Driving sustainability into financial markets in Australia

In 10 years' time, we may come to see these transactions as the vanguard of what became a wave of new sustainable-focused debt issuance. The Australian fixed-income market in 2030 is likely to look a lot different from what we see today. We expect that, in 2030, individual green bonds and sustainability-linked bond transactions will have become mainstream – barely raising a ripple in a market where they have become business-as-usual.

How we move from an individual transaction focus to a systemic market change is the focus of ASFI, an initiative led by volunteers that has been established to set out a roadmap for realigning the finance sector to support greater social, environmental and economic outcomes for the country.

Formally established in March 2019, ASFI now has more than 130 individuals representing more than 80 separate organisations working collaboratively to deliver a sustainable finance roadmap for Australia in 2020. In May 2020, ASFI will produce its interim report with a final report to be delivered mid-year.

Led by a steering committee that includes senior executives from the four major banks, superannuation funds, community-owned banks, insurers and civil society, ASFI has established four technical working groups. These are:

• Mobilising capital to deliver on our sustainability challenges and opportunities.
• Creating a more sustainable, resilient and stable finance system by embedding sustainability into systems, markets, products and services to better account for risk and impact.
• Making better-informed financial decisions by enhancing disclosures and transparency.
• Meeting community and consumer expectations, and putting people at the centre of finance's purpose.

There is also a coordinating working group set up to deliver practical recommendations on overarching and cross-cutting issues not captured in the technical working groups – including short-termism, valuation, taxation, accounting standards and education.

In November 2019, ASFI delivered its first publication – a progress report identifying six critical challenges Australia's financial services sector must address (see box on facing page).

The work ASFI is doing is not occurring in a vacuum. Countries around the world have undertaken similar exercises. The reason for this is that nations, including Australia, have signed up to three international agreements: the UN Sustainable Development Goals, the Paris Agreement and the Sendai Framework for Disaster Risk Reduction. All explicitly mention the importance of the finance sector. This focus on finance in international agreements reflects its central role in a nation's economy to meet the scale of the challenges it faces.

For Australia's finance sector, it not only makes sense to align with our society and economy. Because finance is increasingly global, it also makes sense to align with what others are already doing.

We are seeing that sustainable finance markets in Australia are experiencing rapid growth and are continuing to adapt and evolve. As of 2018, assets managed in accordance with responsible-investment principles represented 44 per cent or A$980 billion of Australia's A$2.24 trillion in professionally managed assets. This has grown from A$178 billion invested in responsible funds at the end of 2013 which, at the time, represented just 17 per cent of the total assets under management.

Sustainability bond markets – which include green, social and sustainability bonds – are an area where we are seeing change.

Cumulative green-bond issuance from Australian entities reached A$15.6Êbillion as of the first half of calendar 2019. This ranks Australia 10th in the global country rankings. It was third in Asia for 2018 green bond issuance.

Issuers include financial institutions, nonfinancial corporates and state governments, with the latter issuing sustainability bonds to finance projects aimed at delivering environmental and social benefits including transport, renewable-energy, water and low-carbon-building projects.

We are also seeing the evolution of social bonds. The states of Victoria, New South Wales, Queensland and South Australia have issued social impact bonds (SIBs) or conducted SIB pilot programmes aimed at improving particular social outcomes.

There is significant focus on developing SIB markets. In particular, the Australian government has established a Social Impact Investing Taskforce with a view to developing a strategy for the Commonwealth in the social-impact-investing market. One aim of the taskforce is identifying how social-impact investing can provide "additional solutions to address entrenched disadvantage, achieve measurable impact and facilitate private-capital investment".

One of the core questions ASFI is considering is how to accelerate the rate of development of Australia's sustainable-finance markets.

While there is evidence of market development, is it at a scale that will be required to support Australia to meet the future needs of all Australians and deliver on its international commitments? What practical interventions can be made that can support market development?

There is an opportunity to use the ASFI process to identify and address some of the challenges fixed-income investors face when looking for Australian investment opportunities. Unlike the US, we do not have a deep municipal bond market. Corporate bond issuance is thin compared with the size of the pool of superannuation capital.

Are there also gaps that could be filled through new and innovative investment models? We know, for instance, that social enterprises and community clubs are often unable to finance their needs. Can we learn from the development of securitised debt markets for housing to find new ways to aggregate small-scale projects into investment-scale opportunities?

We recognise that Australia's financial-services sector has traditionally played an important role providing financial services and investment into the region, in particular the Pacific. Challenges remain in allocating capital to economic activity such as infrastructure. Is there an opportunity to explore fixed-income structures and partnerships that can scale and deploy finance in the region?

If we are able to answer questions like these, there is a commercial opportunity for Australia to develop a sustainable-finance market that attracts capital and issuance from around the region.

ASFI is seeking submissions from across the finance sector. If you have an idea about how to support the development of Australia's sustainable-finance markets, we want to hear it.