The financial sector and an ESG common cause
The Australian Sustainable Finance Initiative (ASFI) aims to “set out a roadmap for realigning the finance sector to support greater social, environmental and economic outcomes”. Following its launch at the end of March, KangaNews spoke to seven member institutions of the ASFI steering committee about the initiative’s goals and how they will be measured.
GOALS AND ASSESSMENT
Craig What are ASFI’s quantifiable goals and how will we be able to measure success?
These recommendations will be guided by four roadmap objectives. Overall, these objectives aim to deliver a financial system that is aligned to the long-term needs of Australian society, the environment and the economy. The role of the observers is to ensure knowledge is shared between regulators and the industry participants and global initiatives.
A likely output is a need for regulatory or legislative changes. Success will be if we have built up the case to government and regulators and thus been able to translate recommendations from the roadmap into policy changes which can embed sustainability across the finance system.
The Australian Sustainable Finance Initiative (ASFI) was formally launched on 27 March as a means of delivering a roadmap for the whole financial sector to deliver critical environmental and social outcomes.
The initial membership of ASFI’s steering committee is 18-strong, supplemented by two observers (see table). ASFI describes this list as an “unprecedented collaboration” in Australia, featuring as it does the input of major banks, superannuation funds, insurance companies, financial-sector peak bodies, civil society and academia.
ASFI is modelled on what it calls international best practice, that has been established through the formation of groups including the EU’s High-Level Expert Group on Sustainable Finance and the UK’s Green Finance Taskforce.
The primary goal ASFI has set itself is to develop a roadmap including pathways, policy signals and frameworks that will better enable Australia’s financial-services sector to contribute to delivering the country’s international commitments while underpinning national economic stability and prosperity. The commitments include the Paris Agreement on Climate Change and the UN Sustainable Development Goals.
Zaunmayr What are you personally most excited about regarding this initiative?
Most importantly, we are eager to help our communities tackle the big societal challenges we face. We want to support a sustainable – in all senses of the word – and prosperous, equitable, inclusive 21st century economy for all Australians.
The timing is also good from a consumer perspective, particularly with the emergence into wealth of the millennial generation. Consumers are becoming very choosy around where their water comes from, how their money is managed and where they buy their clothes. What we are doing through this initiative is ensuring these consumables will continue to be available.
From this point of view, I am pleased that ASFI is also looking at societal challenges, over and above the global-warming challenges that also exist.
We have a very committed group of senior-level finance executives from what is an unlikely collaboration in many ways, across banks, superannuation, insurance, civil society, academia and industry bodies.
That it doesn’t sit within any particular camp or ideology is a strength. As Emma Herd says, the timing is good for us to progress with this right now. It is urgent and important that the finance sector understands its role in delivering on important national sustainability goals such as the Paris Agreement and the UN Sustainable Development Goals (SDGs).
We are already seeing a high level of commitment from individuals and organisations on the steering committee to do this right. ASFI could be transformative to the way finance is directed and how capital flows in Australia.
This can set up Australia to be a more sustainable and prosperous economy and society, which is very exciting to me personally and to Responsible Investment Association Australasia as an organisation.
Many countries around the world already have financial roadmaps and I’m excited that we’ve been able to get significant interest and commitment from across the entire finance sector to develop one for Australia.
TIME TO ACT
Zaunmayr It has already been mentioned a couple of times that the timing is right for ASFI. On climate change, there is credible evidence that we have barely a decade to mitigate the most damaging effects. Are we moving fast enough to meet this deadline?
We need to deliver something tangible. It is one thing to say we want to move to a net-zero emissions economy by 2050 or we want to support the UN SDGs or deliver on the commitments of the Paris Agreement. But this doesn’t happen overnight. We need interim, quantifiable targets.
Our commitments and actions to date involve better understanding the risks. We have reviewed our credit policy and its settings, and our appetite for lending. We have also begun delivering new products and services which will go towards meeting our environmental-finance targets and the Paris Agreement commitments.
