors and industries
-Australia leading the world
-Quick backgrounder
-Early guides to ESG winners and losers?

By Sarah Mills

Monash University’s Centre for Financial Studies (MCFSC) has published a white paper ranking the ASX300 on the quality of their modern slavery statements.

Modern slavery is considered a key ESG metric but to date, there has been very little research provided to guide investors on listed-company performance in this respect.

Modern slavery, alongside health and circularity, are forecast to be key investment themes for CY22. 

Biodiversity is also swimming around in there but the foundations may not be in place to deploy the thematic until FY23, but that doesn’t mean big capital aren’t jockeying for position beforehand.

While big investors have their own research and are no doubt ahead of the curve, individual investors have been playing it by ear. 

Even less clear than the degree of modern slavery in supply chains is the forecast cost to each industry to adjust to the new ESG standards (including non-slavery metrics such as climate and circularity), particularly for those companies starved of capital.

But the Monash study titled Measuring Disclosure Quality of Modern Slavery Statements – ASX300 Companies provides some interesting insights to investors in the meantime.

Top-line findings

As expected, the Monash study reveals major disparities in the level of disclosure in, and quality of, disclosure statements, some companies going above and beyond legal requirements, others barely complying.

Only six companies received an A rating. These included: Ansell ((ANN)), Bega Cheese ((BGA)), Fortescue Metals ((FMG)) Wesfarmers ((WES)), Westpac ((WBC)) and Woolworths ((WOW)).

On the flipside, Monash singled out Fisher & Paykel Healthcare ((FPH)), IDP Education ((IEL)), Invocare ((IVC)), Nanosonics ((NAN)) and WestGold Resources ((WGX)) for poor performances.

Only a dozen companies gained a B rating, suggesting less than 20 companies have broken from the reporting pack. 

The B-team included ANZ Bank ((ANZ)), Lendlease ((LLC)), Newcrest Mining ((NCM)), Rio Tinto ((RIO)), Santos ((STO)), Cimic ((CIM)), Cromwell Property Group ((CMW)), Blackmores ((BKL)), Dexus ((DXS)), Iluka Resources ((ILU)), St Barbara ((SBM)) and Super Retail Group ((SUL)).

The preponderance of the ASX100 in the A and B ratings reflects on their deeper pockets.

Vulnerable sectors, industries, and groups

Monash singles out Consumer Discretionary, Consumer Staples, Real Estate, Materials and Healthcare sectors as most at-risk of forced labour and child labour, while debt bondage proved more prevalent across all sectors.

The ASX100 were more exposed to modern slavery risks than the ASX200, which in turn appeared more vulnerable than ASX300 companies.

While not specifically addressed in the study, vulnerable Australian industries also include agriculture, construction, fashion, retailing, manufacturers and technology companies using components produced offshore, and miners, particularly those with offshore operations.

Quick background

The Australian Parliament passed the Modern Slavery Act in 2018 requiring large Australian companies identify and report on modern slavery risks and practices in their operations and supply chains. 

Under the Act, companies must provide information on the following seven criteria, which will be placed on a public register maintained by the Australian Border Force:

-Identify the reporting entity 
-Describe the reporting entity’s structure, operations and supply chains
-Describe the risk of modern slavery practices in the operations and supply chains of the reporting entity and any entities the reporting entity owns of controls
-Describe the actions taken by the reporting entity and any entities that the reporting entity owns or controls to assess and address these risks, including due diligence and remediation processes
-Describe how the reporting entity assesses the effectiveness of actions being taken to assess and address modern slavery risks
-Describe the process of consultation with any entities the reporting entity owns or controls
-Any other relevant information

The Act as it stands is fairly toothless but it represents a shot across the bow, and regulation is expected to tighten as industry adjusts.

The disclosure statements provide the foundation for the Monash study, which expands upon the university’s 2021 study ranking Australia’s top-100 listed companies. 

