In July of this year, delegates across the Insurance, Banking and Investment industries, representing around 300 institutions and over $10 trillion in assets, released a joint statement  in support of a sustainable financial system for Australia and New Zealand.
The statement was released at the end of the 2018 UNEP FI Conference in Sydney and sets out a Sustainable Finance Roadmap commitment with recommendations on policy, regulation and practices for the finance sector to transition to a more resilient and sustainable economy.
A Sustainable Finance Roadmap is a set of actions (in the form of commitments, policies and practices) taken to transition to a more sustainable and resilient economy. This means factoring sustainability issues (Environmental, Social and Governance) into financial decision making and ensuring investment and lending practices account for the long-term impacts that business activities have on society.
Given the revelations uncovered around systemic failures in governance across the Australian finance sector in the Royal Commission, coupled with an increasing number of urgent issues that are impacting business and society such as climate change and modern slavery, the time is ripe for a shakeup of business and the regulatory framework under which it operates.
In the context of sustainable development and measuring risk and impact across ESG issues, the finance sector represented by insurance, banking and investment, is often clumped together for comparison. Although it’s not entirely fair to paint the finance sector with such a broad brush when you’re looking through the lens of ESG issues, in terms of creating a resilient and sustainable economy, there are key lessons that each of the streams of finance can learn from each other, and key principles upon which a sustainable financial economy can be built, and much of that was discussed in this UNEP FI forum.
Financial Lending and Investment: incorporating a sustainability lens
Reiterating the Why
Within the ESG community, arguments for why sustainability is good for finance and better for investment have been made convincingly, but it’s fair to say that we’ve done a pretty bad job of communicating these arguments to the wider finance community. Case in point, I sat at this UNEP FI conference and watched a banker google “What is ESG”. So shame on us for the terrible PR and convoluted acronyms.
It’s worth reiterating some of the agreed reasoning in favour of sustainable finance:
- Environment, Social and Governance (ESG) issues that form part of a company’s core business strategy, and that are aligned with the company’s financial goals, are more closely embedded in a company’s core values. These businesses tend to have better financial performance over time, largely because these companies are inherently better at flagging systemic risks and recovering when things go awry.
- In addition, they have more involvement in and less adverse impacts on the communities they work in, and more people want to work for these companies for longer. Quite a lot of others reasons ensue, but these arguments establishing that “there are reasonable returns on good ESG performers” are easy to investigate and many amazing industry and academic papers say the same .
Additionally, because ESG issues flag systemic risks and opportunities in company activities, some countries are and have introduced legislation and policy instruments which clarify that fiduciary duty requires investors to take account of ESG issues in their decision-making processes. The Principles of Responsible Investment has research on this, and the EU has recently passed legislation that links financial decision making and extra-financial issues .
Where are we at now?
RIAA provides a detailed list of the drivers for development in its Sustainable Finance Roadmap briefing paper . In summary, it looks at 10 key components (in no particular order):
- Clarifying investor and director duties
- Improved disclosures on sustainability and climate risks
- A sustainable finance taxonomy
- Enabling consumers to align their finances with sustainability
- Government (state and federal) role in building the sustainable infrastructure pipeline
- Aligning finance with long term goals
- Setting standards for sustainable investments
- Supporting social impact investment
- Building sustainability into the role of regulators
- Appropriate skills in leadership in finance
These 10 key components were discussed at the conference, and it was clear that participants viewed all of these aspects as essential and important to the development process.
The level of engagement and participation at the UNEP FI conference, alongside what we observe working with the responsible investment community in the implementation of strategies that align with global norms such as the SDGs and TCFD, are good indicators that there is a desire from the finance sector to engage in maintaining a sustainable and resilient economy for the benefit of corporations and all of their stakeholders. Quite a lot of work is happening already amongst investors to combat urgent sustainability challenges such as climate change and modern slavery.
Signatories to the joint statement include the Investor Group on Climate Change (IGCC), the Principles for Responsible Investment (PRI), the Responsible Investment Association Australasia (RIAA), UN Environment’s Principles for Sustainable Insurance, and the UN Environment Programme Finance Initiative (UNEP FI).
This leadership is an essential driver for change, and success will come down to how effectively these components are used to mitigate risk and accelerate sustainable development opportunities in Australian and New Zealand.
We look forward to seeing how it develops and how CAER can contribute as an organisation.
Interested in discussing this issue further? Feel free to get in touch.
References Joint statement in support of a sustainable finance roadmap for Australia and New Zealand:
http://www.unepfi.org/psi/wp-content/uploads/2018/07/Statement-for-a-Sustainable-Finance-Roadmap-July-2018.pdf (accessed 26/10/2018)  S&P Global – https://www.spglobal.com/en/research-insights/articles/ESG-Investment-Returns-Starting-to-Outperform-Other-Mutual-Funds-ETFs; Forbes – https://www.forbes.com/sites/georgkell/2018/07/11/the-remarkable-rise-of-esg/#6a69c9f16951; ESG Shareholder Engagement and Downside Risk – https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2874252 (accessed 26/10/2018)  PRI – https://www.unpri.org/fiduciary-duty/the-changing-landscape-of-fiduciary-duty/248.article; European Commission Brussels, 24/05/2018; https://www.ipe.com/news/esg/eu-considering-sustainable-investing-as-fiduciary-duty-for-investors/www.ipe.com/news/esg/eu-considering-sustainable-investing-as-fiduciary-duty-for-investors/10021736.fullarticle (accessed 26/10/2018)  UNEP FI Sustainable Finance Roadmap Briefing Paper, 2018 – http://www.unepfi.org/fileadmin/events/2018/sydney/2-Sustainable%20Finance%20Roadmap%20BRIEFING%20PAPER.pdf (accessed 26/10/2018)