At National Australia Bank, we believe in leading by example. We have done this through being the first Australian bank to become carbon neutral, in 2010, by improving our disclosures over time and via our renewable-energy purchasing and our climate-financing commitments.
We need to do a lot of work around climate change, particularly in the finance sector – which sits at the heart of the economy. We have not done nearly enough but we see strong appetite to push forward.
“We have moved far too slowly so it is timely that this roadmap initiative has come to life now. Hopefully, in the next 12-18 months we will be able to outline some recommendations that can not only have a positive impact on the debate in Australia but also drive policy, legislation and regulation.”
We believe there is work to be done to limit the impacts of these events on communities. IAG supports action on climate change mitigation and believes the most effective way to address insurance affordability in higher-risk areas is through a nationally coordinated, well-resourced disaster-resilience programme that reduces the impact of extreme weather events.
IAG is working with all levels of government around the country, our industry, nonprofit groups and local communities to increase resilience and address the risks posed by extreme weather events and the changing climate. We look forward to continuing this work and exploring further opportunities for collaboration with government.
It is not just dynamics around climate change that are significant but how better to manage the impact humans are having on the earth. Initiatives like the roadmap will deploy new capital to the right places to drive positive change.
Debt capital needs a framework that allows it to act more constructively. Creating such a framework will allow – with haste and speed – the other forms of capital that are needed for sustainability to move quickly and to respond and adjust as required.
Zaunmayr What are the genuinely new commitments from your organisation?
We are focused on helping the sectors that are big users of electricity to reduce their carbon footprints. We’re also exploring sectors where private capital can catalyse improved social outcomes, such as social and affordable housing.
CommBank also strongly supports transparency and consistency in reporting on climate risks. We have adopted the Task Force on Climate-related Financial Disclosures (TCFD) recommendations as part of our reporting and this is publicly available in our latest annual report.
We are taking a phased approach to identifying and managing climate risk. This means focusing on having the right policies in place, understanding risk, developing and implementing strategic responses, building internal and customer capabilities and contributing to economy-wide initiatives. ASFI ticks the last box perfectly.
ANZ has a set of key values – which include integrity, collaboration, accountability, respect and excellence – and a purpose to help shape a world in which people and communities thrive.
There are three broad areas where we believe we can play a valuable role. One is a focus on how better to drive suitable and affordable housing for Australians and New Zealanders. The second is financial wellbeing, and ANZ is rolling out programmes on money awareness and education around how to manage finances in a world of multiple options. The third is environmental sustainability, where we have a particular focus on energy, water and waste.
In 2015, ANZ targeted A$10 billion (US$9.3 billion) of new financing to support our customers as part of the transition to a lower-carbon economy. We increased this to A$15 billion in September 2018 and we have reached about A$11.5 billion.
We will provide resources to inform and contribute to the various ASFI working groups. As the initiative progresses, we will evaluate exactly where the roadmap is going and consider our next steps to support and further those commitments.
Spreading the gospel on investment performance
Academic research suggests an environmental, social and governance (ESG) approach should not handicap investment performance. One of the Australian Sustainable Finance Initiative (ASFI)’s goals is to clear the path for investment capital to support a sustainable economy.
HERD There are two parts to this. The first consideration for investors will always be legal obligations and fiduciary duties. Regulators are telling industry that they view climate change as a material, foreseeable and actionable risk it should be managing.
In this sense, it is very clear that climate change is a part of fiduciary duty – a view which is supported by multiple legal opinions. A whole range of sustainability issues are also part of the core fiduciary duties in meeting legal obligations.
The second consideration is risk-adjusted return. The days of ‘profit at all costs’ are gone. The industry understands that a wider range of factors can influence return and create financial risk beyond the traditional, binary factors.
Craig How do you believe coordination and cooperation will help delivery?
Having insurers, climate and social expertise, academics, large and small banks, and retail and institutional investors is key to ensuring the roadmap is comprehensive and is tested as well as it can be, to ensure it will deliver on our quite ambitious objectives.
