ESG Focus: Governance, Supply Chains, Risks

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ESG Focus: Governance, Supply Chains And Rising Risks

Governance and social themes, while not attracting big expenditure in the December half, still proved a strong focus for corporations, and some hefty indigenous law suits are lining up against the majors and their shareholders.

-Indigenous guarantees new kid on the block
-RAPs keep flowing
-Light at the end of the tunnel for labour markets
-Modern slavery and supply chains
-Remuneration strikes more than double
-Cybersecurity, corruption, lawsuits and tax
-Woodside faces shareholder backlash

By Sarah Mills

Psychosocial and cyber-crime expenditure may have dominated social reporting in the December half, there was plenty of activity in other areas such as indigenous relations, modern slavery and governance.

The bulk of this story is based on research from Jarden, Macquarie, Morgan Stanley and Georgeson.AGMIntelligence.

Indigenous Relations Moves Into Guarantees

Corporations continued to make headway on the relatively easy box-ticking exercise of indigenous relations, and the Reconciliation Action Plans (RAP) kept flowing.

The main progress Jarden observed on the indigenous front was that some companies had started taking actions beyond the typical employment and procurement expenditure.

National Australia Bank ((NAB)) launched its indigenous business guarantee and Seek ((SEK)) finalised its First Nations Strategy to help Indigenous job seekers and support indigenous businesses, in concert with Indigenous Business Australia.

Commonwealth Bank's ((CBA)) expenditure on Australian Indigenous supplier direct spend rose 47% in the December half and Viva Energy ((VEA)) completed 85% of its RAP deliveries.

Indigenous relations falls heavily into the Resources sector’s remit and the miners continued to forge ahead on this front.

Beach Energy ((BPT)) finalised an enterprise native title agreement and completed the pipeline tie-in to the Otway Gas Plant, observes Macquarie. 

BHP Group ((BHP)), Fortescue ((FMG)), Iluka Resources ((ILU)), Mineral Resources ((MIN)) and Rio Tinto ((RIO)) reported on indigenous procurement and employment plans.

BHP indigenous procurement rose to US$289m from US$141m in the previous corresponding half while indigenous employment fell to 14% from 16%.

Mineral Resources increased procurement spend at $24.2m in the half, compared with $24m for the entirety of FY23.

McPhillamy Gold Project’s development application relating to Aboriginal and Torres Strait Islander Heritage Protection is complete and the operator, Regis Resources ((RRL)), is awaiting a response.

Among the REITs and developers, Charter Hall Group ((CHC)), GPT Group ((GPT)), HMC Capital ((HMC)) HomeCo Daily Needs REIT ((HDN)), Mirvac Group ((MGR)) Stockland ((SGP)) and Vicinity Centres ((VCX)) reported on reconciliation plans. 

Rio Tinto, BHP And Santos Singled Out For Rising Risks

In a separate paper this year, Jarden spied rising environmental and social risk for Rio Tinto and highlighted known risks for BHP and Santos ((STO)), all of which may prove very costly to shareholders.

The paper observes that, based on recent reports, Norges Bank is assessing Rio Tinto and BHP’s environmental and social credentials, particularly as they relate to: blast management, environmental concerns, development in highly sensitive areas, rehabilitation and closure challenges.

Jarden says these areas are posing high operational, financial reputation and social licence risks for the companies.

Jarden highlights Rio Tinto’s continued blast management in culturally significant rock shelters in the Pilbara (readers will recall high-profile resignations for similar incursions a few years ago); combined with environmental concerns in Brazil, Quebec and Madagascar; rising rehabilitation costs ($850m and $2.2bn for the Argyle and Ranger mines); and biodiversity problems at Simandou in Guinea. Serbia has revoked Rio’s Jadar lithium project licence after environmental protests.

Specifically, the bulk of Norges criticisms related to the company’s stake in Mereracao Rio do Norte in Brazil; contaminated water with toxic metals in Madagascar (65 residents in Madagascar made the allegations); water management at Oyu Tolgoi in Mongolia (the Local Authority Pension Fund forum has raised concerns); and media reports of more than 100 environmental infractions at Rio Tinto’s aluminium division in Quebec over 15 years.

