Social linkage shakes the foundations – and validity – of ESG

Social factors have tended to be the black sheep of the sustainable finance family: harder to measure than emissions and frequently less prioritised than the need to respond to the existential threat of climate change. Participants at a KangaNews-Westpac Institutional Bank roundtable, which took place in Sydney in September, discussed moves to improve the measurability of social impact, the sector’s challenges and why the link between the pillars of environmental, social and governance (ESG) might make the term redundant.

  • Katherine Palmer Executive Director, Strategic Balance Sheet Management NEW SOUTH WALES TREASURY
  • Linh Quach Director, Sustainable Finance WESTPAC INSTITUTIONAL BANK
  • Aleksandra Simic Director, Office of Social Impact NEW SOUTH WALES TREASURY
  • Siobhan Toohill Group Head of Sustainability WESTPAC BANKING CORPORATION
  • Kate Turner Global Head of Responsible Investment FIRST SENTIER INVESTORS
  • Adam Vise Group Treasurer AUSTRALIAN UNITY
  • Marayka Ward Director, Fixed Income Strategy QIC
  • Charlotte Plaisant Millecamps Director, Sustainable Capital Markets WESTPAC INSTITUTIONAL BANK
  • Sam Swiss Chief Executive KANGANEWS

Plaisant Millecamps How would participants assess the success or otherwise of attempts to address societal challenges through finance?

TOOHILL We are at an interesting juncture to reflect on this. The UN Sustainable Development Goals (SDGs) put a lot of focus on social issues but the gravity of the Paris Agreement shifted attention to climate change. Nevertheless, the focus on social is growing, particularly through a human rights lens and, in Australia, through modern slavery legislation.

I act as co-chair of the banking board for UNEP FI [UN Environment Programme Finance Initiative] and we have carriage of the Principles for Responsible Banking. The principles have traditionally focused on the Paris Agreement and SDGs, but we are currently refreshing them to focus on four key pillars out to 2030. These are climate, nature, economic inclusion and human rights.

It is clear that the balance is being re-addressed and social dimensions are increasing in significance, underscoring a global view that we need to be leaning into these areas. I believe there is also a greater appreciation of the intersection between social and environmental factors, as well as nature. Frameworks recognise that banks in particular have a role in economic inclusion. A need to better understand intersectionality across these dimensions is emerging as a solid theme.

WARD We also view environmental and social as inextricably linked. There is far more awareness now than there was 20 years ago of the social and environmental impacts companies can have and the influence investors can bring to bear on nonfinancial topics.

Debt investors don’t need a labelled bond to convey expectations on behaviour and social impact to issuers. As part of QIC’s UN Principles for Responsible Investment (PRI) stewardship commitment, we have the flexibility to mobilise capital away from transgressions such as modern slavery breaches. Our clients expect us to do this and, most importantly, this is what the law expects. What is more difficult for vanilla bond investors is to mobilise capital toward specific social impacts.

We believe environmental and social will become even more linked so we are also trying to extract ourselves from using the phrase ESG – we are looking at the bigger picture.”

PALMER I agree about the link between environmental and social, to the extent that separately ringfencing the two is not quite correct anymore. This is partly why New South Wales Treasury Corporation (TCorp) created a sustainability bond programme that contains green and social assets.

In fact, individual assets often exhibit both characteristics. For example, we have included assets from the transport sector such as Sydney Metro. Not only is this supporting electrified mass transport but the way in which the asset was constructed achieved a number of social milestones. Along the same lines, we also included the Transport Access Program, which provides more accessible train stations.

A sustainability bond programme makes sense for government because much of its spending is on education, health and other social activities – a significant proportion of expenditure already goes toward supporting social objectives.

There is also the argument about transition. While climate and environment may be more developed in the sense that they have more consistent standards and metrics, we also need to consider how we get from A to B in social. It is incumbent on us as an industry to look ahead and assess how we bring everyone along on the transitional journey.

QUACH Westpac Institutional Bank worked on the Sydney Metro Western Sydney Airport SSTOM [stations, systems, trains, operations and maintenance] project, which could be viewed as an early adopter of the link between environmental and social given its combined green and SLL [sustainability-linked loan] transaction.

Given the nature of the project, it would have been easy to just consider the green aspect or even just the environmental component in the SLL. But the sponsors were keen also to address and link social objectives and impacts from the project. As the social impacts were specific to the projects, ascertaining the relevant benchmarks, measurements and appropriate metrics for the social-related KPIs was far more challenging.