We need to have a thorough understanding of the whole financial system to deliver effective recommendations in the roadmap. To achieve this, we need to work together and take a broad view from across the finance sector and also from academia and the community.
The different perspectives, experiences and knowledge from the participants in our steering committee and working groups will be essential to developing carefully considered and practical recommendations that can be implemented.
ANZ is a regulated commercial bank and we operate within a structure that frames what we can do and the level of risk appetite we can take. Organisations that are playing a key role in the transition to a sustainable economy – for instance the Clean Energy Finance Corporation – can play a role that a commercial bank cannot. Insurers and superannuation funds play a different role again. Working out how to fit these contributions together is pivotal to devising a roadmap that people are committed to.
A big part of this is ensuring that working groups are set up and that the steering-committee members are looking for the outcome in aggregate, which will be better than the individual members all chasing targets on their own.
We get things moving forward as quickly as possible by being transparent and upfront on what we are doing and sharing successes with the broader community.
It is helpful to have the Australian Prudential Regulation Authority as an observer on the steering committee. We have also engaged with the Reserve Bank of Australia, the Australian Securities and Investments Commission, federal Treasury and the Department of Energy and Environment.
These institutions declaring together that they believe there is connectivity between climate change and the economy has not happened before. We have the momentum we need, everyone seems to believe the science now and to be willing to endorse the idea that activity between climate change, prosperity and the economy is linked.
ROLE OF GOVERNMENT
Craig What does the private sector need from government in Australia to make a roadmap achieveable? Can ASFI achieve its goals without better engagement from federal government than we have seen to date?
A clear and agreed roadmap will help provide certainty and support the investment we need to get everyone working together to meet Australia’s climate-change and sustainable-development goals and commitments. This includes across local, state and federal government.
ASFI is a bottom-up, industry-led initiative. Once the working groups are established, it will more strategically engage governments in the consideration and development of recommendations to form and deliver on the roadmap.
We need a clearer and more coherent signal at federal-government level to set the overarching parameters and clear goalposts. This will establish the direction and support to accelerate the process we are on. What has been interesting is that industry has been moving in spite of a lack of clear direction from government.
Globally, governments are moving, coming to the party and strengthening requirements based on the evidence of what we are confronting.
We have explicitly set out a plan to work very closely with government through this process, because we know we need it on board. We need legislators to understand why we are doing this work and how it fits across multiple departments, ministries and levels of government.
No matter who the government of the day is, we already have in place formal lines of communication to ensure it is informed and understands the work we are doing. We hope by the time we get to the delivery of the roadmap we have really strong support at federal-government level for the work we are doing and an understanding that it is key to contributing to national economic, as well as sustainability, objectives.
This is a critical piece and we have already had a lot of interest and engagement from multiple levels of government. We will continue to build these.
Going forward, we envisage that government at different levels will engage throughout the process. This is not just about federal government: local councils and cities also play a very valuable role. There is no question that certainty is required in order to accelerate investment policy.
However, are we waiting for handouts from the government? Definitely not. The job of ASFI is to create debate and work together with government to assess the best way to achieve interim targets, including the kind of environment we need to deliver on them in Australia. We are not going to wait for government. We will guide and come up with our own ideas with a view to facilitating conversation between the private sector and government.
Craig Do we need ‘big picture’ government direction, for instance around energy policy, or can we progress sufficiently with less politically sensitive measures like environmental considerations being taken into account in building standards?
This said, anyone involved in finance with a long-term perspective has seen the trajectory the world is on. The Paris Agreement has writ this large. We know we need to be heading towards an effective net-zero emissions economy by 2050 and this is the direction in which Australian businesses are moving.
It will happen with or without government support, but progress is hindered in its absence and would be hastened if it was in place. We hope we will see sensible and strong policy signals because they will help the whole process.
Australia has been getting on with the business of transitioning to a low-carbon economy. There aren’t many corporate treasurers who do not want to discuss sustainability with their bankers, investors or other stakeholders. This suggests a large number of Australian Securities Exchange-listed companies understand the need for transition – particularly around climate change.
