ESG Focus: Rounding Up A Psychosocial FY23 Season

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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: 
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ESG Focus: Rounding Up A Psycho Social FY23 Season

In FNArena’s final instalment for the FY23 ESG reporting season, we round up analysts’ observations on of psychosocial safety metrics; reconciliation action plans; modern slavery reporting and gender diversity.

-Psychosocial metrics the new kid on the safety block
-Modern slavery metrics not so popular
-Corporate Australia mobs reconciliation action plans
-Progress on gender equity for boards
-Retreaters from guidance highlighted

By Sarah Mills

Rounding off the FY23 ESG reporting season, FNArena covers some of the less immediately material social trends.

One that we didn’t see coming was the emergence of psychosocial safety metrics, in addition to standard safety metrics. 

Meanwhile, corporate Australia rushed to adopt reconciliation action plans – an initially low-cost, easy metric for companies to report on. 

Ditto for gender diversity on boards although the tougher metric – closing the gender pay gap – barely gained a mention.

In contrast, corporate Australia has shied away from more difficult metrics, such as modern slavery in supply chains, forcing regulators to wave their big stick.

Technology entered the modern slavery coterie to lend a hand, analysts observing a recent influx of forensic reporting technologies that can help companies track their supply chains and reveal vulnerabilities.

Psychosocial Metrics New Kid On Safety The Block

We’ve all heard about the pandemic of toxic workplaces but the issue has largely been ignored.

Yet toxic workplaces are placing a massive burden on the world’s health infrastructure and are contributing to lost time through days off work, higher injury rates and lost productivity.

That’s not to mention their contribution to the great resignation – a potentially more serious issue. 

The problem has become so severe that a new expression has been coined to describe it: psychosocial safety.

Psychosocial safety is costing investors a lot of money, particularly during a period of labour shortages. 

Toxic workplaces are an important factor in churn, and the likelihood of a company attracting an employee back after a bad experience are slim. 

McKinsey defines psychosocial safety as the nurturing of:

“… an environment where people are encouraged to share creative ideas without fear of personal judgement or stepping on toes. In this kind of environment, it feels safe to share feedback with others, including negative upward feedback to leaders about where improvements or changes.”

In this sense, psychosocial safety also represents an attempt to tap the intellectual property of the commoners.

The Australian Public Service Commission offers a more widely understood definition:

“Psychosocial hazards or factors are aspects in the design or management of work that increase the risk of an adverse impact leading to work-related stress, exacerbated non-work-related stress or affect individual workers’ health and well-being.”

Macquarie expects psychosocial safety will grow as a reporting focus in FY24. 

The broker observes resources companies in particular are becoming aware of the issue, and are likely to lead the reporting pack next year.

This does not mean that mining companies have more toxic workplaces than other companies – probably the reverse given its productive nature and reasonable pay – which makes it a fairly attractive metric for the industry to report on relative to physical safety.

Although certain elements, such as fly-in-fly-outs, long working hours and remote work does take its toll on mental health.

Other Industries Have Tougher Challenges

The mining industry’s challenges are obvious and industry-specific, and therefore easier to tackle. Not so in companies with greater levels of management, bureaucracy and lower pay, all of which can impact mental health.

Bullying is perhaps one of the more insidious and difficult issues to manage in such environments.

Toxic workplaces are usually a product of managers managing up rather than down but it appears from now on, managers will have to cast their eyes in both directions (which is already happening with the linking of physical safety to executive remuneration). 

The affects of toxic workplaces are amplified by less malleable externalities such as big mortgages, high rents and expensive real estate, which often cause people to stay in psychologically unsafe environments.

The bully manager, laissez faire manger, or solely numbers-oriented manager, is likely to struggle in this environment. Without naming names, the ASX has already witnessed CEOs stepping down on this basis.

While retention, churn and legal costs should fall for companies, other associated costs could rise.

Theoretically, demand for soft management skills should also rise.

Psychosocial safety is an issue for company culture so some investment would be expected on this front. 

As psychosocial safety becomes “a thing”, investors are likely to want the companies in which they invest to be considered great places to work, so that people don’t leave, so they are hit with fewer law suits and reputation scandals, and so that their chances of attracting the best of the best rise. 

This will mean companies are going to have to sharply lift their game.

Analysts and investors will be seeking more evidence than curated photos and testimonials of happy workers in annual reports. 

