The landscape of Environmental, Social, and Governance (ESG) priorities is constantly evolving, and recent shifts in the United States are prompting a re-evaluation of these issues globally. For Australian directors, understanding these changes and their potential implications is crucial for navigating the complexities of modern business.
DISCLAIMER: This article draws on insights from a recent AICD (Australian Institute of Company Directors) webinar and article ‘Shifting winds on ESG?‘ and other sources referenced in the footer of this comprehensive overview of the key trends impacting ESG.
Summary:
- The article discusses the evolving landscape of Environmental, Social, and Governance (ESG) priorities, noting a recent US pushback on ESG initiatives.
- There’s a need for a “realignment and recalibration” of ESG priorities due to shifts in global politics and policies.
- It emphasises the importance of understanding stakeholder perspectives and managing risks.
- While a full rollback of diversity initiatives is unlikely in Australia, there may be changes in public positioning.
- The article touches on policy implications of Australia’s mandatory climate reporting regime.
- Stakeholder engagement and risk management are crucial for directors navigating these changes.
The US Pushback and Its Global Ripple Effects
A notable trend in recent years has been a pushback against ESG initiatives in the United States. This movement has intensified with the change of presidency, leading to the dismantling of DEI programs and corporate withdrawals from net-zero alliances.
On his first day in office, President Trump reversed executive orders from the previous administration, targeting areas such as decarbonisation and diversity, equity, and inclusion (DEI). This has led to companies like Meta, Amazon, McDonald’s, Walmart, and Ford retreating from DEI programs that were previously seen as business imperatives.
There have also been high-profile withdrawals from the voluntary UN-convened Net Zero Banking Alliance (NZBA), and the Net Zero Asset Managers (NZAM) initiative has been suspended. These actions raise important questions about the scope and impact of these shifts for Australia.
Realignment and Recalibration: A New Era for ESG
According to Dan Wilcock from the UN Global Compact Network Australia, who participated in an AICD webinar, we are seeing a strain on multilateralism more broadly, and international frameworks are struggling to deliver results across various areas, including sustainability. As a result, the emphasis is shifting to national and subnational governments to lead policy development and drive change.
With many countries undergoing changes of government, shifts in policy are likely. This means that ESG priorities are going to be realigned and recalibrated. This makes it crucial for Australian organisations aiming to build sustainable value to closely monitor shifts in stakeholder sentiment as diversity and climate priorities face renewed scrutiny.
Navigating Change Through Stakeholder Perspectives
Directors need to navigate change by understanding stakeholder perspectives. Jane McKellar FAICD, an experienced non-executive director, emphasised the importance of a stakeholder-centric approach: “Actively engage your stakeholders, listen to them, understand their concerns and expectations, and shape your sustainability strategies around that”. This approach ensures alignment with both business strategy and stakeholder objectives. McKellar also noted the importance of framing ESG issues around specific business risks and opportunities, which “takes away a lot of the emotive language”.
Varied Sentiment and Shifting Priorities
While DEI has become a polarising issue in the United States, the debate has been less intense in Australia. Even so, a Rio Tinto cultural survey revealed resistance to diversity programs aimed at promoting women. The ASX Corporate Governance Council’s draft Corporate Governance Principles and Recommendations, which acknowledge broader aspects of diversity, are under deliberation. There are varying perspectives on DEI goals, and there may be some realignment in the current positioning.
Subtle Shifts, Not Rollbacks
According to Tim Stutt, partner at Herbert Smith Freehills, significant shifts like those in the US are less likely in Australia. He suggests that companies are still valuing diversity as an issue of good people management and for bringing a broad range of viewpoints to the board table. While a giant rollback of diversity initiatives is unlikely, there may be a shift in public positioning, such as less focus on rankings and awards.
The focus will likely shift toward getting good viewpoints around the board table, with board skills matrices and performance evaluations having regard to diverse viewpoints.
Policy Implications and the Future of ESG in Australia
Australia’s mandatory climate reporting regime began on 1 January 2025, with broad stakeholder support. However, there is a potential for policy uncertainty, with the Coalition signalling that, if elected, it will look to wind back mandatory climate reporting laws. Despite this, the Coalition has reiterated its commitment to achieving net zero by 2050.
The Coalition leader has also expressed opposition to ‘de-banking’, where lending is restricted to industries like fossil fuels and forestry based on corporate policies. Despite the potential for policy uncertainty, ESG issues are expected to remain on boardroom agendas, with sustainability now seen as an enduring priority.
Community Support for Environmental and Diversity Initiatives
A recent AFR Freshwater poll revealed that most people believe businesses have a role in reducing environmental impact and promoting sustainability and also agree that businesses should address diversity, equity, and inclusion. The poll found that:
- 77% believe businesses have a role in reducing environmental impact and promoting sustainability
- 59% agree businesses should address societal diversity, equity, and inclusion (DEI) challenges
- 36% think businesses should advocate for a position on contemporary social issues, while 37 per cent oppose such advocacy
These findings highlight that businesses should stay attuned to these shifts and remain agile.
ESG and Recruitment: What to Consider
For businesses looking to attract and retain top talent, understanding the role of ESG in recruitment is crucial. Here are some tips for your business, based on the shifting landscape:
- Highlight Commitment: Clearly communicate your organisation’s commitment to sustainability and diversity on your website and in job postings.
- Showcase Initiatives: Give real examples of your initiatives to reduce your environmental impact, as 77% of people believe businesses should have a role in this. Similarly, highlight any DEI programs, given 59% of people think business should address diversity challenges.
- Align with Values: Attract candidates whose values align with your ESG goals. This can improve employee engagement and retention.
- Communicate Transparently: Be open about your progress and challenges in implementing ESG strategies. Authenticity is key to building trust with potential employees.