The big difference between the two is that this report introduces a rating system, opposed to a simple ranking, which applies a rating between A-F to a company’s disclosure performance.

Early Insights for ESG investors

Given it’s early days and given the ratings reflect on the quality of disclosure rather than the extent of a company’s modern-slavery challenges and costs, Monash’s ratings provide little insight into the long-term performance of individual ASX300 companies. 

But it is one of the few sources of information the markets have upon which to base their decisions so until disclosure nets tighten, investors may use it as a near-term guide.

The survey results may prove a potential indicator to performances on other ESG metrics, particularly governance given reporting under the law is a serious compliance issue.

Plenty of companies bottomed out

A total of 42 companies received an F score, of which seven were ASX100 companies.

These included Cochlear ((COH)), Cleanaway ((CWY)), IDP Education, Fisher & Paykel, Nine Entertainment ((NEC)), REA Group ((REA)) and Resmed ((RMD)).

The best interpretation one can draw from the poor scorers is that management does not consider their operations to be heavily exposed to modern slavery issues, and therefore not a priority, although a quick scan suggests that for many of the poor scorers, supply chain slavery is clearly an issue.

Poor disclosure is an indictment regardless

Regardless of whether a company has high or low slavery exposures, poor disclosure is something of an indictment given that trillions of dollars in capital are being directed towards the ESG megatrend. 

One would assume companies would be working to ensure all ESG metrics are shipshape.

At worst, it could point to more serious problems. 

On the upside, Monash says after the completion of the first annual cycle of modern slavery statements under a new national legislative regime, Australia has legitimate claims to being a global leader in tackling modern slavery.

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

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CHARTS

ANN ANZ BGA BKL CIM CMW COH CWY DXS FMG FPH IEL ILU IVC LLC NAN NCM NEC REA RIO RMD SBM STO SUL WBC WES WGX WOW

For more info SHARE ANALYSIS: ANN - ANSELL LIMITED

For more info SHARE ANALYSIS: BGA - BEGA CHEESE LIMITED

For more info SHARE ANALYSIS: BKL - BLACKMORES LIMITED

For more info SHARE ANALYSIS: CIM - CIMIC GROUP LIMITED

For more info SHARE ANALYSIS: CMW - CROMWELL PROPERTY GROUP

For more info SHARE ANALYSIS: COH - COCHLEAR LIMITED

For more info SHARE ANALYSIS: CWY - CLEANAWAY WASTE MANAGEMENT LIMITED

For more info SHARE ANALYSIS: DXS - DEXUS

For more info SHARE ANALYSIS: FMG - FORTESCUE METALS GROUP LIMITED

For more info SHARE ANALYSIS: IEL - IDP EDUCATION LIMITED

For more info SHARE ANALYSIS: ILU - ILUKA RESOURCES LIMITED

For more info SHARE ANALYSIS: IVC - INVOCARE LIMITED

For more info SHARE ANALYSIS: LLC - LENDLEASE GROUP

For more info SHARE ANALYSIS: NAN - NANOSONICS LIMITED

For more info SHARE ANALYSIS: NCM - NEWCREST MINING LIMITED

For more info SHARE ANALYSIS: NEC - NINE ENTERTAINMENT CO. HOLDINGS LIMITED

For more info SHARE ANALYSIS: REA - REA GROUP LIMITED

For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED

For more info SHARE ANALYSIS: RMD - RESMED INC

For more info SHARE ANALYSIS: SBM - ST. BARBARA LIMITED

For more info SHARE ANALYSIS: STO - SANTOS LIMITED

For more info SHARE ANALYSIS: SUL - SUPER RETAIL GROUP LIMITED

For more info SHARE ANALYSIS: WBC - WESTPAC BANKING CORPORATION

For more info SHARE ANALYSIS: WES - WESFARMERS LIMITED

For more info SHARE ANALYSIS: WGX - WESTGOLD RESOURCES LIMITED

For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED