According to the report, nine out of 10 business leaders think ESG outcomes were important when investing — including for capital expenditure and merger and acquisition — with over half saying they are very important or critical.

Despite this, almost half of respondents reported abandoning or delaying ESG-related investment proposals in the past two years due to barriers, with regulatory uncertainty being the only barrier cited as being unique to Australia.

Concerns about regulatory uncertainty and inconsistency were among a number of barriers, including tenure of investment, legal concerns, tax issues, and predictably, access to capital and apprehension around returns.

A good case has been made for leading with an ESG strategy being good for business, as well as the importance for legal teams to go beyond compliance issues and offer their clients a variety of lessons on the ESG front.

Partner and Australian lead for Herbert Smith Freehills’ ESG practice Timothy Stutt explained that “uncertainty is holding back investment, so conversely, building that certainty is key to unlocking ESG investment in Australia”.

“ESG-aligned investment decisions are posing a trade-off between immediate financial outflows, versus long-term returns, which may be unquantifiable or unclear, and appear risky. Building confidence to bridge this gap will be key for companies to deliver on their ESG ambitions,” he said.

“Increased collaboration within the private sector alongside government directives will give boards the certainty they need to take their next leap of faith. Similarly, placing more trust in their governance processes in the fact of uncertain outcomes will also help take their ESG objectives from theory to implementation.”

VIEW ALL

The release of the report comes after 51 US BigLaw firms received a threatening letter from Republican senators about ESG advice — which stated that the ESG movement “attempts to weaponise corporations to reshape society in ways that Americans would never endorse at the ballot box” amid the rise of corporate accountability in the ESG space.

Additionally, the report notes that businesses will need to adapt to these issues moving forward, which will require “mind-blowing levels” of investment into ESG. Uncertainty about risk, returns and regulation needs to be addressed in order for business’ ESG aims to be met.

“In an operating environment where stakeholder expectations can often sit ahead of regulatory frameworks, there is a chasm in which we have seen uncertainty grow,” Mr Stutt added.

“The positives are that there is agreement on the direction of travel, and we are seeing a freshness of approach in tackling some of the complexity across the ESG landscape.”

Whilst barriers to Australia’s energy transition feature heavily in the report, respondents also highlighted that the “S” in ESG, covering many social factors, was a key emerging issue, with modern slavery one of the issues most commonly identified — something that a number of firms and partners have also expressed concern about.

“Although the term ‘social licence’ is sometimes contentious, it is clear that there is a need for business to understand and meet the baseline ESG expectations of a broad set of stakeholders if they want to operate on a sustainable footing long term,” Mr Stutt explained.

“ESG is as much about people as it is about energy, technology or supply chains. It was no surprise to me that the S factors featured heavily, but that doesn’t make them any less of a barrier. In many ways, the grand challenge of building certainty is even more pronounced for investment in this area given the difficulty of quantifying social outcomes, whether in companies’ workforce, supply chains or the community in which they operate.”

Eighty per cent of respondents said they have conducted, or plan to, an ESG review of their policies and operations — and 75 per cent said ESG factors are being used to assess their investment decisions. When making these investments, 66 per cent of businesses “explicitly include” ESG considerations in their due diligence processes.

In terms of net zero commitments, 60 per cent of businesses had a net zero commitment ranging between now and 2050, but 40 per cent say the net zero commitments don’t reflect indirect scope three emissions in their value chain.

“This indicates there is lots of work to be done ahead of new reporting standards, which are expected to include scope three requirements,” the report noted.

Furthermore, over half of all respondents don’t know how much additional ESG-aligned investment budget they need to achieve net zero but just 15 per cent say it will take no extra investment, and 20 per cent say they will need at least 50 per cent to 200 per cent plus in further investment to meet their commitments.

ESG commitments and factors can cover any business, in any sector — and “is a lens, not a prescriptive text”, according to Mr Stutt.

“ESG dimensions can lay over any business, in any sector, with any multitude of operational practicalities. Advising clients across the breadth of ESG concerns, we work with businesses who have been adapting their operations fundamentally, others who have limited ESG risks or opportunities, and some who are still recovering from the past two years of disruption and are yet to set their strategy on ESG,” he said.

“This context was our spark for collating this data and bringing together a team of global ESG experts, both internal and external, who helped us unpack and make sense of the numbers.”