For BHP, the big-ticket items were the well-publicised Samarco court case and its continuing class action in Britain involving 700,000 claimants. The company also faces the closure and rehabilitation for Nickel West.

The Arizona Resolution Copper project is also on the back foot following a challenge to the US government’s transfer of the land to Rio Tinto and BHP. It has already been postured by ESG observers that the Resolution Copper project represents something of a litmus test for ESG resolve – the world’s biggest copper mine versus a major indigenous challenge in the western world. 

At some stage, an example will have to be made to demonstrate big capital’s commitment to the social theme, and perhaps Resolve is it? Although given forecast shortages of copper it appears a long shot. Regardless, Jarden suggests Rio Tinto, BHP and Santos are all skating on thin “social” ice.

Light At The End Of The Labour Tunnel

There were a few welcome and some less-welcome developments on the industrial relations/labour front.

The tight post-covid labour market has been the bane of recent reporting seasons so it was with some relief that many corporations cited signs of an easing.

While some companies such as Cleanaway Waste Management ((CWY)), Downer EDI  ((DOW)) and Ventia Services ((VNT)) observed a stabilising market. Others such as Aurizon Holdings ((AZJ)) and Monadelphous ((MND)) were still feeling the pinch.

Labour costs at Evolution Mining ((EVN)) jumped 6% in line with guidance although management does expect a slower rise in 2025. Macquarie observes labour comprises about 48% of the company’s cost base

Not so welcome was the continuing same job same pay stoush.

Rio Tinto’s chief lamented in its report that same job, same pay; labour hire changes and multi-employer workplace agreements were threatening to undermine the “co-operative environment” the company had cultivated with staff.

Modern slavery and general supply chains

Corporate Australia continued to push ahead on the modern slavery front as they tried to get their houses in order prior to looming mandatory disclosure and supply chains generally were in focus as part of the broader environmental push.

Modern slavery garnered a few due diligence mentions from Charter Hall ((CHC)), G.U.D. Holdings ((GUD)), JB Hi-Fi ((JBH)) and Seek.

G8 Education ((GEM)), G.U.D. Holdings, Iress ((IRE)), SmartGroup Corp ((SIQ)), TPG Telecom ((TPG)) and Ventia all advised of progress on supply chain due diligence.

Among the REITs, Arena REIT ((ARF)), Charter Hall, Charter Hall Long WALE REIT ((CLW)) and Charter Hall Retail REIT ((CQR)) all mentioned modern slavery in supply chains, observes Macquarie. 

Ramsay Health Care ((RHC)) said it was on track to achieve its 2024 target for sustainability assessments to be completed by 60% of global suppliers by expenditure; and 80% by 2026.

BlueScope Steel ((BSL)) advised it had completed 145 supplier assessments in the first half.

As an aside on supply chains, Morgan Stanley observed an interesting development on the supply chain front were data and expects near-shoring of data centres to be prioritised. 

The analyst cited a survey which showed more than 80% of European consumers believed it was important to know which country their data were stored in. These respondents preferred domestic storage and roughly 20% were prepared to pay more to do so.

The analyst also forecast supply disruptions for critical minerals given hawkishness this US election year.

Small caps

Quite a few small caps proved focused on ESG, making movements across the ESG spectrum, observes Macquarie.

G8 Education was busy with solar rollouts, RAPs, safety training, cyber costs, supply chain software, emissions reductions, and recycling initiatives. Ditto for Iress.

The companies also made inroads on modern slavery, supply chains, indigenous employment, and injury rates.

G8 linked executive pay to ESG, placing a 10% weighting on electric vehicle and hybrid transition milestones and 10% weighting on risk management.

Governance

Remuneration strikes and psychosocial safety were the standouts on the governance front

Georgeson.AGMIntelligence observes 2023 proved a big year for remuneration strikes at ASX300 companies, the number of strikes near doubling from 2022 to 40 (from 21). Numbers were even lower in 2020 and 2021.

The analyst observes the severity of strikes at the top end of the range also rose, the highest “against” vote being 83.1% and all top-five “against” votes were over 60%, compared with 55.8% in 2022.

