ESG Focus | Nov 09 2023
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ESG Focus: Day Of The TRIFRS
This final instalment on reporting season checks out the S in ESG in a season defined by labour shortages, fatalities, safety reporting, and same-job-same-pay developments; and psychosocial safety.
-Labour shortages proving material
-Companies fight Same Job, Same Pay Bill
-Executives pay for fatalities
-Australian corporations flock to safety metrics
-Psychosocial safety the new kid on the block
By Sarah Mills
When it comes to social reporting, labour shortages proved the defining element of the FY23 reporting season.
Difficulties attracting skilled and semi-skilled labour pushed costs up across the board and threw the spotlight attention to safety metrics, as fatalities rose and companies posted mixed injury performances.
Mining, Building Materials and Industrials were particularly hard-hit.
In the absence of more material retention metrics, investors were reading through safety metrics as an indicator to companies’ ability to retain and attract skilled and semi-skilled staff in a tight labour market, say analysts.
Executive remuneration was increasingly linked to safety performance with many company executives losing short-term incentives due to fatalities.
The Same Jobs, Same Pay bill drew pushback from several major corporations but on a decade-long view, companies are well ahead of labour as a percentage of GDP.
Demand for labour remains firm post-covid and competition for staff is likely to dog companies as the transition gains traction and new industries suck up staff from dying industries.
Again, this article relies heavily on Jarden and Macquarie analysis of the FY23 reports.
Labour Shortages Proving Material
Labour shortages on both sides of the Tasman proved to be the highlight in the FY23 reporting season with labour inflation proving costly.
KPMG, in a paper title Workforce Reward: The remuneration landscape for 2023, observes labour shortages pushed wages higher across the board, with particularly strong demand recorded in cyber-security, technology, engineering, healthcare, risk and finance.
Roughly 21% of workers negotiated a pay rise in the December 2022 quarter, resulting in an average rise of 3.3% (higher than any December quarter across the decade), observes KPMG, with individual agreements yielding the strongest rises.
The private sector logged a 3.6% increase in pay, seasonally-adjusted.
To be fair, this compares with a sharp reduction in labour costs as a percentage of GDP over the past few years, which we discuss below.
On the bright side, Cleanaway Waste Management ((CWY)), Ventia, Healius, Cochlear ((COH)) and Ramsay Health Care ((RHC)) were among the growing cohort of companies to report an improvement in the situation heading into FY24.
Consumer companies also reported labour cost pressures.
Same Job, Same Pay Legislation
The Closing the Loopholes Bill 2023 caused a stir with several companies pushing back at Same Job, Same Pay provisions.
BHP Group ((BHP)) estimated the provisions would cost $1.3bn, and add $200m to the cost of its copper mine, claiming it would threaten Australia’s ability to mine critical minerals for the transition, delivering a -US$2bn blow to its copper plans.
South 32 ((S32)) is another company to announce that the legislation represents a blow, claiming it will foster production cost increases across the majority of its global operations.
Wesfarmers ((WES)) has also voiced opposition, revealing it employs about 50,000 out of 122,000 employees – a highly casualised workforce. From an ESG investor’s perspective, this is not necessarily a good thing given future flows of capital based on social metrics.
As is regularly widely televised, Qantas ((QAL)) has a record of using internal hiring subsidiaries and contracting out labour.
Jarden rounds up the companies most likely to be affected by the bill, but that’s for another story.
A More Nuanced View
On the bright side, as the social theme kicks in and trading mechanisms (tariffs) are implemented accordingly, strong social metrics could prove a key competitive advantage to the West in its face-off with Asia, not to mention the importance of a strong wage base to maintain a consumer-driven economy and a smooth transition.
Also, corporations are ahead on the wages metric so have plenty of room to move.
Workers have been squeezed in the past few years, observes The Conversation, with the share of GDP being directed to workers falling to a record low of 44.1% (despite low unemployment and rising nominal wages) as at December 31, 2022.
The share of GDP going to corporate profits rose to a record (ex-Jobkeeper) 29.9%, with real wages plummeting, wiping out a decade of workers gains in real wages.
This trend has enabled corporations to increase margins in recent years, but the challenge is likely to become more difficult from here, potentially switching corporate focus to save money on metrics like retention and churn.
