Amidst the accelerating challenges posed by climate change and biodiversity loss, Australian companies find themselves compelled to take decisive action, having committed to pivotal international agreements such as the 2015 Paris Agreement and the 2022 Global Biodiversity Framework. Regulatory mandates, stakeholder expectations, and community demands afford no latitude for inertia.

The Sustainability Disruption

Recent research underscores an imperative reality: enterprises unwilling to harness Environmental, Social, and Governance (ESG) principles and sustainability as strategic enablers risk relegation to obsolescence as markets pivot around them. As legal imperatives heighten, board directors and C-suite executives must shoulder the responsibility for tangible action and transparent disclosures regarding greenhouse gas emissions and significant environmental impacts.

In the words of Associate Professor Ioannis Ioannou from the London School of Economics, this pivotal juncture heralds a "Sustainability Disruption," an epoch of transformation mandating the recalibration of entire business paradigms. This surge delineates a paradigmatic shift, acknowledging that corporate evolution demands proficiency in climate science, biodiversity preservation, and societal impact—conjoining profit and planetary well-being harmoniously to forge a sustainable future.

The status quo is untenable, with the erstwhile disregard for planetary impacts and constraints on natural resources no longer sustainable. Humanity resides beyond the geophysical limits of the planet, and while the climate has dominated discourse for decades, the preservation of nature and biodiversity has emerged as a paramount concern.

Australia’s Nature Risk Exposure

Australia's Gross Domestic Product (GDP) evinces a moderate to exceedingly high direct reliance on the natural environment, with the natural environment providing substantial cultural and well-being services, particularly to First Nations Peoples. Despite its unique ecological richness, Australia's ecosystems face unprecedented depletion. Since European colonisation, Australia has suffered more mammalian species loss than any other continent, with ongoing rates of species decline exceeding those of OECD nations. Prolonged neglect of environmental stewardship imperils Australia's economic and social fabric.

Available data indicates a deficiency in Australian companies' recognition of nature-related risks and opportunities, compounded by an inadequate sense of urgency. While KPMG's biannual study highlights that 90% of ASX100 companies acknowledged climate risks as financial concerns in 2022, Martin Currie Australia's findings suggest that 61% of the ASX-listed companies surveyed in 2022 failed to incorporate nature risks into their policies, with no commitment to doing so within the ensuing two years.

This dearth of attention to nature impacts among Australian companies mandates a paradigm shift, further underscored by recent independent legal opinions across Australia, New Zealand, the UK, and Singapore. These opinions assert that company directors are duty-bound to consider nature risks in addition to those posed by climate change.

Leveraging Executive Compensation for Positive Change

Given the substantial reliance of numerous Australian companies on—and the consequential impacts upon—the nation's delicate yet distinctive natural environment, board directors must embrace a core set of non-financial metrics and recommended disclosures. These measures must address materially pertinent nature-related risks and opportunities. For instance, mining, oil, and gas, as well as agricultural enterprises, must integrate risks and opportunities concerning surface and groundwater resources, terrestrial and freshwater ecology, biodiversity, and land-use changes into their core business strategies and governance frameworks. Regrettably, anecdotal evidence suggests that such integrative practices are not commonplace.

This issue is not confined to Australia; a recent Semler Brossy report revealed that while 72% of S&P 500 companies employed ESG incentive plans in 2023, only 4% and 7% included environmental metrics such as water consumption and waste reduction, respectively. Despite the widely acknowledged potency of executive compensation in driving organisational strategy, and the recognition of risks posed by climate change and nature loss, many executive teams remain incentivised solely on short-term financial performance, contradicting aspirational long-term ESG and sustainability objectives.

The first step in formulating an effective compensation plan lies in articulating the company's goals—namely, what it aspires to achieve. If nature, climate, and social impacts are deemed pivotal imperatives for maintaining market competitiveness, the executive compensation framework must align with these strategic objectives and reflect the company's ESG commitments. Such a plan must carefully consider its implications for various stakeholders, including employees, shareholders, customers, and the broader community, serving as a catalyst for positive change and fostering behaviours that benefit all stakeholders.

Not all ESG metrics hold equal weight, underscoring the importance of identifying those most pertinent to the company's stakeholders. These may encompass reducing water usage, curbing water pollution, safeguarding or enhancing biodiversity, mitigating greenhouse gas emissions, or fostering positive impacts on First Nations communities. Prioritisation of metrics that hold the greatest material significance and align with the company's purpose is imperative, employing SMART principles to ensure the chosen metrics are transparent, measurable, and of high quality. Progress must be visible, quantifiable, and transparently communicated through annual reports, sustainability disclosures, and stakeholder engagement efforts.

Future Proofing Investments

Furthermore, companies encounter significant challenges in gathering and synthesizing environmental and social data, along with establishing automated systems and platforms to streamline and enhance this process. Developing such systems necessitates considerable investment in technology infrastructure, data analytics capabilities, and data governance frameworks to ensure accuracy, repeatability, and efficiency. Equally vital is the allocation of responsibilities to staff members possessing the requisite environmental and scientific expertise to navigate the complexities of data collection and analysis effectively. Boards must recognise the pivotal role of scientific knowledge in shaping sustainability strategies and decision-making processes. Hence, it is incumbent upon them to either enhance their understanding of environmental and social science or augment their ranks with directors possessing the requisite environmental and social expertise. This infusion of expertise ensures that boards are equipped to provide informed oversight, steer strategic direction, and uphold the organisation's commitment to sustainability in a rapidly evolving landscape.

Time to Act is Now

It is imperative for executives and directors to recognise that the integration of ESG principles and sustainability initiatives should be viewed as a long-term investment strategy rather than a short-term obligation. As the business landscape evolves amidst the sustainability disruption, companies must adopt a forward-thinking approach to ESG, acknowledging the enduring relevance of the skills, data infrastructure, and operational processes developed. This long-term view extends beyond mere compliance, encompassing the cultivation of organisational culture, resilience, competitive advantage, and stakeholder trust. Executives and directors must therefore prioritise the allocation of resources towards building robust ESG frameworks, fostering a culture of continuous improvement, and nurturing the requisite expertise to navigate the complexities of sustainability in the years ahead. By embracing ESG and sustainability as strategic imperatives, companies can position themselves as leaders in a rapidly changing business environment, driving value creation and sustainable growth over the long term.