The Australian Prudential Regulation Authority has cemented the importance of ESG in new guidance on investment governance for superannuation funds but needs to be clearer on terminology.
The Responsible Investment Association Australasia (RIAA) said new guidance on investment governance sends a clear signal that factoring in ESG issues, and tracking how companies perform against them, was now integral to how superannuation funds should operate.
Speaking to ESG Investor, Susan Quinn, Head of Policy and Advocacy at RIAA, said it was great that the draft APRA SPG 530 Investment Governance identified ESG considerations throughout the investment lifecycle. “We know that you can’t manage what you can’t measure. APRA’s setting a clear direction that super funds should be able to demonstrate the outcomes of responsible investment approaches. It highlights how important responsible investment approaches really are – for fund members but on broader social, environmental and economic indicators.”
She added that RIAA was pleased that climate risk was highlighted as a specific consideration in investment risk.
But while the RIAA has welcomed the draft guidance it noted that the Australian Prudential Regulatory Authority (APRA) wasn’t consistent in its use of ESG-related terminology. Quinn said: ‘”It’s great to see ESG issues elevated in the revised guidance. But clarity is really important when we’re talking about responsible investment, whether we’re talking ESG integration, screening, impact investing, stewardship or other approaches. Looking globally, regulators have called on industry to agree on key terms. That’s a huge challenge.”
She said that RIAA was working the UN Principles for Responsible Investment (PRI), CFA Institute and others to develop some agreed key ESG terminology. “APRA could look to this, and past work by the PRI, to ensure the guidance is clear on the role of ESG issues in investment governance.”
Wider definition of stewardship
Meanwhile, the Australian Institute of Superannuation Trustees (AIST) has said APRA needs to be clearer on its definition of stewardship considerations in its guidance, warning there is a risk it might be read as confining stewardship to just proxy voting. “We suggest the SPG recognise a wider definition of stewardship that includes other stewardship activities such as engagement, policy and advocacy,” says AIST.
AIST also said if APRA is encouraging disclosure of stewardship activity, it should provide guidance on the appropriate level of disclosure, noting, “better practice is likely to involve disclosure in line with an existing stewardship code”.
The draft guidance is due to be finalised in Q2 2023.