Australian Sustainable Finance Strategy: setting us up for success

Australia currently has a unique opportunity to set up a framework that can support investment aligned with the nation’s sustainability goals, by means of the Australian Sustainable Finance Strategy (“the Strategy”). 

First Sentier Investors’ submission to the consultation paper released on the Strategy covers a range of issues, including:

• the need for education and capacity building,
• a holistic approach that recognises the interconnectedness of different sustainability issues and the role financial market actors have to play within a broader ecosystem; and
• the importance of a considered approach to a sustainability labelling regime that learns from other markets. 

Below are some of the key points included in the submission.

As a global asset manager, our range of investment teams have different investment strategies, styles and risk appetites, which provide different levels of opportunity for, and barriers to, sustainable investment. We welcome the consultative approach taken by the Government to the Strategy, and encourage continued consultation with financial market actors in order to map and address these barriers and leverage opportunities.

Examples of barriers in relation to broader policy settings could include: reviewing the Your Future Your Super performance test to ensure it is fit for purpose, aligning the superannuation regulatory framework to Australia’s climate change objectives; and providing guidance on fiduciary duty and sustainable investment.

The Government can enable opportunities for sustainable investment by mandating quality disclosure of consistent information from investee companies and by helping to support the development of new industries. The companies we invest in are impacted by real economic policy that can either incentivise or disincentivise emission reductions. Together with a supportive regulatory framework, policymakers can support sustainable investment opportunities by providing funding that de-risks emerging sustainable solutions.

The transition to a sustainable economy is a complex and urgent undertaking requiring creativity and a systems perspective to achieve shared goals. We think it is critically important to recognise the interconnectedness of sustainability issues and to encourage the Government to take a holistic approach to its sustainable finance strategy. As investors, we seek to identify the material sustainability-related risks and opportunities of each investment. For example, when we are considering the risks and opportunities connected with the transition to a low carbon economy, it is also important to understand and address any unintended consequences of addressing those risks and opportunities, such as increases in inequality¹, heightened risks of modern slavery², and loss of First Nations People’s rights³. If we exacerbate those issues as part of the transition, they will be more difficult to address later. If we create more biodiversity loss, this will worsen the impacts of climate change. For the same reason, these issues should be considered alongside climate change as part of the Strategy.

A broad range of sustainable products in the market apply different approaches, have different objectives, serve different needs and are necessary to achieve sustainability goals. Whilst this creates complexity – and potentially increases the risk of misleading consumers - any labelling regime should not be so narrowly focused that it stifles innovation of legitimate sustainable products.

Our view is that this can be addressed by developing a consistent understanding of various sustainability-related terms (such as ‘ESG’, ‘sustainable’, ‘impact’, ‘ethical’ and ‘responsible’), and by the product provider ensuring that the sustainable investment objective is clearly disclosed, and the process for meeting this objective is clearly demonstrated. The onus should be on the product provider to demonstrate the effectiveness of their approach while complying with existing provisions for misleading and deceptive conduct.

In Australia, given that the Responsible Investment Association of Australasia (“RIAA”) certification scheme is well-respected and has evolved with the industry, we feel that any approach to labelling should build off this scheme. In our view, it would be more appropriate for regulators to either: 

• provide some oversight or set minimum requirements (for example, independence and transparency) for the RIAA certification scheme; or 

• set principles or standards in relation to labelling (for example, providing the common definitions of what an ESG, responsible or sustainability-themed product is) but allow RIAA or other market participants to deliver outcomes commensurable with the intent of the standards (or better). 

Finally, we note that there seems to be a lack of understanding across the industry in Australia of the difference between the taxonomy, labelling, and disclosure regimes. We recommend that the Government clarifies the purpose of each of these three tools and the role that they have to play within the broader Strategy. 

Whilst not a labelling regime, the EU Sustainable Finance Disclosure Regulation (“SFDR”) has a number of characteristics that are similar to a labelling regime. SFDR allows Article 9 product providers to develop and demonstrate their own approach for selecting and maintaining sustainable investments. This is important for promoting stewardship and approaches that address sustainability issues beyond climate change, or which take a more integrated approach to sustainable development.

