This article forms part of CAER’s ‘Responsible Investment Agenda 2019 – A Work Plan for Australian and New Zealand Investors’ Report
As the availability, use and impact of environmental, social, and governance (ESG) research continues to grow so too does its impact on investment decision-making and the development of new models for risk analysis. Out of a turbulent year that has included a Royal Commission into banking, the legislation of a modern slavery act, and increased dialogue on the urgency of climate action emerges a greater alignment between the long-term goals of the responsible investment (RI) industry and the overall economy.
Building upon a rich dialogue within an increasingly sophisticated RI market, CAER presents our second Responsible Investment Agenda report highlighting our key ESG considerations for the year ahead. The report supports our mission to broaden the reach of responsible investment through the provision of high-quality ESG research by reflecting upon issues that we see as influential to ESG analysis and thinking.
While identifying ‘trends’ in ESG can be counterintuitive to creating and sustaining holistic thinking and decision-making by investors, this report aims to encourage clarity and criticality in the ESG approach of investors in 2019. It is also our hope that issues discussed in the report facilitate healthy debate among the broader investment community.
In addition to discussing five specific issues influencing the RI market this year, we have identified a number of broader changes taking place that investors should consider.
The proliferation of ‘greenwash’ across mainstream investment offerings?
In 2018, the Responsible Investment Association Australasia (RIAA) reported that 55.5% of total assets managed in Australia were covered by a Responsible Investment (RI) strategy. Representing $866 billion, the majority of this group (78.5%) was covered by a broad RI strategy, such as ESG integration, whilst the remainder used a core RI strategy, such as screening, sustainability-themed or impact investment. These findings note that majority of investment offerings in Australia now constitute considerations of ESG risks.
However, alongside this increased consideration has come concerns of a rapid proliferation of ‘greenwashing’ – that is, the marketing of mainstream investment products as ethical, sustainable, or otherwise ‘green’ as part of a key sales strategy without applying or changing the product process and/or outcome. Regardless of whether the product meaningfully integrates ESG, investment houses have become well versed in the packaging and description of traditional investment products according to their perceived RI traits.
These strategies correlate with the demands of an incoming demographic of millennial investors. According to the Legg Mason Investment Survey of December 2018, millennials are more likely to invest in ESG products than their previous generational counterparts. The annual survey, which captures the perspectives of 17,000 investors across 17 markets, found millennial investors leading the call for ESG, ranking environmental impacts as the most important aspect of ESG for long-term investing.
As noted by Anthony Serhan, former managing director of research strategy Asia-Pacific at Morningstar, “There has been a lot of ‘green washing’ of investment options just to capture this demand and broadly, the industry has not done a good enough job educating investors on what is a meaningful way to invest.” 
There are signs that the RI industry is starting to consider this challenge through the tightening of RI benchmarking frameworks, such as the PRI setting minimum standards of ESG integration for signatories. But more work is required to ensure the integrity of mainstream ESG offerings. In cases such as the 2018 Climate Change, Superannuation and Millennials report published by the Future Business Generation and EY, the push is coming from millennial investors within the RI industry regarding what meaningful action on climate change looks like in terms of specific investment actions. The authors of the report have noted that they will consider benchmarking superfunds against these actions in the future. As greenwashing appears to proliferate, investors are consequentially tasked with ensuring renewed rigor in ESG integration as well as increased transparency of RI strategies. This means interrogating the intended and actual impacts of ESG products and evaluating how fit-for-purpose RI strategies actually are in light of the real socio-political and environmental concerns we face. The increasing sophistication of RI investors in this area suggests that those who do not evaluate the effectiveness of their RI strategies against their impacts will be left behind among a new generation of investors and superannuation members.
Working with companies in an era of ESG regulation
The development of regulatory interventions regarding ESG risks indicates a distinctive shift in the mainstreaming of ESG while also ushering in a new framework for discussion between RI investors, investee companies and regulators. This shift highlights a number of important considerations for investors.
Who is responsible for driving change?
Whilst consumer groups and NGOs often carry the baton for raising awareness, there is an increasing need for RI investors to become active participants in advocating ESG-based policy measures, particularly when policy outcomes are uncertain. Where investors do not assume this mantle, and consumer groups fail to secure adequate audience, other actors rise to fill this gap and influence policy-makers.
