ASCI has developed two proposals around regulation, calling for the acknowledgement of ESG considerations and strengthening investment stewardship by making it more consistent.
ASCI has recommended APRA revise its guidance to recognise the importance of ESG issues in investment strategies, saying as it is, its coverage is limited and confused with ethical investing.
“Australia’s regulatory framework lags behind other developed economies in recognising the importance of ESG factors,” said Louise Davidson, chief executive, ASCI.
“There is significant opportunity to bring Australia up to date by clarifying that ESG risks and opportunities are financially material and should be taken into account in risk and return analyses.”
While ESG factors are a tool for managing financial risk and have an impact on investment value over the long-term, stewardship requires active ownership by asset owners and managers.
Stewardship can involve monitoring assets and service providers, engaging with companies and holding them to account on material issues, and voting and publicly reporting on their outcomes.
Ethical investing in contrast, uses ethical or social principles as its primary filter.
In addition to its demand for APRA to upgrade its framework, ASCI has also proposed reviewing its own regulatory framework for stewardship, making a stronger code that would apply to all institutional investors.
The body developed the ‘Australian Asset Owner Stewardship Code in 2018’, which investors can adopt voluntarily.
ASCI said the review should consider appropriate minimum standards and reporting, the appropriate regulatory framework and a stewardship code that applies to all institutional investors.
“We think it’s time to start a discussion about a framework that would apply across the market to all institutional investors, including asset owners,” Ms Davidson said.
“This would promote stronger stewardship, which in turn supports the quality and integrity of our financial markets and contributes to sustainable long-term value creation.”
Ms Davidson added that businesses and boards need to rebuild trust, and investors are able to help through the responsible management of assets.
“A stronger stewardship framework would support the quality and integrity of our financial markets and contribute to sustainable, long-term value creation for beneficiaries,” she said.
“The momentum for change is strong following the royal commission.
“Australia’s policy makers and regulators have a significant opportunity to improve regulatory settings in ways that are good for consumers and investors, good for sustainable business practices, and in line with growing demand for investment stewardship and ESG integration.”