Given the above-mentioned erosion, companies are still starting from a lower base than might have been the case, making some of the brouhaha on all fronts appear a tad disingenuous.
Big Fish Caught In Safety Net
An interesting development in FY23 was the growing trend for executives to pay for fatalities in their organisations through the garnering of short-term incentives within bonuses.
A growing number of companies now include a fatality component in their short-term incentive packages (and a couple, strangely, in long-term incentives).
Fatalities would normally be considered a fairly safe bet amongst Australian corporations outside of the mining and construction sectors (and still largely is), so most would consider that component of their incentives to be a shoe-in. Not so this year.
Surprise Jump In Fatalities
Fatalities within Australia’s largest corporations totalled 24, based on Macquarie's and Jarden’s estimates.
Amcor ((AMC)), Endeavour Group ((EDV)) Lendlease ((LLC)) Mineral Resources ((MIN)), Newcrest Mining [now owned by Newmont Mining ((NEM))], Qube Holdings ((QUB)), Sims ((SGM)), Woodside Energy ((WDS)) and Worley ((WOR)), all reported one each.
Remuneration Structures Building in Safety
South 32 and Woodside Energy did not have a fatality gateway.
Jarden commended Perenti for its threefold approach to safety in its remuneration structure, and the company makes a good case study for what investors might expect on remuneration reports going forward.
The company’s safety gateway was not met so executives’ short-term incentives (STI) were cut to 0% from 20%.
The company also included an additional scorecard for downward discretion.
The board also accepted a recommendation from the managing director and chief executive office to apply an additional -5% downward discretion to the STI business scorecard due to the fatalities in FY23 and prior periods.
Jarden observes Fletcher Building ((FBU)) focused on building safety metrics into STIs and commended its move to include lead safety indicators rather than just TRIFRs (total recordable injury frequency rate).
The company introduced the revised approach after scoring an admirable TRIFR of less than 2 points.
A downward discretion of -10% also applied to executive key management individual performance for Newcrest’s managing director, CEO and President Contract Mining.
BHP, which suffered two fatalities, is another interesting example of remuneration linkages.
The company’s TRIFR rose to 4.5 from 4.0 and HPI (high potential injury) frequency to 0.18 from 0.14.
The company’s weighting for significant health and safety events is set at 10% of the total 25% and the CEO took an additional discretional cut from 96% to 90% against the target.
A standout was Woolworths, which surprisingly recorded two fatalities, and Macquarie observes the board exacted a -10% reduction in group STI outcome for FY23.
Similarly, Endeavour Group’s managing director, CEO, managing director for BWS and another senior executive all volunteered a -5% reduction their short-term incentives as a result of the company’s fatality. The company also fell short of achieving its Safety Hours Lost target but hit its TRIFR target
Lendlease’ subcontractor facility resulted in reduced bonus awards to the global leadership team. CEO Americas’ and Global COOs’ deferred STI was reduced -5% for the fatality despite the incident being found not to be the result of a failure of supervision.
Mineral Resources’ executive key management personnel were ineligible to receive the safety component of their STI, which comprised 40% of the 20% of STI reserved for safety governance and ESG.
Several other companies, which experienced fatalities, failed to mention them in remuneration outcomes and some failed to mention fatalities in their FY23 results logged with the ASX. Qube, Cleanaway and Sims were among these.
Sims was treated more positively by analysts than the other two after moving its TRIFR to a record low.
A Case In Point
Fatalities can prove material to company performance. Cleanaway, for example, was fined $12m for a work health and safety breach that resulted in a fatality (late reduced to $3m on appeal).
In our last report, we mentioned that Cleanaway had to do the walk of shame, after Jarden issued a scathing report on its fatalities (which provided the basis of FNArena’s statement).
We stand corrected. Cleanaway’s fatality was mentioned in the speaker’s notes to the FY23 result logged on the company’s website. Cleanaway later mentioned the fatality in its Chairman’s Address in its Annual Report.
To be fair to Jarden, there was no mention of fatalities in any of the company’s FY23 financial results logged on the ASX website, nor was there any mention of the fatality in the remuneration report, and Cleanaway deeming the fatality to be out of its control.
A company spokesman advised Cleanaway wasn’t shrinking away from the issue, but didn’t consider it material, and I suspect that is true and no doubt the board will address this for the future.