TOOHILL Inherently we know that, with these kinds of projects, we have created enormous social and financial value because of the positive social impact. Sometimes it is hard to measure or anticipate, but it is tangible when we experience it. The value of a project like this has been informed by the way it was managed from a social and community engagement perspective.

“It is clear that the balance is being readdressed and social dimensions are increasing in significance, underscoring a global view that we need to be leaning into these areas. I believe there is also a greater appreciation of the intersection between social and environmental factors, as well as nature.”


Swiss We often hear that social is more difficult to tackle than climate because it is hard to measure. How did Australian Unity land on wellbeing as its measure for social?

VISE We had a theory that social needed a measure, similar to the carbon measure for environmental, to make it investible and understandable. I recently had an interesting conversation with Mary Delahunty, the former head of impact at HESTA, about sustainable investing. One of the revelations from this discussion is that social is really a people measure and this is inherently subjective. The question is thus whether the best measure for social is a series of development goals from the UN or a subjective measure of people’s wellbeing.

We concluded that wellbeing is the measure of social. A really exciting opportunity to consider is consistent, universal measurement of social outcome rather than a series of discrete development goals or other tests.

Through this, we aim to advance social from being 10 or 20 years behind environmental frameworks to catching up. The moment we start to measure, manage and assign social factors, and find where capital gets return, we have the ability to move from small- to large-scale sources of capital to produce social policy outcomes. When we have good social policy glue, we get enhanced economic outcomes as well.

Australian Unity has undergone an interesting journey of pulling together all these strands to hone in on what does – and what does not – work for a purposeful organisation that measures wellbeing.

“As an investor, I may not agree with the values of my client but I must respect its mandate and values, and where the money I am investing is coming from. There is a values input to social that doesn’t arise in the same way in green investing.”

Swiss Issuers can define how they measure social impact but is this kind of measurement sufficiently definitive from an investor’s perspective?

TURNER Investors love to measure things and I wholeheartedly agree with the saying ‘what gets measured gets managed’. When we started our modern slavery work at First Sentier Investors, several years ago, we brought together a working group across investment teams to brainstorm effective measurements. The answer for modern slavery was that there are some things we can measure qualitatively and some that we can measure quantitatively, but we will never be able to land on a set of metrics that is a silver bullet.

Metrics can be incredibly helpful to identify risk and see how it is managed, but they will never be the end point. We decided, therefore, to measure what we can and not to use the fact that something is difficult to measure as an excuse to not get started. Even though there has been progress with investors and companies considering social issues, it all too often falls into the too-hard basket. Inability to measure is one of the reasons for this.

I completely agree with the need to link social and environmental issues. I don’t think we have done ourselves any favours with the ESG [environmental, social and governance] acronym as it encourages people to view them separately when they are not, in any way, three different topics.

For example, we have been doing a lot of work on deforestation recently, which is a biodiversity issue and also a climate change issue – deforestation is a huge contributor to emissions. It is also very much a social issue. We have been taking the modern slavery data we have pulled in the past to ascertain how it might be an indicator of deforestation, precisely because we know these issues are so closely linked.

I believe social and the environment are inextricably linked. Unfortunately, all too often they aren’t considered this way and climate change can often be looked at to the exclusion of other issues. I can visualise a future where we have decarbonised but a huge amount of inequality has been created through, for example, a ballooning number of victims of forced labour.

PLAISANT MILLECAMPS When discussing use-of-proceeds (UOP) bonds with issuers, we encourage them to add social indicators to their reporting on social co-benefits. To do this, they have to find measures for social. It doesn’t have to be perfect but the idea is to start somewhere.

This is an iterative process that improves over time. By making a start on measuring social aspects, issuers also surround themselves with experts in the field who can help measure and find the right indicators to use. We believe environmental and social will become even more linked so we are also trying to extract ourselves from using the phrase ESG – we are looking at the bigger picture.

“While climate and environment may be more developed in the sense that they have more consistent standards and metrics, we also need to consider how we get from A to B in social. It is incumbent on us as an industry to look ahead and assess how we bring everyone along on the transitional journey"

SIMPSON I think ESG as a term is unhelpful. Using the term sustainability includes economic outcomes and it truly is quadruple-bottom-line stressing the need to do things in an integrated way. To get better outcomes we have to look at social, environmental, economic and governance.

