The future of [sustainable] finance in Australia
We are in the midst of significant change in the way finance operates in Australia and with the Treasurer set to shortly release a draft Sustainable Finance Strategy, this change is about to accelerate further.
ASIC Chair Joe Longo recently acknowledged the momentous nature of the changes underway in financial services stating that this evolution of ESG and sustainable finance constitutes “the biggest change in the financial services sector in a generation”.
The future of finance in this country is being drafted right now, and what has already been revealed shows much of what the next chapter for finance – sustainable finance – looks like.
The release of the promised Sustainable Finance Strategy will kick start the next phase – building off APRA’s focus on climate risk, ASIC’s focus on greenwashing, and recent draft climate disclosures legislation – whereby sustainability will be further hardwired into the finance sector.
Done right, this Sustainable Finance Strategy has the potential to fast track the capital needed to drive our low carbon transition. Done without sufficient ambition, it could be a huge wasted opportunity and leave us lagging in the global race for green capital.
Why has the Treasurer (rightly) chosen this focus?
Governments globally have elevated their focus in this area for three reasons:
1. An appropriate focus on ESG and sustainable finance can make our financial markets stronger, better informed and more resilient in light of major changes, particularly caused by climate change.
2. Citizens are increasingly keen to know how sustainability issues are being managed by their banks, pension funds, investment managers and financial advisers, wanting to ensure their life savings are invested in a positive future.
3. Sustainable finance will ensure significant amounts of capital is unlocked to align with the economic shift to a low carbon economy by 2050.
Australia playing catch up
The UK’s Green Finance Strategy and the EU’s Sustainable Finance Strategies are well progressed in their roll out, and Australia is now playing catch up.
Government interventions such as the US Inflation Reduction Act have added further competition to unlock and attract global capital to drive the huge economic transition underway to meet objectives such as the Paris Agreement and renewable energy targets.
We at the Responsible Investment Association Australasia (RIAA) have long been advocating for our government to step up to the sustainable finance table, since our work to incubate and lead the development of the Australian Sustainable Finance Roadmap 2030, and so we welcome the government moves in this direction.
These strategies are important – they already are fundamentally shifting how capital is allocated across markets. Goldman Sachs recently reported this as “a new regulatory world order [that] has significant impacts on capital flows” citing the impact of new sustainable fund classifications in Europe that have resulted in sustainable funds seeing 3.4 times the inflows compared to non-ESG funds.
What to expect from the Sustainable Finance Strategy:
1. Better, clearer and comparable information on ESG: Consumers want greater transparency on how their investments are impacting sustainability. We hope to see consistent and comparable disclosure requirements, firstly on climate (TCFD), then broader sustainability (ISSB), followed by nature (TNFD).
2. A basis upon which to prove green claims: A taxonomy is not a silver bullet, but it will give us a yardstick to assess green claims objectively. With the ASX currently tracking at 4.5 degrees of warming by 2050, the key for Australia should be how we can objectively measure progress towards net zero. A taxonomy, already supported by Treasury, will help put credibility behind the claims, but only if it is based on science and not politics.
3. Distinguishing your ESG fund from your sustainable fund: Navigating the world of ESG investment options right now is challenging, and a core pillar of the Sustainable Finance Strategy should be creating a consistent classification system for fund labelling. Australia should be leveraging industry standards which have been in operation here for 15 years, through RIAA’s Certification Program. The UK’s SDR, EU’s SFDR, the US SEC ‘names rules’, all signal that greater clarity in product labels is needed and coming.
There remain many other pieces that need to be aligned – from YFYS benchmarking, to nature disclosures, to a sovereign green bond program, to continued progress on investment manager portfolio holdings disclosure, and additional policy to incentivise investment in low carbon transition asset – to complete this sustainable finance puzzle such that it can unlock the full potential of capital markets.
It’s critical that our government catch up with global developments and not waste this monumental opportunity, and with the right ambition, we can unlock a tidal wave of green capital ready to support a rapid low carbon transition.
About Simon O’Connor
As the CEO of RIAA, Simon operates at the intersection of economics, finance and sustainability and has extensive international experience as an economic adviser, investment analyst and sustainability consultant across finance, corporate and not for profit sectors.