- Promote a Diverse Workplace: Create a workplace where diverse viewpoints are valued. This can be a selling point for candidates who seek a more inclusive work environment.
- Use Metrics: When promoting your company, highlight your progress in key metrics of board diversity and the viewpoints they bring. Use board skills matrices and performance evaluations to guide your efforts.
Key Takeaways for Directors
- Manage Risks: Focus on managing the physical, financial, and legal risks associated with ESG issues. Fiduciary duties should be a primary concern.
- Embrace Change: Directors need to embrace change and remain current by continuously fine-tuning their skills on critical emerging issues like sustainability and AI.
- Prioritise Disclosure: Good disclosure is essential for navigating these changes. Be frank about progress and start the review process early.
- Build Sustainable Value: Sustainability is not just a trend; it is an enduring priority that contributes to building long-term value.
By focusing on these key points, Australian directors can navigate the shifting winds of ESG and ensure their organisations remain resilient and responsible.
Related Resources Referenced in This Post
- AICD Webinar: A webinar discussing ESG priorities, including modern slavery, mandatory climate reporting, and greenwashing. https://aicd.companydirectors.com.au/ – Webinar Link: https://www.aicd.com.au/courses-and-programs/all-webinars/EV170557.html
- Australian Institute of Company Directors (AICD): Australia’s independent organisation for directors, providing governance resources and information. https://aicd.companydirectors.com.au/
- UN Global Compact Network Australia: An organisation focused on sustainability and policy development. https://www.unglobalcompact.org/
- AFR Freshwater Poll: A poll revealing community attitudes toward businesses’ role in sustainability and diversity. https://www.afr.com/
- Rio Tinto Cultural Survey: A survey that highlighted employee resistance to diversity programs. https://www.riotinto.com/ & Survey Link: https://www.riotinto.com/en/news/releases/2024/rio-tinto-releases-findings-of-external-progress-review-on-workplace-culture
- UN Net Zero Banking Alliance (NZBA): An alliance focused on net-zero emissions in the banking sector. https://www.unepfi.org/net-zero-banking/
- UN Net Zero Asset Managers (NZAM): An initiative focused on net-zero emissions for asset managers. https://www.netzeroassetmanagers.org/
People Also Ask
“Diversity, equity and inclusion is a term used to describe policies and programs that promote the representation and participation of different groups of individuals. DEI encompasses people of different ages, races, ethnicities, abilities, disabilities, genders, religions, cultures and sexual orientations. It also covers people with diverse backgrounds, experiences, skills and expertise.” Source: informa tech target.
The key ESG issues facing Australian directors revolve around Environmental (climate change, sustainability), Social (diversity, equity, and inclusion), and Governance (risk management, disclosure) matters. Recent pushback against ESG initiatives in the US, particularly concerning DEI programs and net-zero commitments, are causing a global recalibration. This means Australian boards need to be aware of changing stakeholder sentiments, potential policy shifts, and how these affect business risks and opportunities. It’s not necessarily about a complete rollback, but a realignment of priorities and how they are positioned publicly.
The US pushback is driven by a change in presidency and associated political polarisation. This has led to the dismantling of DEI initiatives and corporate withdrawals from net-zero alliances. In Australia, while there is some debate around DEI, particularly with resistance seen in a Rio Tinto survey, the situation is less intense. There’s a broader community support for environmental sustainability and DEI. While Australia is unlikely to experience the same magnitude of rollbacks, there may be shifts in public positioning of ESG initiatives. The focus is likely to shift to focusing on the skills and viewpoints of diverse board members rather than chasing rankings and awards.
“Realignment and recalibration” signifies a shift in how ESG priorities are being approached. Due to changes in global politics, international frameworks, and domestic policies, the emphasis is moving to national and subnational governments to drive change. This may result in a reprioritisation of some ESG objectives and a re-evaluation of strategies.
It means that businesses need to be adaptable and closely monitor shifts in stakeholder sentiment around diversity and climate initiatives.
Directors need to adopt a stakeholder-centric approach, actively engaging with stakeholders, understanding their concerns and expectations, and shaping sustainability strategies around that input.
Framing ESG issues within the context of specific business risks and opportunities can remove “emotive language” and focus on practical outcomes, and will help align business strategy with stakeholder objectives. This means both internal and external stakeholder opinions need to be considered.
While Australia’s mandatory climate reporting regime has commenced with broad stakeholder support, there is potential for uncertainty. The Coalition has signaled that it might wind back these laws if elected. Despite this, they’ve reaffirmed their commitment to net zero by 2050. It is crucial that directors understand that, regardless of policy changes, ESG issues remain a priority for businesses and are seen as essential for building long-term, sustainable value.
A significant portion of the Australian public supports businesses taking action on environmental issues (77%) and DEI (59%). There’s less consensus on advocacy on broader social issues. This means businesses should focus on environmental impact and diversity initiatives while being cautious in public advocacy on contentious social topics. It highlights that businesses must be attuned to shifts in community attitudes and remain agile in their approaches.
ESG is increasingly important for attracting and retaining talent. Companies need to communicate their commitment to sustainability and diversity clearly in job postings and on their websites, showcasing initiatives, and aligning with candidate values.
Promoting a diverse workplace, being transparent about ESG progress, and highlighting relevant metrics (like board diversity) are important. This can improve employee engagement by attracting people who care about these issues, and retaining them because they feel values are aligned.
Australian directors should primarily focus on managing risks associated with ESG, especially financial, legal and physical risks.
They should embrace change, staying current on issues like sustainability and AI, and understand that ESG is not just a trend but a path to long-term sustainable value. Directors must focus on good disclosure of progress and start the review process early. It is important to understand that, while there are shifts happening, fiduciary duties remain paramount.
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