In the age of climate change and technological acceleration, Australian investors are increasingly demanding more from their investments and governments.
A recent Investor Group on Climate Change (IGCC) survey of 50 Australian and New Zealand asset owners and managers, representing over $3.1 trillion in assets, found four-in-10 investors had a portfolio-wide commitment to net zero greenhouse gas emissions with another 40% planning to implement the goal.
This article focuses on the ‘E’ in environmental, social and governance (ESG) investing and explores the actions that Australian fiduciaries are taking to encourage sensible government policy in this space.
IGCC chief executive, Rebecca Mikula-Wright, said policy engagement was a relatively newer focus of climate risk management for its investors because of the growing recognition of the scale of risk that climate change posed on their investments.
The IGCC is an ESG-focused collaboration of some of the largest Australian and New Zealand institutional investors and superannuation funds. It represents over 7.5 million people with total funds under management of over $2 trillion.
According to Debby Blakey, chief executive of HESTA Superannuation, which is an IGCC member and signatory to the Climate League 2030, constructive collaboration between investors, business and government is vital.
“Investors have led the call for a net zero by 2050 target and substantive climate action, warning of the shift by leading global investors to actively manage their carbon exposures and to invest in transition opportunities,” she said.
“The broad business support for a net zero target, particularly among industry bodies that previously opposed this, shows the effectiveness of this engagement and advocacy push.”
She says we are seeing an inflection point in investment.
“Global investors are putting in place strategies to drive down carbon in their portfolios and looking to capitalise on opportunities arising from the transition to a low-carbon world,” she said.
Blakey said this was having “a profound effect on the flow of capital globally” as countries who were establishing clear long-term policy settings would likely be at the front of the investment queue.
“It’s why we have strongly advocated for the Australian government to commit to net zero by 2050 and provide greater investment certainty through clear interim targets on the path toward achieving this goal.”
What does advocacy really mean?
Will van de Pol, asset management campaigner at Market Forces, an affiliate advocacy group of Friends of the Earth, said many IGCC and Responsible Investment Association Australasia (RIAA) members “talk a good game on net zero by 2050”.
“But none of their portfolios are in line with that outcome because they are still investing in companies that are expanding fossil fuels and that’s incompatible with the International Energy Agency net zero by 2050 pathway,” he said.
“And they are failing to vote in favour of a number of key climate-related resolutions that would bring companies’ behaviour into line.”
In April, a Market Forces climate-related shareholder resolution was filed to Woodside, Santos and Oil Search calling for the companies to disclose how their capital expenditure and operations would be managed “in a manner consistent with the climate goals of the Paris Agreement”.
Van de Pol said many of Australia’s top super funds voted against the resolution, including HESTA who is mentioned in this feature.
He said all super funds, except for those set up to specifically invest ethically, were continuing to invest in fossil fuel companies, particularly in the gas sector.
“In a lot of cases they are saying they won’t divest and instead engage with these companies but they’re failing to demonstrate that engagement is making any progress.”
According to RIAA’s executive of policy and standards, Nicolette Boele, fiduciaries were putting greater focus on government policy engagement through an evolving implementation of the Superannuation Industry (Supervision) Act 1993.
Section 62 of the act requires superannuation trustees to act honestly, to properly invest funds and to “act in the best interests of the beneficiaries”.
According to Boele, many of RIAA’s fiduciary members were engaging in a process known as common goals and collaborative action which evolved from the need to act in the best interest of beneficiaries.
Members would engage with Australian companies they invested in to encourage them to lobby for more policy certainty around climate change – favouring the certainty of New Zealand’s net zero by 2050 target, Boele said.
“They’re engaging for getting some policy certainty… like ‘what’s going to happen at 2030?’, an emissions trading scheme with a cap and trade and a price on carbon,” she said.
Boele said clear policy signals would help investment managers achieve better risk-adjusted returns for their beneficiaries because systems could be developed, like the Clean Energy Finance Corporation (CEFC), which would better help funds price risk in their valuations.
The CEFC is an Australian Government-owned Green Bank responsible for investing $10 billion in clean energy projects on behalf of the Government.
Although Boele did not have a strong opinion on whether it was the role of government to create a classification system, she did say there was no clear guidance in the Australian marketplace in place.
For instance, the Australian Competition and Consumer Commission oversees a green consumer law that regulates false and misleading environmental claims. But, according to Boele, this has not been translated clearly into the finance sector.
Many members are using RIAA’s certification program which checked that products were true to label under its certification requirements.
“It’s all about understanding how to price risk, so we’re just getting on with it and using the data we have,” Boele said.
“And if we can get those parameters out of the government and not just a 2050 but a 2030 target like nearly every other country in the world has, then the investment community can put those parameters into their own pricing, and we can have better price discovery, and then the money is going to flow away from those assets that don’t help us achieve it, to ones that do.”
According to Mikula-Wright, the IGCC and its members are working closely with policymakers to ensure they understood the risk of capital flight and the opportunities available if they get the right policy settings.
“They are also constructively engaging with governments and regulators on more technical, but critical areas, such as driving better quality climate risk disclosure and valuing climate adaptation,” she said.
“This is about engaging in the areas of climate change where it is possible, and then pushing externally where more ground needs to be made.”
On that point, this year the IGCC partnered with the Global Investor Statement which saw 587 global investors representing US$46 trillion ($61.3 trillion) in assets join to call on global governments to commit to stronger climate policies.
And 21 investors, banks and insurers, have joined IGCC’s Climate League 2030, which pledges support and acts towards achieving deeper Australian emissions reductions of at least 45% below 2005 levels by 2030.
The Climate League 2030 includes Aware Super, Cbus Super, IFM investors, QIC, Allianz, TelstraSuper, Lendlease, Pendal, Teachers Mutual Bank Limited, Pollination, UniSuper, NewForests, AustralianSuper, VFMC, U Ethical, ISPT, Active Super, Impact Investment Group, Hesta, Australian Ethical Investment and abrdn (formerly Aberdeen Standard Investments).
Mikula-Wright said portfolio alignment and traditional risk mitigation approaches alone are not enough to fully mitigate the scale of risks associated with climate change and financial organisations had a role to play by providing funding.
“Ultimately, to secure a healthy economy for Australia it will require the government to work in partnership with investors, companies and communities to unlock the private capital required to fund our inevitable transition to net zero emissions,” Mikula-Wright said.