One reason social is not featuring highly is that there is not sufficient governance and measurement yet. We can take politics out of some of the investment decision making in infrastructure when we embed sustainability into governance. ESG forces us to focus on certain aspects rather than on the complexity of the whole – which is greater than the sum of its parts.

TRAN We specialise in social impact measurement and we have had the pleasure of working with Australian Unity on its community and social value (CSV) framework over the years. I echo Adam’s point about social measurement being subjective.

One of the factors holding social back relative to environmental, I believe, is that it is inherently more complicated to measure social impact. Social impact is about what happens to people and communities, and how they change over time – and they have their own perspectives about how they are affected, which should be listened to in a meaningful way. Measurement is a lot less straightforward.

With all social impact measurement, there needs to be a degree of judgement – and this adds to the complexity of constructing accepted standards. In other words, even if there are standards there still needs to be good judgement informed by a true understanding of the impact that has occurred when applying those standards. It is promising to see the extent of development in this space so far – for example, the Impact Management Platform, which is a collaboration seeking to pull together different standards, as well as SDG impact standards. The sector is rapidly evolving and working to build consensus on the standards and practices for measuring social impact. But it is still at an earlier stage of its evolution.

PALMER Having standards and an evidence-based approach is a key point. It is possible to do this and it doesn’t have to be politically or emotionally charged. If we can measure and monitor something, we can point to where there is progress and work out where we need to allocate our resources.

This is the kind of work Aleksandra’s team delves into very deeply – whether it is the metrics of the social aspect of the state’s sustainability bond programme or social impact investment. It is all about measuring and monitoring.

SIMIC It is, and I like the point that has been made today that even if we cannot measure social impact perfectly this shouldn’t prevent us from exploring different metrics, testing them and iterating based on the lessons learned.

The New South Wales (NSW) government has been at the forefront of social impact investing in Australia over the past decade, delivering social programmes through payment-by-results contracts and social impact bonds. In these contractual arrangements, payments to service providers and investors depend on the achievement of agreed outcomes.

Where viable, the most robust way to measure achievement is via a statistically matched control group. However, over the years, we have gained appreciation for the trade-off between robustness and timeliness. By the time statistically robust results are available, which may be anywhere between three and six months after service delivery, it may be too late to implement programme changes before a new measurement cycle begins.

Hence, for more recent investments we have been looking at separating payment metrics from evaluation metrics. This means we may use leading indicators or proxies for payment measures and then a more robust holistic analysis toward the end of the programme to inform the decision on whether and how to continue.

Building on the link between social and environmental, from the inception of the NSW sustainability bond programme we have looked at all eligible assets through both lenses before deciding if the case is stronger for social or green. One of the first assets we included in the programme was Sydney Metro Northwest, which is very clearly a green project and was certified accordingly. However, once it was in the asset pool, we made a point of highlighting its social aspects in our annual report to investors.

One of the strongest social aspects of large infrastructure projects is enabling employment and training of people facing disadvantage. Through the Sydney Metro’s workforce development and industry participation programme, more than 1,000 long-term unemployed people, people with disabilities and young people not in education, employment or training were employed and upskilled.

In our impact measurement work, we come back to the core principle of listening to and involving stakeholders. If we are seeking to understand impact, we need to put parameters on who judges the value of a programme or service.”

TRAN Social Ventures Australia (SVA) has also been heavily involved in the development of the social impact bond (SIB) market since Australia’s first SIB in 2013: the Newpin social benefit bond in NSW. We play an intermediary role between government, service providers and investors, establishing and managing SIB arrangements.

SIBs are an example of where private capital can play a valuable role in helping to finance social service programmes: by stepping in to share the performance risk. This supports innovation, and helps services learn and scale up what works to drive better outcomes for participants.

The programmes delivered through our nine SIBs to date cover a range of social issues, demonstrating the model can be applied to funding services across education, out of home care, homelessness, recidivism, employment for people experiencing disadvantage and mental health.

ISSB standards and modern slavery

The publication of International Sustainability Standards Board (ISSB)’s first standards has turbo-charged environmental reporting. The consequences for social impact measurement are also significant.

PLAISANT MILLECAMPS ISSB has recently published its standards 1 and 2. Is any part of these applicable to reporting standards relating to human capital and human rights?

