The Principles for Responsible Investment (PRI), UNEP FI and the Generation Foundation are calling on Australian policymakers and regulators to help responsible investors direct capital towards net zero.
In its report, A Legal Framework for Impact, Australia: Integrating sustainability goals across the investment industry, the PRI looked at the extent to which investors can pursue sustainability objectives and made a set of recommendations to policymakers to help facilitate this.
It found under the current legal and regulatory framework, some institutional investors in Australia have more freedom than others to mitigate system-level risks by shaping sustainability outcomes.
However, as the law is not explicit on the scope of this discretion and current investment governance and risk management standards do not address system-level risks, and although investment managers are generally allowed to shape sustainability outcomes where they can achieve financial returns, in practice, they don’t often do so unless explicitly told to.
“Fundamentally, fighting climate change and building a prosperous and resilient future start with reform of the law: of how investors’ duties are understood by market participants; of how active ownership is facilitated; and how beneficiary interests are understood and managed,” said David Atkin, CEO of the PRI.
While the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investment Commission (ASIC) increasingly encourage companies to disclose climate-related risks, Australia’s regulatory framework does not require companies to disclose their climate or other sustainability impacts, the report found.
It also noted, while stewardship is one of the most effective ways for investors to shape sustainability outcomes and thereby mitigate system-level risks, Australia’s regulatory framework does not explicitly require investors to exercise stewardship to shape sustainability outcomes.
“Nor has APRA, the primary regulator for Australia’s asset owners, acknowledged the importance of stewardship in its investment governance standards or guidance,” it said.
ASIC is the only regulator that has recognised the value of effective investor engagement, saying it can enhance a company’s long-term performance and noting that collective engagement can sometimes be more effective and efficient than action by individual investors. Yet this limited support for investor engagement is insufficient to encourage broader stewardship activities on sustainability outcomes, the report said.
As a result, the PRI recommends Australia’s policymakers update standards and guidance to clarify investors’ duties to address sustainability risk; adopt a reporting framework; strengthen regulatory support for investor stewardship; implement an Australian sustainable finance taxonomy; and address the effects of product heatmaps and financial performance tests on investors’ actions on sustainability outcomes.
Atkin added: “Australia is yet another G7 country that is taking on climate change. With a new government on board, we expect a lot of policy reforms this coming year that will bring the Australian market closer to leading economies on sustainable finance reform. Sustainable finance is not optional, and climate change cannot be put on hold.”