In the climate area, what we need from government is very clear and there is no shortage of noise from the business and financial sectors around what they need to achieve their goals. It is more challenging in other areas.
It also depends on the type of government we’re referring to. If we are talking about physical-risk impact to climate change, we need state and local governments to be involved. This is not the sole responsibility of federal government and a political-economic solution is required.
In other areas, such as responsible, ethical or governance issues, a mix of private and public players need to come together with a common understanding of how to address the challenges.
The reality of sustainable finance is that a wide range of issues are at stake. We require a common thread that is industry-wide and can help push the private sector forward.
Whether you look at this through the lens of decarbonisation of the electricity-generation sector, or through expectations around how cities will work in the future – where jobs will be and how people will access them – there are logical outcomes which commercial activity will dictate, and then there are the efforts government makes to ensure the path is as fair and equitable as possible. For example, the government could ensure that programmes around social and affordable housing are driven in locations where people have transport access to work, over and above simply creating accommodation outcomes.
Where such accommodation is built and the outcome of these programmes as people are integrated into the broader workforce is important. Government has a role to play in ensuring long-term decisions are being made on this basis.
Craig ASFI wants to find ways to “direct and incentivise” lending for a sustainable economy. How might this be achieved?
An interesting debate over time will be what level of capital relief or incentives the regulatory triumvirate can provide for banks to allocate large parts of their balance sheets to the low-carbon transition.
There are also examples of innovation by offshore sovereigns like China, where the central bank has implemented settings to tilt capital towards a more resilient and sustainable economy. These include providing discounts for repo-eligible green bonds to incentivise the issue and purchase of these by Chinese banks.
Other ways to incentivise sustainable investments include innovative financial products such as sustainability-linked loans, where there are margin incentives for borrowers to improve ESG risk performance. At the moment, this is driven by margin discounts which are provided by bank balance sheets. There are no capital or risk-weighting reductions.
Adding higher risk weightings to lending to ‘brown’ assets and lower risk weightings to lending to ‘green’ assets is a mechanism which fits with the emerging hypothesis and evidence that vindicates that greener assets have a lower risk of default.
There are other mechanisms, such as a heightened focus on standards and labelling around sustainable investments and assets. We see a lot of work coming out of the EU on the environmental and green taxonomy, which has been developed to define which assets can sit within an investment product that is labelled as sustainable.
Some of the mechanisms which catalyse retail interest are also important. For example, UBank has recently announced a retail deposit product that seeks to unlock significant latent demand from Australians to invest and bank their money in line with their own values.
A lot of what we see coming out of Europe in particular has been focused on unlocking retail demand. It is quite transformative when a financial adviser or pension fund has to ask its members and clients about their sustainability preferences as part of their duties.
We will aim to identify potential strategies for progress and what makes the most sense for our market through our working groups. It’s difficult to say what these could look like right now.
However, we will be considering all options to give us the best chance of identifying the optimal solutions through our working groups and the consultation process.
Realignment of bank goals and shareholder expectations
Establishing and sticking to long-term sustainability goals might be expected, at times, to conflict with the near-term interests of shareholder value. Banks involved in the Australian Sustainable Finance Initiative (ASFI) insist the two can coexist, however.
JENKINS The clearly stated objective of ASFI is to divert finance away from the short term and towards the long term so as better to address the needs of society and the economy.
This will have ramifications, and we are already seeing how it is affecting the balance sheet. For example, National Australia Bank’s climate-change strategy means we have seen a transition in exposures away from fossil-fuel generation, which is now sitting at around 30 per cent, to renewable generation, which is now around 70 per cent and increasing. Our balance sheet is transitioning towards a low-carbon mix in line with the bank’s strategy.
Longer term, the action of regulators and government to support a more sustainable economy with policy is imperative to ensure we meet the UN Sustainable Development Goals by 2030 and continue the progress being made towards meeting the Paris Agreement. It comes back to the fact that we all need to take complementary and collaborative actions to meet these goals.