But Cleanaway does make a great case study in this respect, in that it highlights investors’ preferred approaches to companies’ reporting of fatalities.
For example, Cleanaway compares with Lendlease, which exacted -5% from executive bonuses despite finding the fatality not to be related to management supervision.
Cleanaway does have an at-fault fatality as a gateway to the safety KPI element of its short-term incentives, but analysts appear to find this unsatisfactory given it is often the courts that decide such matters.
From a transparency perspective, it appears analysts want to know front and centre in results announcements (and at the time of the incident) whether a fatality has occurred so that they can determine themselves the chances of a fatality being declared “at-fault” by a court.
The Cleanaway study also highlights the growing tensions between a board’s responsibility to protect its brand, and its responsibility to be transparent.
It would be fair to say that, in the current climate, transparency wins, but it is likely to take some time before this tension fully resolves itself and the commitment of regulators is tested.
Regulators have been threatening steeper and heavier fines for repeat offenders in the past year.
One would want to be standing in a safe place when that time comes, as investors have observed in previous instances of regulatory posturing with high-profile money laundering and corruption cases.
Analysts estimate Commonwealth Bank ((CBA)) still has -$518m to go to dig itself out of its Royal Commission hole.
Companies Crack Whip On TRIFRs
The Day of the Triffids, a classic sci-fi novel by John Wyndham, which envisages a scenario in which alien plants that take over the world, seemed to aptly represent FY23 reporting season on social metrics.
Safety metrics were everywhere with TRIFR reporting proliferating.
TRIFRs proved the flavour of the reporting season, with the majority of companies (83%) reporting on safety according to Jarden.
TRIFRs are easy social metrics to report on given they largely within a company’s control, and represent low-hanging fruit for companies yet to find their feet with the social reporting.
Nearly all companies felt margin pain from higher wage costs and staff shortages, with Cleanaway and Qube particularly impacted.
Analysts say this is all very good and appropriate (safety first), but Jarden observes TRIFRs usefulness is limited given it is a lagging indicators and generally lacks context.
Jarden is seeking in-depth reporting on more material social measures such as retention and employee churn rates and are also calling for reporting on leading safety indicators and quarterly safety reporting.
The other major safety metric used during the season was the Lost Time Injury Frequency Rate (LTIFR) which is more directly material, but Jarden points out it is still a lagging, rather than leading indicator.
The analyst observed 58% of miners and 67% of oil and gas companies include at least one leading safety indicator but spies no consistency or compatability for ease of contrast.
For example, Jarden considers near misses, for example, a relevant indicator of the broader risks in a company.
Nevertheless, analysts are using TRIFRs to evaluate the effectiveness of remuneration-linked policies.
In the absence of more material measures, many analysts took the opportunity to use safety performances as a read-through to the ability of companies to attract skilled and non-skilled labour given the expensive labour shortages dogging the world.
One assumes that once more powerful computing is introduced, the mapping of safety statistics to profitability (among other things) will become an easy task.
Kicking Off With Mining and Oil and Gas TRIFRs
Macquarie observes that 17 of 26 listed mining companies and six oil and gas companies reported high TRIFRs relative to peers, with 47% recording a worsening trend in the final quarter of FY23.
The two sectors reported that labour market pressures were likely to continue, particularly in WA mining with new projects coming online, making safety an area of focus.
Injury rates were also mixed but they did fall for many companies. Beach Energy ((BPT)), scored an impressive TRIFR of 2.4, compared with 4.4 in FY22. Woodside’s TRIFR also improved.
Woodside confessed that its safety performance in the past two years was below its historical standard and resolved to improve. Cooper Energy ((COE)) also disappointed.
Macquarie observes that many of the labour pressures dogging the sector are starting to ease, particularly those related to covid absenteeism.
Among the miners, Newcrest was the star performer, its TRIFR falling -31% year on year to 3.0 from 3.9.
Wooden Spoon Awards
IGO won the “gaming” award for setting a stretch TRIFR target of 14.9 – well above peers but also above its previous year’s TRIFR of 14.1.
These companies, including those who failed to report fatalities, have likely done themselves a disservice given they are likely to attract greater scrutiny in years to come.