“In 2022, only one issuer received more than 50% of strike votes compared to 13 in 2023,” advised the analyst.

The average of “against” votes where a strike occurred also rose to 45.7% in 2023 from 34.2% in 2022, returning to the averages seen in 2020 and 2021, observes the analyst, and just two strikes were second strikes.

The penultimate wooden spoon award went to Link Administration Holdings ((LNK)) and Lovisa Holdings ((LOV)), which both managed to garner three consecutive remuneration strikes without triggering a board spill resolution given the corporations law provides for a reset after two years.

NRW Holdings ((NWH)) took the gong for the worst performer, after logging its sixth consecutive remuneration strike. A resolution to spill the board was proposed but “resoundingly” defeated. 

Jarden observes more than 50% of investors voted again the re-election of the long-standing Remuneration Committee Chair who had already resigned prior to the AGM, making the vote more of a symbolic gesture.

The fact that no board spills were recorded underlines shareholders reluctance to prosecute the three-strike rule to its full extent.

Jarden sheets rising shareholder ire back to cost-of-living pressures, inflation and rising interest rates and observes big institutional investors are becoming increasingly accountable to their big stakeholders.

The analyst also observed an increasing intolerance to pay bonuses to executives in years where workplace safety incidents or fatalities and strong reputational losses occurred.

Still, no board spills suggests the broad take out from the February reporting season is that remuneration strike provisions remain all sizzle and no steak.

Rounding Up Governance themes

Cybersecurity, corruption and tax also featured under the governance theme.

Downer EDI is still awaiting a determination from ICAC over Dow’s tendering for certain rail projects.

The company advised it had strengthened its procurement process “particularly around corruption and prevention and subcontractor governance and is conducting an independent review of the ‘”Contractor control environment,” observed Macquarie.

Cybersecurity was also top of the agenda, with Iress, Kelsian Group ((KLS)), Macmahon Holdings ((MAH), Monash IVF ((MVF)), and Seek all reporting enhancements to cybersecurity governance.

A fair few legal settlements were registered, the most notable being BHP’s Samarco’s US$3.2bn post-tax impairment charge to deal with Brazilian Federal Prosecution. The total provision has reached US$6.5bn.

The psychosocial theme also made its presence felt in the governance arena.

AMP Ltd ((AMP)), Australia and New Zealand Banking Group ((ANZ)), Bendigo & Adelaide Bank ((BEN)), Bank of Queensland ((BOQ)), Commonwealth Bank ((CBA)), Insurance Australia Group ((IAG)), Medibank Private ((MPL)), National Australia Bank, nib Holdings ((NHF)), QBE Insurance ((QBE)), and Suncorp ((SUN)) all announced they had implemented a governance structure for psychosocial safety. 

Jarden observes Significant Financial Institutions had to meet specific APRA requirements this year, the upshot of which included:

-New metrics to long-term incentive plans (LTI). These included: AMP’s introduction of a Reputation Index, which comprised 30% of the CEO’s LTI; and Insurance Australia Group’s customer-experience performance hurdle based on transactional net promoter scores (to be used to set targets and hurdles for future LTI vesting).

-The major banks kept traditional financial targets such as total shareholder return as the main basis for long-term incentives observes Jarden, but held up to 50% to retrospective assessment against risk-based criteria such as compliance breaches and material inactions at the time of vesting (up to four to six years in the future).

Jarden expects a tightening of modern slavery and workplace diversity reporting.

Analysts point out that new disclosure rules (including incoming rules) will be judged on how well companies integrate these into their business strategies and operations.

Latest News On ESG Governance

Woodside Energy ((WDS)) suffered the largest backlash at its Annual General Meeting this month with 58.36% of shareholders voting against Woodside’s climate strategy, the first time the company has lost majority support on the subject, beating the previous record by 10%, observes the Australian Conservation Foundation.

Voters also recorded a historic 16.6% vote against chairperson Richard Goyder, who has advised he is unlikely to stand for re-election.

The ACF says these results suggest the company will have review its gas developments.

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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