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New report from Europe sets out a pathway to a sustainable finance system – what does this mean for Australia and New Zealand?

By Simon O’Connor, CEO, RIAA

 

A new report was launched this week in Europe from the High Level Expert Group (HLEG) on Sustainable Finance, making wide-reaching recommendations on how to set the European financial system on a more sustainable footing, whilst driving more capital into supporting the emergence of a sustainable and inclusive economy.

 

This important report comes as a race emerges globally, not just to have the largest responsible investment community, but to direct more capital into sustainable industries that underpin future jobs creation and a sustainable economy.

 

Recently the UK established a Green Finance Taskforce, China’s State Council delivered its sustainable finance report, and France implemented Article 173 that moves investors and companies to play a role in shifting to a low carbon economy and driving green growth.

 

These activities underpin a shift in responsible investment, as it moves from a focus on investment processes – ESG, screening, engagement etc. – to the broader role of finance in shaping the future economy.

 

Over the last decade we have witnessed the emergence of green investment banks around the world catalysing investments into low carbon infrastructure, however these investment vehicles are primarily targeted at catalysing finance and investment into specific assets such as renewable energy. An example of this is Australia’s own Clean Energy Finance Corporation. What’s new is the focus on the whole to:

  • support the emergence of a sustainable economy;
  • re-focus investments on longer term horizons;
  • build the infrastructure tomorrow’s economy requires, and
  • better serve beneficiaries who increasingly seek out or expect that their investments will be made into sustainable assets and enterprises.

 

The HLEG Final report is worth a close look, as it sets out a menu of the mechanisms for achieving a more sustainable financial system – one that has relevance far beyond Europe and creates a precedent upon which this race to be a leader in sustainable finance will closely follow.

 

Key take-outs from the HLEG report include:

  1. Clarify investor duties to consider ESG and sustainability issues and align with longer-time horizons; this aligns with RIAA’s work in Australia to have APRA better clarify its expectations of these duties.
  2. Improve disclosure laws for companies and financial institutions to improve data and strengthen investment decision-making; this highlights the importance of global initiatives such as the Task Force on Climate-related Financial Disclosures.
  3. Engage beneficiaries in sustainable finance – acknowledging that beneficiaries are increasingly seeking out more sustainable options for their investments and that this should be recognised in the products being offered, the labelling of RI/SRI products, that investment funds should be more transparent on their sustainability impacts, and that we should be moving towards setting standards for retail responsible investment products.
  4. Consult beneficiaries on sustainability preferences; specifically that financial advisers and pension funds be required to ask clients/consult beneficiaries about their sustainability preferences and reflect these in their investment offerings.
  5. Strengthen governance and leadership in finance, ensuring the industry is governed by ‘fit and proper’ leaders equipped to address sustainability risks and opportunities.
  6. Set standards and a common taxonomy for sustainable investing, starting with green bonds standards.

 

So what does this mean for Australia and New Zealand?

Pleasingly, many of these same issues were raised in RIAA’s Policy Roadmap released in November 2015, which we continue to prosecute in Australia and New Zealand.

 

Specifically, we are focused on:

  • clarifying investors duties to unambiguously encompass ESG and sustainability factors along a longer-time horizon;
  • requiring advisers to elicit and consider clients’ best interests, including sustainability issues (noting RIAA’s 2017 consumer research confirms the high level of expectations of beneficiaries on sustainability issues);
  • ensuring investing-consumer primacy by promoting transparency and improving disclosures;
  • advocating for better corporate disclosures on ESG issues so investors are informed investment decisions across the range of relevant ESG, sustainability and long-term indicators; and
  • setting and building upon standards processes, such as RIAA’s Certification Program, enjoying its13th year of operation in 2018.

 

This report reframes responsible investment as not just an investment strategy, but as a means of delivering a stronger more sustainable economy as a whole.   Its recommendations are as relevant to Australia and New Zealand as they are to European countries.

 

In a part of the world with our own sustainability and economic challenges – dilapidated energy infrastructure, massive exposure to climate change risks, a growing and ageing population, and a financial industry with low public trust – Australia and New Zealand investors and governments should also be moving to consider these recommendations.

 

We are in absolute agreement that responsible investment should be regarded as core to economic prosperity, sustainability and inclusion for Australia and New Zealand – this is as relevant here as in the EU. As such, our governments need sustainable finance to feature centrally in policy debates and formulation. The time in nigh for our two countries to look at how we are tracking in this global race to a more sustainable financial system.