TURNER I think what ISSB confirms it will do next will be interesting for social issues. It is currently considering a range of issues, including human rights and human capital. Another hat I wear is chairing an initiative called Investors Against Slavery and Trafficking APAC, and we are advocating for there to
be some social standards in the next tranche of work.

Much of standard 1 is focused on disclosure of frameworks and processes. As an investor, we also need to see how the policies and procedures are moving toward outcomes-based measurement.

An example I would use is that it is great to see a company that has a modern slavery policy and therefore ethical procurement standards in contracts, but the number one question we ask companies we engage with is ‘have you found any instances of modern slavery in your operations or supply chain in the last 12 months?’ There are 50 million victims and we know this is likely to be sitting in the supply chain of every company.

We need to get to the bottom of whether companies are box ticking or really working on finding the issues. I would therefore like to see more outcomes-based metrics.


We almost view modern slavery as the 'scope-three of social', given we are already doing the work to understand the carbon impact of our supply chains. We can also find out if their procurement policies meet our requirements.


WARD There is another aspect to social, which has been mentioned by Adam: personal values.

There have been some great examples of the link between the green and the social outcomes of a project like the Northwest Rail Corridor. But if we take an example such as a healthcare, for instance a pharmaceutical company that is undertaking medical research that will reduce healthcare costs overall – most of us would say this is a great investment. However, some clients have religious-based values and may have an ethical objection to other things the same company is researching.

As an investor, I may not agree with the values of my client but I must respect those values and where the money I am investing is coming from. There is a values input to social that doesn’t arise in the same way in green investing.

TRAN Personal values is an important element of measuring social impact. People have different values, and we place different value on various social impacts. This is a challenge in applying standard measurements to social change.

In our impact measurement work, we come back to the core principle of listening to and involving stakeholders. If we are seeking to understand impact, we need to put parameters on who judges the value of a programme or service, or a social impact investment.

To us, this is the beneficiary of the programme or the people that are affected by the change. What the beneficiary judges the impact to be should inform how impact is measured and reported. We come back to this principle to help us understand what the reported value of a social change should be.

TOOHILL Through an Indigenous-relations lens, we need to think about the concept of free prior and informed consent. When we reflect on the principles set out in the UN Declaration on the Rights of Indigenous Peoples, we recognise that financial institutions need to better understand the concept of free prior and informed consent, and how it can be built into their operations – including lending decisions.

There are no easy answers, but we need to engage and listen so we can better assess. It is interesting that we can talk about ascribing a number to values, but sometimes it is excellent judgment that will inform the value of an outcome as well as positive or negative social impacts.

“One reason social is not featuring highly is that there is not sufficient governance and measurement yet. We can take politics out of some of the investment decision-making in infrastructure when we embed sustainability into governance.”

PALMER Earlier this year, the NSW government published an ESG review of the investment funds managed by TCorp. The independent reviewer, Pru Bennett, called out the idea of value versus values. That is, value from a financial outcome perspective as compared with specific investor beliefs or desire to achieve societal outcomes.

For example, when I receive my superannuation maybe I want to have the highest possible return on my investment. However, my values might prompt me to ask ‘at what cost?’ The value versus values issue is not an easy question to answer, and it will differ from entity to entity. We work with entities across the investing spectrum and find, for example, that the philanthropy sector may be highly motivated around a more complex set of outcomes than just dollar value return.

VISE In our reporting, it is interesting to see where we get traction and where we don’t when it comes to values and value.

The philanthropic market finds values really attractive because it reflects the values of the individual – it is not intermediated. We have had success with our mutual capital instruments in the high net worth market because we are able to connect with individuals on their wealth as well as their values.
The importance of value for everyone else is interesting. Our CSV is a central element of our investability for institutional investors. But when we talk to super funds, they are ‘no’ on the sole purpose test unless we prove that we are providing at least equivalent on financial value.

This is important. Social does not mean a trade-off to philanthropy and charity; it should be a signal for businesses that are in the world of providing social service, showing we are providing value to our customers as much as we are charging. We have had more success in engaging with super funds when we show that we are delivering more value, more growth or more opportunity in the sectors in which we operate.

Plaisant Millecamps How was Australian Unity’s CSV framework developed? How did it come up with the wellbeing factors?

