The Responsible Investment Association Australasia (RIAA) chief executive officer Simon O’Connor said ahead of the InvestorDaily ESG Summit 2023 that interest in environmental, social, and governance (ESG) investing has grown as more investors choose to engage with the sector.
This is despite 2022 throwing various challenges at those who were underweight or avoided fossil fuel and armaments as their investments suffered in the short term, he added.
“At the same time, we’re seeing an industry that is hitting its strides and taking a much more sophisticated view on the approaches, through which ESG investors can manage risk in a portfolio,” he told InvestorDaily.
“It now goes well beyond just divesting of certain sectors.”
Mr O’Connor’s comments preceded the 2023 ESG Summit, where he will paint a picture during his session about the ESG landscape for 2023 and beyond, the challenges the sector faced amid economic and geopolitical events such as the gas crisis and the war in Ukraine, and how to keep moving forward during these challenging periods.
Mr O’Connor said the Australian ESG landscape would shift significantly in 2023, shifting from a “nice to have” to a compliance and regulatory driven marketplace.
“We’ve seen that flagged very clearly from our Treasurer in December last year, when he laid down plans for pursuing a regulatory and legislative agenda around sustainable finance and ESG,” he noted.
Indeed, the Albanese government published a consultation paper on the development of a new Australian climate risk disclosure framework, with the consultation period closing on 17 February.
The government said Australia would establish a framework for “consistent, credible, internationally comparable disclosures” amid rising investor demand for higher-quality reporting requirements.
The reporting requirements will be phased in over time and is expected to be mandatory for large entities, with the government also intending to apply tailored requirements to comparable Commonwealth public sector corporate entities and investment funds.
Mr O’Connor said the development represents a “dramatic shift” because the government has recognised that it is required to work with private finance, superannuation funds, and fund managers so that the finance sector plays a larger role in tackling climate change.
“What I think has been absent in Australia is a sophisticated understanding of the role of finance in delivering commitments such as the Paris Agreement obligations to reduce emissions to net zero by 2050,” he said.
“Until very recently, the government and the regulatory environment had really been lagging behind its major global trading partners like the US, UK, Japan, and Singapore on support incentivisation and the direction of finance to play a bigger role in tackling climate change.
“But it’s pleasing to see that this is now bringing our financial markets up to speed with our major global trading partners and other financial markets globally.”
Mr O’Connor also called for legislation that standardises language around what constitutes environmentally friendly activities and what is harmful.
“Often referred to as taxonomy, this will help put consistency around that so that investors and advisers can ensure they're not being greenwashed by product claims,” he said.
“It’ll also remove uncertainty because there will be a standard definition of what constitutes progress, what is transition, and what is green.”
Mr O’Connor noted that major super funds and fund managers have been adopting net zero commitments and excluding and divesting certain segments of the fossil fuel industry in portfolios, particularly thermal coal.
In addition, investment institutions have been proposing resolutions at AGMs around proxy voting to apply pressure on ASX companies with a significant carbon footprint to design and implement credible transition plans to decarbonise their organisation over the next couple of decades, he said.
“We’ve got a much more sophisticated approach now,” he said.
“What’s really interesting is when large super funds start making these moves, it flows down to big corporations who are jumping on board. This flows down to the fund managers.
“So, I think at the product level, we’re seeing more investment products that are aimed at achieving net zero and tackling climate change available to advisers and wholesale and retail consumers.”
To hear more from Simon O’Connor about the future outlook of the ESG landscape, the history of ESG investing, and how you can tackle challenges to keep progressing, come along to the 2023 ESG Summit.
It will be held on 23 March at Aerial UTS Function Centre, Sydney, and 29 March at Grand Hyatt Melbourne.