It will be interesting to see which metrics, apart from obvious broader metrics such as churn and retention will be chosen by company reporters.

Macquarie is the first analyst to explore this issue in its FY23 reporting season’s coverage.

After trawling through the results, Macquarie finds companies to demonstrate psychosocial risk assessments, training and enhanced frameworks in their reporting included: Austal ((ASB)), Emeco Holdings ((EHL)), IGO ((IGO)), Macmahon Holdings ((MAH)), Mineral Resources ((MIN)), NRW Holdings ((NWH)) Netwealth Group, ((NWL)) and Seven Group Holdings ((SVW)).

ASX-Listers Drop Ball On Modern Slavery 

It appears the issue of modern slavery in supply chains has proved too challenging for Australian corporations, and now the government is threatening a crackdown.

In April, ACSI (the Australian Council of Superannuation Investors) published a report titled Compliance Without Ambition, taking stock of ASX200 reporting under Australia’s Modern Slavery Act. 

ACSI found 77% of reporting entities in the year to December 31, 2022 failed to address all mandatory reporting criteria in their statements. 

And 52% failed to identify obvious modern-day slavery risks in the first reporting cycle. 

There were some signs of life, with 8% of major ASX-listers identifying a modern slavery incident.

Analysts broadly commended these companies for their efforts in the FY23 reporting season for their transparency, giving big ticks to BlueScope Steel ((BSL)) (in Malaysia) and Fortescue Metals ((FMG)), which observed a possible indicator, for having identified issues in their supply chains.

At the moment, companies are being rewarded for ferreting out problems.

Overall, however, the ASX’s efforts fell well short of the government’s expectations.

In May, the Attorney General proposed eliminating “bare minimum” modern slavery reporting after a review of modern slavery statements showed a very large percentage of reporters had adopted a minimum approach to compliance, rendering the statement incompatible with current legislation.

Over the year, the Federal Government also published 30 recommendations on the subject, including:

-reducing the reporting threshold from $100m a year to $50m;

-mandating due diligence systems; and

-applying financial penalties for non-compliance such as failing to report without a reasonable excuse. (NSW charges up to $1.1m for this breach)

Meanwhile, an Anti-Slavery Commission was appointed to enforce compliance in NSW.

Technology And Slavery

Identifying slavery can be challenging, so major corporations are turning to software and AI to combat modern slavery in their supply chains.

Macquarie observes a major theme in the FY23 results was the deepening of modern slavery supply chain due diligence, most of which revolved around screening tools, improvement plans and audits.

BlueScope, for example, advised it had increased the number of suppliers assessed through its EcoVadis system and conducted 5% of onsite audits, with three assessed as high risk. 

GUD Holdings ((GUD)) advised it was developing an ethical sourcing platform.

Super Retail ((SUL)) used technology to audit 92% of its 462 factories identified as high-risk.

Jarden observed one of the more interesting tech initiatives included Citi Chic Collective’s ((CCX)) first pilot on DNA/fingerprint testing on cotton products in FY23.

Jarden highlighted the advent of Oritain technology that enables forensic audits in a report titled The Power Of Origin Verification, which works by testing natural products to determine their provenance and authenticity.

Jarden says that over 15 years, Oritain, working with 120 large multinationals in 20 countries, has created a large data base and developed IP traceability of more than 25 key commodities such as cotton, wool, leather, palm oil, soy, honey, timber and milk powder.

Oritain advises products should be tested rather than relying on packaging or technologies such as blockchain or AI. Its processes look for isotopes and trace elements, which can be conducted at any stage of the process from farm level through to retail.

Elsewhere, Macquarie identified improvers as Bapcor ((BAP)), City Chic, Challenger ((CGF)), Dexus ((DXS)), Flight Centre ((FLT)), IGO, James Hardie ((JHX)), nib Holdings ((NHF)), Sky Network Television ((SKT)), Super Retail and Universal Store Holdings ((UNI)).  

Johns Lyng Group ((JLG)), Paladin Energy ((PDN)) and Pilbara Minerals ((PLS)) advised they would adopt modern slavery measures in FY24.

Gender Diversity

Modern slavery reporting may have proved confounding for many ASX-listers but not so gender diversity, the number of women on ASX-listed boards continuing to rise as corporations fell on the metric with relative relief.