VISE The starting point was to decide what we were going to measure. As an organisation, we are focused on people and impact. We have always reported on our impact to our board as we justified our various activities. The board members said they would like us to find a way to measure this impact effectively.

We then asked ourselves what we would measure. Australian Unity had already been measuring wellbeing via the Australian Unity Wellbeing Index for the past 22 years, in partnership with Deakin University, so we had a good sense  of how wellbeing performed through various events for the community.

We knew we wanted to measure wellbeing and how value shows up in improving people’s lives. We engaged SVA, and it became clear that social value is a good framework for assessing outcomes for stakeholders.

The federal government’s “measure what matters” living framework has 50 clear outcomes that matter from a public policy perspective. We measured 220 stakeholder outcomes across our business lines. Because we work with the Commonwealth government, we took an extra step and added a value measurement to ascertain the more and less material aspects – in a value sense – to our stakeholders.

By attributing the value to our stakeholders of things that show up in community and social value, effectively they are aligned to wellbeing. This enabled us to break down the areas of impact. We identified three key areas of material impact, and six specialist areas within these, that we believe to be important to our purpose and achievement of our corporate strategy.

Ultimately, it comes back to the wellbeing insights of thinking about subjective outcomes for stakeholders, and having accountability that wellbeing can be measured, change over time and show up as social value.

Plaisant Millecamps What methodology did SVA use for measuring impact?

TRAN The work we did with Australian Unity was informed by our experience measuring the value of a range of community programmes across the social sector.

In particular, we drew from the social return on investment (SROI) methodology, which is an internationally recognised framework for measuring and accounting for the broader concept of value. It can cover social, environmental, cultural and economic values. This allowed us to put a financial value on the social and community impacts created by Australian Unity so it could be better understood, reported and tracked against.

At the beginning, we spent a lot of time across the business units to understand their products and services, as well as what they believe to be the social impact of these products and services to members, customers, employees and the broader community.

This was followed by further interrogation to ascertain how the organisation can be confident it has created social impact – for example, is there feedback from customers or data from the business that can speak to how much impact is created? We then used our best knowledge about the impacts to estimate a financial proxy for the value of the impact to the stakeholder.

One of the principles in the CSV framework is to avoid over-claiming. There are therefore additional steps that ‘discount’ the value claimed by Australian Unity, which consider whether impact would have happened even if Australian Unity’s activities had not taken place, and the proportion of outcomes that should be credited to the contribution of others. This helps us better isolate and report only on the social value that Australian Unity is uniquely responsible for creating.

This is the third year we have worked with Australian Unity to report on its CSV, and the framework and data continue to improve. One of the ways we can reduce the learning curve for other organisations that may be going through a similar process, as well as building capability in impact measurement and holding ourselves to account, is to be very transparent about the methodology. To this end, we have included a lot of detail about the CSV methodology in Australian Unity’s impact report.

“I believe social and the environment are inextricably linked. Unfortunately, all too often they aren’t considered this way and climate change can often be looked at to the exclusion of other issues. I can visualise a future where we have decarbonised but a huge amount of inequality has been created.”

Swiss How does Australian Unity’s approach to impact measurement compare with what NSW Office of Social Impact Investment uses?

SIMIC The type of social impact investments we facilitate through the NSW Treasury’s Office of Social Impact Investment is payment-by-results (PbR) contracts and SIBs.

We look at these investments via four pillars: preventions and early intervention, innovation, partnerships and outcomes. The first pillar is whether we can shift expenditure from acute services to early intervention and prevention. Then we consider whether we can deliver this through innovative programmes and funding arrangements to establish an evidence base of what works. We do this via partnerships with the for-purpose and for-profit sectors, leveraging their expertise and capital. The fourth pillar aims to show whether we are making an impact. To do this, we embed outcomes in the contract, and measure, report and pay on them.

Through early intervention and prevention, we aim to reduce avoidable usage of government services such as justice, specialist homelessness services and emergency room presentations, by enabling NSW residents to achieve better outcomes for themselves. This can mean achieving stable housing, engaging in education, employment or community health services.

Therefore, when structuring social impact investments we seek outcomes that link back to government service usage. But when it comes to evaluating a programme delivered through a PbR or SIB, we look at a much larger suite of measures.

To give an example, we have a programme delivered in partnership with the NSW Ministry of Health for palliative care, called Silver Chain Community Palliative Care Service. There are two objectives: to improve quality of life for people during their last phase of life by caring for them in a community setting and to support them to die in the place of their choice.

