The research and investment consultancy’s head of responsible investment and sustainability, Dugald Higgins, said that while the consultation announcement is a welcome development, the lack of global harmonisation is still a key barrier to achieving adequate outcomes in sustainability issues.
“We have repeatedly noted previously that while Australia is currently lightly regulated in this area compared to many countries, we will not be able to remain apart from the impacts of regulatory trends offshore,” Mr Higgins said.
“Not only will there be higher disclosure obligations, but there will be fewer places to hide for transgressors and those seeking to greenwash the market.”
Treasury released the industry consultation paper on 12 December 2022 on climate-related financial disclosures and received a broadly positive response from the industry.
“In the paper, Treasury states that the development of offshore standards potentially creates a ‘guidance gap for Australia’ as market expectations change,” Mr Higgins said.
“The government has tasked Treasury with the development of a comprehensive sustainable finance strategy, which will include new taxonomies for sustainable investment and further initiatives to reduce greenwashing and strengthen ESG product labelling.”
Mr Higgins added that despite the government’s announcement being a step in the right direction, there are more than a few challenges.
“With Australia now committing to a firmer path on sustainable finance, this is going to be a much-needed win for investors and capital markets,” he said.
“However, current global standards each have their own challenges, with numerous growing pains relating to issues like disparities in economic classifications under local taxonomies, fund labelling walkbacks, and perceived litigation risk associated with tackling some disclosures, like Scope 3 carbon accounting. We hope that the new proposals can strike the right balance between global harmonisation and usability for all parts of the financial value chain.
“The upcoming launch of the International Sustainability Standards Board (ISSB), which will stand alongside the International Accounting Standards Board (IASB) and result in a comprehensive global baseline of sustainability disclosures for capital markets, will also be a game-changer for Australia.”
Mr Higgins added that adoption of the standards around the world would help deliver “much-needed consistency and comparability in sustainability-related information to markets”.
“While it will be challenging and an imperfect solution for every scenario, just like accounting standards today, it will be a big step in the right direction,” he said.
According to Mr Higgins, the lack of transparency on ESG metrics in fund holdings data means comprehensive third-party assessment by consultants, and even advisers is near impossible on a large scale.
“This is particularly problematic for ethically driven investors who are essentially ‘blind dating’ without access to full portfolio transparency,” he said.
“There are well over 100 funds in Australia with some form of overt ESG or sustainability orientation. However, they all have different ways of looking at these issues based on their asset class, style and investment methodology. So, it pays to understand what’s underneath the bonnet. This is an area that’s highly subjective and definitely not a one-size-fits-all approach.”