The Watermark and Governance Institute of Australia’s 2023 Board Diversity Index found female representation on ASX300 boards in FY23 continued to exceed the 30% benchmark, rising to 35% – up 80% since 2016. 

The institute expects the ratio of men to women on boards will approach parity in 2030. 

Among the highlights in reporting season:

BlueScope Steel reported 55% female representation at the executive level after two senior appointments, not bad for a male-dominated industry.

Female representation also rose to 24% in the company’s workforce.

Sims ((SGM)) also gained an honourable mention.

Mineral Resources met its target to increase female participation by 10% to 22.6%.

Closing The Gender Pay Gap

The tough yards are still to coming with companies still expected, over time, to close the gender pay gap.

KPMG says companies are expected to be reviewing outdated salary structures, and simplify remuneration frameworks to provide clearer guidance and transparency using benchmark data.

KPMG spies gender equity as a key lever available to management in this respect. 

The pay gap between men and women is estimate to be close to $1bn a week, with the pay gap most evident at the executive level.

However, given executives represent a smaller percentage of the workforce, it is likely companies will likely to tackle this easier and less expensive option first.

Indigenous Engagements Get Plenty of RAPS

It was a similar story for reconciliation actions plans (RAPs)

Corporate Australia flocked to the indigenous reporting theme, which is relatively easy to develop, applies to a very small percentage of the workforce and can be implemented over a period of six years or more.

Fortescue Metals took the gong after awarding more than $4bn in contracts through its Billion Opportunities program to date – the company has a 15% indigenous employment rate across its Pilbara operations. 

Some of the other more material initiatives included BHP Group's ((BHP)) $333m commitment to indigenous procurement. The company also advised 8.6% of its workforce are indigenous.

Mineral Resources raised its indigenous procurement expenditure 140% to $24m and its indigenous participation rate rose to 3.5% of the total workforce in FY23, up from 1.8% in FY22.

Northern Star Resources ((NST)) committed to establishing sustainability supply contracts valued at $20m with indigenous business by the end of FY24.

The Four Stages of RAPPING

When it comes to tracking progress on RAPS, analysts identify four RAP stages and frameworks. 

Those that: 

–Reflect – this is the preparation stage in which companies typically take 12 months preparing for future RAPS; 

–Innovate – this is a two-year development and piloting stage of initiatives, which typically involves building relationships with first peoples; 

–Stretch – this is a two to three-year stage, in which companies implement piloted initiatives into business strategies and define measurable targets; and

–Elevate – this is when investors know that a company has succeeded – the company is demonstrating a proven track record of embedding successful initiatives, and championing these to advance reconciliation, and independent assessment).

Most ASX-listed companies are still in the Reflect or Innovate stages, advise analysts.

Listing The RAPPERs

Macquarie observes companies to launch RAP plans in FY23 included: Bendigo & Adelaide Bank ((BEN)), Car Group ((CAR)), Commonwealth Bank ((CBA)), Credit Corp ((CCP)), Domain Holdings ((DHG)) Dexus Industria REIT ((DXI)), Endeavour Group ((EDV)), Goodman Group ((GMG)) IGO, Liberty Financial ((LFG)), McMillan Shakespeare ((MMS)), Mondalephous ((MND)), nib Holdings, Qualitas ((QAL)), South32 ((S32)), Steadfast ((SDF)), Sims, Service Stream ((SSM)), Seven West Media ((SWM)), Transurban ((TCL)) and Woolworths ((WOW)).

The broker says a large proportion of these launched Innovate RAP plans.

Companies planning to develop a RAP in FY24 included: ARN Media ((A1N)), APA Group ((APA)), Beach Energy ((BPT)), Charter Hall Group ((CHC)), Charter Hall Long WALE REIT ((CLW)), Cochlear ((COH)), Charter Hall Retail REIT ((CQR)), CSL ((CSL)), Emeco Holdings ((EHL)), G8 Education ((GEM)), Stockland ((SGP)), Super Retail and Woolworths.

Incitec Pivot ((IPL)), Steadfast; Seven Group and Suncorp ((SUN)) advised they had progressed development of their RAPs.

That pretty much (ahem) RAPS up the FY23 reporting season.

One last note: AMP ((AMP)) and Domino’s Pizza Enterprise ((DMP)) received a rap over the knuckles on the governance front after the latter retreated from guidance, and AMP’s transformation project delivered a fail.

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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