What we measure for our payment metric is use of hospital services. But when we are looking holistically at the whole value of this programme, we also use qualitative measures, including structured interviews with patients’ carers on their experience. We measure and report on a much broader system of social outcomes.

Swiss The Infrastructure Sustainability Council was set up to ensure infrastructure delivers cultural, social, economic and environmental benefits. One of the key tools offered is the IS rating scheme. What kinds of social elements are rated and what metrics are used?

SIMPSON The IS rating scheme has been in existence since 2012 and it has been deployed on about A$294 billion (US$187.6 billion) of assets across Australia and Aotearoa New Zealand. From a social perspective, I agree with Katherine that the ability to measure is growing – a strong evidence base is emerging. However, while some features are measurable they can’t always be easily monetised.

An example is stakeholder engagement, which is one element within the social theme. In assessing this, we look at the engagement strategy and how a company or project team identifies who its stakeholders are so it can understand what they value and what kind of impact and benefits can be created. We also consider heritage, which includes First Nations people and their connection to country.

We also assure workforce outcomes. As Adam has said, social is all about people. In the built environment, many of the ways in which we deliver value and impact are through a highly engaged workforce. Here we consider skills requirements, creation of long-term careers as well as jobs, diversity and inclusion, and workforce wellbeing and culture.

Legacy is another consideration. The way we measure legacy is looking at how an asset might be delivering benefits that are not solely for the purpose for which it was designed. Sydney Metro is an excellent example. The intent was to streamline traffic congestion and get greater throughput into the economic centre. But there were job and skills outcomes as well as incredible community engagement outcomes, such as embedding STEM from a programme that focused on increasing and reaching school students.

Some of the governance elements we measure are sustainable and social procurement practices. Here we look at how local employment opportunities are created and local business, including social enterprise, are engaged. This is a very clear and defined policy outcome that can be delivered.

Resilience is critical, so we consider the resilience enabled by an asset for the community it serves. How will the community function in response to shocks and stresses?

Something we look at right from the feasibility or business case planning stage is benefits realisation. This involves how the asset owners are making sure the benefits are going to come to pass not only from an economic perspective but also when it comes to the social and environmental aspects.

Swiss How do investors go about measuring the social aspect of instruments such as UOP or sustainability-linked bonds?

WARD Whether we are talking about green, social and sustainability bonds or sustainability-linked instruments, we have an investment standard that guides the minimum structural requirements we will accept on a deal. It starts with credit approval of the issuer. We are not just buying because the security has a green or social label.

If I put a credit analyst hat on, it is far easier for me to look at a green asset pool and understand how I can value the underlying assets that are being funded. If I’m looking at something like solar panels or LED lights going into buildings, I know there is something physical from which I can recover value if I need to. I can see the cost savings for the issuer and how I am going to get repaid. There is also the science element to it that we have talked about. It is an easier decision than a deal that has social elements.

Take education improvements. Longer term, I can see the benefit for society in improving education standards. But I have to rely on the creditworthiness of the bond issuer, because I can’t see how a child is going to pay me back in the five-year time frame the bond is in the market for.

From our perspective, when we look at the pure social bonds that have been issued we are in in a lucky position because they largely come from government or supranational issuers – this kind of financing is core to their purpose. They are the ones that are going to be paying us back. We would have to really think hard about a pure corporate issuer of a social bond.

Having said this, there are plenty of areas where private sector finance can support government policies. We are in a lucky position in the sense that we are close to government but we are also looking after private sector financing. There are various ways to support social investment but it is much easier if the underlying creditworthiness is that of government or supranational entities.

“Given the nature of the Sydney Metro project it would have been easy to just consider the green aspect or even just the environmental component in the SLL. But the sponsors were keen to also address and link social objectives and impacts from the project.”

TOOHILL A relevant issue here is the concept of just transition. When we consider the social impact of climate change and how best to assess it, we can make it more tangible by taking a place-based approach. By looking at the challenge of just transition in a place or region, we can consider a specific community and a set of values. This is when it becomes more real, and investors and others can understand it and test real solutions.

Once the different stakeholders come together about a place, we can begin to assess the social outcome we are looking for. Then we can structure the finance accordingly and understand the role of government, other financiers and other actors in relation to that place. Tailoring solutions for particular regions or places will be very relevant for just transition.