The current debate in Australia regarding the tax on sugar-sweetened beverages provides an example of how other actors can influence public policy against ESG-aligned outcomes. Despite the endorsement of the World Health Organisation and a coalition of 34 health and medical groups – such as the Obesity Policy Coalition, Cancer Council, Royal Children’s Hospital and the Stroke Foundation – calling for a tax on sugary beverages, industry associations such as the Beverages Council and the Australian Food and Grocery Council continue to campaign against the measure.
Some industry associations have explicitly disclosed intentions to disrupt ongoing policy discussions in this space which raises the question, whose interests are represented in policy debates around long-term ESG issues? How can RI investors participate meaningfully in these conversations? These
issues challenge existing mechanisms of ESG integration – such as voting, engagement, and company research – to counter complex socio-political risks that are inherently values-based. They also indicate that an RI investor that is committed to stewardship cannot shirk away from advocacy on key issues, and must instead acknowledge the widening parameters of their accountability through considered action.
What issues should we act on?
RI investors grapple with a multitude of ESG issues each day. Whilst most issues present possibilities for further action – either through investment decision-making, voting, advocacy or company engagement – it can be difficult to identify which issues are the most urgent.
Recent ESG issues that have gained traction beyond the RI market, and eventually resulted in broader policy-based change, suggest that there are a number of confluent factors that result in an ESG issue having material long-term consequence. Some of the factors that CAER has noticed are listed below:
- Investors, civil society, NGOs, and special interest consumer groups share concerns regarding the issue and are able to provide reliable statistical and/or anecdotal evidence regarding the impacts of the risk.
- Controversies surrounding companies embroiled in the ESG risk are globally known and have cultivated strong opinions from consumer groups, including boycotts and ongoing campaigns to disrupt operations.
- Companies involved in the issue are not able to provide sufficient assurances through investor disclosure that the risk is being adequately managed.
- The issue has been addressed in comparable jurisdictions and through regulatory mechanisms that can be feasibly implemented in Australia (and possibly have been raised before in Australia).
The introduction of a Modern Slavery Bill (the Bill) into Australian parliament in November 2018 provides a key example of the kind of ESG risks that showed all of the above characteristics and eventually gained traction to effect policy-based change. Other ESG issues with such characteristics include climate change, plastic pollution and sugar.
While it is not exhaustive, the above list asks investors to consider the threshold factors that suggest an ESG-risk may become an economy-wide and globally acknowledged threat to civil society and the economy.
What information do we need?
It is clear that greater investor attention on ESG risks can build towards systemic policy changes, shaping the conversation between investors, regulators and investee companies. Whether the voice of RI investors on key issues can reach a critical mass remains the challenge.
Climate change represents an area where investors, alongside NGOs, civil society organisations and even companies, have been more active in their efforts to drive policy change and seek information that is consistent and relevant to decision making.
The Task Force on Climate-related Financial Disclosures (TCFD), established in December 2015, now has more than 500 signatories who have agreed to report against the voluntary disclosures it has put forward. While the recommendations made by the TCFD have been welcomed by the Australian government alongside an agreement in principle to related recommendations made by the Australian Securities and Investments Commission and the Australian Stock Exchange, further law reform regarding the disclosure framework has not been indicated. Most RI investors agree that while the TCFD is a step in the right direction, much more needs to be done in providing a detailed framework or strategy for companies and investors to disclose climate risks.
In such an environment, it is
imperative that investors specifically outline the information that they need
to make informed investment-decisions, lest the dialogue be swayed by an influx
of information that – whilst readily available – adds little to our understanding
of the risk.
Actions towards an RI/ESG integrated investment industry
Considering both the concerns of ‘greenwashing’ and simultaneously the deepening accountability for ESG placed on companies by regulators and broader stakeholder groups, investor behaviour is – as always – pivotal towards the development of a cohesive and integrated RI industry. An enhanced maturity and quality of conversation between investors and companies is paramount to the next phase of RI development.