FY23 Exit Rates For Safety
Macquarie looked to June-quarter performances as a guide to company safety trends for FY24.
29 Metals ((29M)), Allkem ((AKE)), Gold Road Resources ((GOR)), Mineral Resources, Newcrest, Ramelius Resources ((RMS)), Regis Resources ((RRL)), and Syrah Resources ((SYR)) were among those to have experienced a deterioration in TRIFRs in the June quarter.
Improvers in the final quarter included BHP, Cooper Energy, IGO, Pilbara Minerals, South 32, and St Barbara.
TRIFRs In The Broader ASX Woods
Many companies in the ASX100 reported worsening TRIFRs outside of the mining sector.
Woolworths’ TRIFR rose 1.11 points to 12.24 from FY22 without any explanation. While analysts observed the severity of incidents fell, the company recorded two fatalities.
Plenty of companies reported improvements.
Sims reduced its LTRI -17% to 0.19 due to more discipline and investment in traffic management, and its TRIFR by -8% to 1.08 in FY23 – the lowest on record.
The company also made notable progress on workforce gender diversity improvement. Sims gender pay equity gap reduction fell to 2.9% from 8.2%.
Most materials companies posted gains, with Boral ((BLD)) the star performer, cutting its TRIFR to 7.2 from 11.8 in FY22.
Amcor managed to sharply improve its TRIFR injury rate to 0.3 from 1.5 the previous year (a -31% reduction), but its fatality took the shine of the sterling performance.
Orora ((ORA)) backtracked, posting an all-time high TRIFR at 9.5, up from 7.5 in 2022. The company only had one serious injury, compared with Amcor’s fatality.
Pact Group’s TRIFR improved to 7.1 points from 9.6, well outpacing its target of less than 8.
A divide emerged among retail companies, with Coles ((COL)), G.U.D. Holdings, and Metcash ((MTS)) all posting strong improvements, but Super Retail ((SUL)), Wesfarmers and Woolworths all reporting a deterioration. Endeavour’s TRIFR improved to 9.86 from 11.43.
Ampol ((ALD)) reported that personal safety was at or near historical best performance in all parts of the business.
The broker observes that Atlas Arteria ((ALX)) and Transurban enjoyed improved safety metrics.
Among contractors, Worley posted a marginal improvement but Downer EDI and Monadelphous Group ((MND)) posted a more than 10% increase in injury rates.
Areas for Social Reporting Improvement
Jarden singles out areas for improvement in the reporting season.
The first criticism of reporting regarded the broad lack of clear scorecards and targets, and/or unclear breakdowns of the percentage weighting allocated to each factor.
Thirteen companies failed to provide any scorecard or explicit ESG metric.
Jarden also called out the use of “sustainability” or “ESG” as catch-cries with unclear targets, with 18 companies found guilty on this count.
Employment engagement surveys are considered vastly inferior to hard data (42 companies relied on theses for social reporting rather than safety statistics).
Statements regarding progress or rewards for improvements without disclosed targets were also given short shrift and the analyst nominated CSL ((CSL)) and National Australia Bank ((NAB)) in this regard.
Analysts were also highlighting companies that did not adopt challenging targets or incentives.
Jarden also says directors need to focus on providing more detailed explanations for misses. For example, were worsening TRIFRs a result of a macro issue such as labour shortages, supply chain issues, or operational shortfalls.
Analysts also turned the spotlight on high TRIFR targets, which Jarden said can make vesting of STI components too achievable. The intention should be to encourage executives to meaningfully improve safety performance, said the analyst.
As an example of a good approach, the analyst holds up Newcrest, which had a reasonable TRIFR threshold target and maximum. The company’s TRIFR improve 18% in FY23 from 4 to 3.29 and had a maximum – stretch target of 2.19 (-45%) which Jarden considered to be sufficiently wide and low to prove an incentive.
Psychosocial Safety New Kid On The Reporting Block
To finish up on our safety report, Macquarie points to the emergence of reporting on psychosocial safety.
Most can probably interpret this to relate to bullying and toxic, poorly managed workplaces, which should really put the cat amongst the pigeons.
We explore this in greater depth in our next and final reporting season instalment, along with developments in Modern Slavery, Gender Diversity and Indigenous Initiatives in FY23.
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