Challenges implementing SFDR include that it sets standards for sustainable products but requires very little of “mainstream” financial products (known as ‘Article 6’). We are concerned that any labelling regime that creates additional hurdles for sustainable investment could unintentionally harm the broader objective of the strategy (i.e. to mobilise private sector investment needed to support the net zero transition and other sustainability goals). It could, in fact, discourage sustainable investment products.

If the goal of a labelling regime is to ensure that consumers/investors are better informed, transparent disclosure rules should apply across the market, not only to sustainable funds.

Our experience with the EU Taxonomy is that any portfolio, particularly in global equity markets, which might look to use the taxonomy as a credible standard for measuring sustainable activities/objectives, is likely to have low levels of taxonomy alignment (whether it has a sustainability objective or not).

Part of the challenge is that countries outside of the EU generally do not publish EU Taxonomy alignment data, which is why alignment across taxonomies globally is so important. For example, for First Sentier Investor portfolios, of the 4,900 securities we invest in across listed equity and debt, only 37.5% had data available. Among the covered securities, currently only 17% of companies have reported data and 83% of companies were assessed based on estimated data according to our research provider, Sustainalytics.

This is difficult to address given that each country has different sustainable development challenges. An option for addressing this is to use taxonomies at asset level (for example, for unlisted property and infrastructure investors) and by banks for project financing and green bonds. 

If a broader use case is employed, we recommend the Government considers the EU Platform on Sustainable Finance’s ‘Data and Usability Report’^4, published in late 2022, which includes a set of recommendations to the EU Commission on the EU Taxonomy, when designing an Australian Taxonomy - with particular focus on defining the use of estimates or ‘equivalent information’ where corporate reported data might be lacking. 

It is important to strike a balance between cross-border interoperability and local relevance. Disclosure and reporting need to be aligned as closely as possible with emerging international regimes, whilst not completely replicating overseas regimes if it does not make sense.

To do this, the Government should seek to build on existing standards, frameworks and market practice (for example, the RIAA certification scheme, FSC and ACSI stewardship guidance) where possible. Mandating disclosure to ISSB S1 standards, initially for larger companies, will be an important first step, however, the Government should encourage a double materiality approach which captures company impacts on the environment and society, not just how ESG and sustainability issues impact the company. Government and private companies should also be subject to these disclosures.

Sovereign green bonds are an important tool for the Government to mobilise capital towards sustainable projects. As large investors in Australian Government sovereign debt, we are very supportive of the development of sovereign green bonds in Australia.

For green bonds to attract funds, they must be credible, meaning there must be a clear reporting framework that fosters transparency and accountability, and shows alignment with credible environmental ambitions set out by the Government more broadly. Investors will assess the credibility of Australia’s green bond issuances against the country’s broader commitment to Paris Agreement goals, in addition to the use of proceeds of the bond itself.

The Government should engage extensively with both banks (the structurers of such programs) and investors, to ensure broader investor support and program longevity. It is also important to coordinate a national level of reporting given that many underlying projects will be joint funded with the states which have their own green bond programs.

¹ According to Minerals Council of Australia up to 50,000 direct jobs (projected to be closer to 67,500 in 2025) and 120,000 indirect jobs are connected to the Australian coal industry.  This represents less than 1% of the labour force in Australia. In regional areas such as the Hunter Valley (NSW) and Central Queensland many of the occupations at risk are very specialised within coal industries and will likely require proactive planning to training and reskilling workers if they are to find employment in the emerging industries. A just transition will require that we match the geographic spread of new opportunities with the geographic spread of the likely disruptions if we wish to be successful and avoid that certain communities are left behind in the transition process.

² According to research by University of Nottingham, around 40% of the global supply of polysilicon (a critical component of solar panels) comes from Xinjiang Uyghur Autonomous Region, where there are heightened risks of state-sponsored forced labour. Between 15 and 30% of the cobalt in lithium-ion batteries used to store solar energy comes from informal mines in the Democratic Republic of Congo, where forced and child labour are common.

³ First Nations people are already being significantly impacted by the effects of climate change, which are compounded by commercial activities including mining, forestry and fishing on Country.   As outlined in the State of the Environment Report 2021, changes to Country due to climate change apply multiple pressures to Indigenous people.  This includes making previously habitable areas uninhabitable, degradation of the environment, and rising sea levels in the Torres Strait. It also damages culturally significant places, plants and animals.

⁴ Platform on Sustainable Finance. (2022). Platform Recommendations on Data and Usability.