The PRI has indicated that signatories will soon be required to meet minimum requirements of responsible investment to remain compliant, thereby increasing accountability against the voluntary scheme. Separately, the Future Business Generation has outlined its expectations of superannuation funds regarding climate change risk mitigation in its inaugural report. The report calls for funds to provide evidence of portfolio-wide risk assessment using forward looking climate scenarios across all asset classes and sectors, as well evidence of the active assessment of asset managers’ climate risk management.
In such an environment, CAER has identified the following actions as integral for RI investors in 2019.
- Ensuring rigour and clarity regarding the appropriateness of RI strategies relative to desired outcomes.
- Sense-checking whether RI products meaningfully deliver the impacts they are designed to. This includes testing the effectiveness and usefulness of ESG inputs, internal and external capacities and methodologies.
- Alignment between company engagement meetings and broader global and national regulatory developments. Particularly with regards to ensuring companies are aware of investors’ expectations regarding adherence to policy, regulatory disclosures and cooperation.
- Identifying areas in which investors require a greater level of insight on an ESG issue than what is afforded through current regulatory disclosures and developing company engagement frameworks that allow for that insight to be obtained.
measures of quality and performance within internal systems to ascertain
overall RI impact.
The Impact on Investment
Overall, in 2019 investors can be more ambitious both in the quality of their internal approaches to RI and in stepping up to the role that they play in addressing economy-wide ESG risks. While regulatory demands are aligning to some areas of ESG, there are many areas in which Australian policy, and the activities of Australian companies, fall behind international policy, consumer demands and the expectations of a smarter and better informed electorate.
Simultaneously, a maturing ESG market and the ‘greenwashing’ of investment products asks investors to scrutinise the appropriateness of their ESG strategies relative to impacts, rather than to rely on the business as usual benchmarks. Like so many ESG risks, RI is also evolving, and investors must adapt to remain committed to the best outcomes for their stakeholders, the upholding of trust and long-term thinking.
CAER has identified the following specific areas as influential to the consideration of ESG and responsible investment practices for 2019.
Explore each of these themes
Interested in discussing any of these issues further? Feel free to get in touch.
 RIAA, RI Benchmark Report (2018): <https://responsibleinvestment.org/wp-content/uploads/2018/08/RIAA_RI_Renchmark_Report_AUS_2018v8.pdf> [Accessed, 17/01/2019].
 Eliot Hastie, ‘Millennial investors lead the way,’ Investor Daily (5 December 2018): <https://www.investordaily.com.au/markets/44097-millennial-investors-lead-the-way > [Accessed, 17/01/2019].
 Nicki Bourlioufas, ‘Beware greenwashing as ESG momentum builds,’ Morningstar (18 September 2018): <https://www.morningstar.com.au/funds/article/beware-greenwashing-as-esg-momentum-builds/170434> [Accessed, 15/01/19].
 CAER, Climate Change, Superannuation and Millennials (October 26 2018) <https://caer.com.au/climate-change-superannuation-and-millennials/> [Accessed, 4/02/19].
 World Health Organisation, Taxes on sugary drinks: why do it? (2017): <http://apps.who.int/iris/bitstream/handle/10665/260253/WHO-NMH-PND-16.5Rev.1-eng.pdf;jsessionid=2D53F7C8D55D3CF86068EC24B83B10B5?sequence=1> [Accessed, 15/01/19].
 Aisha Dow, ‘Hospitals and health groups demand 20 per cent soft drink tax,’ Sydney Morning Herald (18 September 2017): <https://www.smh.com.au/healthcare/hospitals-and-health-groups-demand-20-per-cent-soft-drink-tax-20170918-gyjx7i.html> [Accessed, 17/01/19].
 Governance Institute of Australia, Australians free to adopt TCFD reporting on climate risk (4 April 2018): <https://www.governanceinstitute.com.au/news-media/news/2018/apr/australians-free-to-adopt-tcfd-reporting-on-climate-risk/> [Accessed, 17/01/19].
 Principles of Responsible Investment, The PRI 2018/19 Work Programme (April 2018): <https://www.unpri.org/Uploads/o/f/f/PRIWorkProgramme2018.pdf> [Accessed, 17/01/19].
 The Future Business Generation, Climate Change, Superannuation and Millennials (October 2018): <https://drive.google.com/file/d/1ac0e1hM1lQS01W630lDTRAgF7nyqg-BK/view> [Accessed, 17/01/19].