TURNER The majority of our funds are not labelled as sustainable – they are mainstream products that integrate sustainability. Our credit analysts seek to identify ESG risks alongside other risks. As Marayka described with QIC, our starting point is to look at the issuer. Our credit analysts give an internal credit rating and as part of this they will assess how an issuer is managing ESG risk overall.

Some issuers might have more exposure to environmental or social risk so there might be more emphasis on one of the elements of ESG – depending on its materiality for a particular company.

Quach If analysts include issuers’ overall sustainability strategies as a component of their standard credit assessments, does it sustainability label?

TURNER I wouldn’t say a label makes things more difficult. There are many advantages of having a label, including third-party assurance and a robust framework.

WARD I have always been a fan of the sustainability bond because I view it as an easy way to sneak social financing in without having to go out on a limb with a pure social bond.

Labels are great because many investors have signed up to net zero asset initiatives. I’m wandering into the environmental space here, but an example is that we are working through the Investor Group on Climate Change’s net zero framework. Under the framework, we have to decarbonise bond portfolios but we also have to show increasing investment in sustainable finance. Labelled securities are one of the few ways bond investors can really demonstrate this in the Australian market.

We also need to balance criticism of getting involved in policy as well, when we are meant to be financial investors. A few of us are involved in the PRI sovereign engagement pilot. This is the first time the PRI has engaged with a country – and it picked Australia as the pilot.

Some media have suggested this is stepping into the policy arena. But, as a bond investor in Australia, I have little choice but to hold Australian government bonds – and my ability to decarbonise my portfolio is therefore heavily influenced by the country decarbonising. The ability to get involved in these discussions with government, where I’m potentially carrying risks beyond the political cycle, is really valuable. I think this is something we have to get involved in.

Swiss Are social factors part of this engagement?

WARD It is a climate focused engagement. But the inextricable link between social and environment is well recognised and accepted. It’s a very two-way engagement process.

TURNER I often say that, in an ideal world, my job wouldn’t exist – because investors would all be integrating ESG into their investment decisions and my role would be redundant. I think the same goes for labelled products. In an ideal world, they wouldn’t need to exist. Maybe we will get there one day, but until we do there is a real need for them.

PALMER I agree. The sustainability bond programme we set up was always a first step because our priority is ultimately how we are viewed as an issuer overall. Credit rating agencies are already assessing issuers holistically based on ESG parameters, not just for the bonds issued under dedicated programmes. These assessments, by agencies and investors alike, consider the policy framework and evidence of progress in this space.

In the meantime, one of the differences between Tcorp’s labelled bonds and general purpose bonds is that with the labelled product investors are getting transparency every single year in the form of the annual report on specific projects underpinning the bond.

This makes it easier for investors to say what they are invested in and what improvements are being made. A labelled bond gives investors a narrative straightaway, as well as certification and alignment with international principles. Hopefully, we meet most investors’ requirements. We will never be able to meet them all because, going back to the concept of value and values, some investors may have a different set of values.

TOOHILL This takes us to that beautiful word: taxonomy. Last year, Westpac Banking Corporation put out a paper on how we are thinking about a sustainable finance taxonomy for our own organisation. And, of course, the Australian Sustainable Finance Institute (ASFI) is working with Treasury on a national taxonomy. Westpac’s approach includes looking at the social dimensions of affordable housing and diversity. But it will be interesting to see how, as a nation, we will face into this and how we set the tone of what we mean by social finance.

“Through early intervention and prevention, we aim to reduce avoidable usage of government services such as justice, specialist homelessness services and emergency room presentations. When structuring social impact investments we seek outcomes that link back to government service usage.”

Palmer Is your intention that the Westpac taxonomy will be aligned with the national one? Through ASFI, there is a lot of discussion about the importance of the interoperability of taxonomies and the importance of having a common language.

TOOHILL We are mindful that the ASFI project still has a way to go, so the purpose of working on our taxonomy is to reflect on and strengthen our own sustainable finance targets. We want to reset these because they have been very narrow.

We engaged with the regulators on developing our own taxonomy. Our idea is to release our framework to the market so we are clear about how we are assessing the different dimensions of sustainability, including social. This is also an important step to address greenwashing risks. We will continue to engage with ASFI and we will aim to align with where it lands with the national taxonomy.