Asia-Pacific

Keeping Up with the Neighbours 

With last year’s election of a progressive Labor government, Australia is fast playing catch-up on sustainable finance policy, as it deepens ties with sustainable finance leader New Zealand.   

The US demonstrates the swift difference progressive leadership makes in driving sustainable finance policy. Joe Biden, dubbed by some the “the first climate president”, rejoined the Paris Agreement on his first day in office and now, nearly every agency – including financial regulators and the Environmental Protection Agency – is taking steps to unwind climate-unfriendly Trump-era rules (though Republican opposition to ESG is slowing down action and Biden is continuing fossil fuel expansion in the country).   

A similar picture is emerging in Australia, where the election of Labor Prime Minister Anthony Albanese in May 2022 is driving momentum after years of stagnation on sustainability policy under former Prime Minister and climate sceptic Tony Abbott. Albanese, who last month signed a deal on climate, clean energy and critical minerals with Biden, is quickly aiming to put the country on the “right side of history” with a raft of climate, and more recently nature protection policies.  

“Leaps and bounds” 

Fiona Reynolds, former Chief Executive of the UN Principles for Responsible Investment (PRI) and a director of the Australian Sustainable Finance Institute (ASFI), tells ESG Investor that action on sustainable finance policy is happening very quickly.  

“Within 12 months an incredible amount has happened,” she says. “When I first came back from living in the UK and being in Europe, I just felt ‘oh my God’ Australia was so far behind on everything.  

“But now we’ve really come along in leaps and bounds in the last 12 months. That doesn’t mean that there’s not a lot to do. But the pace is strong. There’s a different vibe from the former government who was very anti-sustainability to a very pro-sustainability government.  

“The whole mindset has shifted.” 

Reynolds says this movement is important for Australia given its unique economy as a large net exporter, with net exports equating to over two-thirds of production.  

“We need to be thinking long-term about what is the future of the Australian economy,” she says, adding that such forward-thinking is important for Australia’s large pensions industry, which is the biggest in the world and continuing to grow. Locally called superannuation, the pension fund market in Australia is currently valued at around A$3.35 trillion (US$2.2 trillion). 

Resource and energy make up a substantial amount of Australia’s exports and have seen a boon in the wake of Russia’s invasion of Ukraine. Australia is forecast to earn US$302 billion from resource and energy exports, reports Energy Monitor. In February 2022, earnings from Australian liquefied natural gas exports trebled from 2020-2021, reaching A$91 billion and thermal coal exports are poised for an increase too, to A$65 billion, up from A$16bn in 2020-2021.   

It’s a very different situation for Australia’s neighbour New Zealand.  

“From an economy-wide perspective New Zealand investors are less exposed to high carbon emissions or hard-to-abate sectors, just due to the nature of the economy,” explains Estelle Parker, Executive Manager, Programmes at Responsible Investment Association Australasia (RIAA).  

Last month, the two countries signed an agreement to tackle climate change collaboratively alongside other Pacific countries. New Zealand’s Minister for Climate Change James Shaw tells ESG Investor that Australia and New Zealand have a uniquely close relationship.  

“2023 is the 40th anniversary of Closer Economic Relations,” Shaw says. “By working together we can achieve more. The window of opportunity is closing, but it’s still there. As climate change is the single biggest issue, we confront singularly and together, we know that the future of the Australia-New Zealand relationship, of our economies, and our people over the next 40 years will be increasingly defined by the state of our planet.”  

Prime minister Albanese takes an equally strong stance, at least in public statements, on the urgency of tackling climate change, supporting an unusual interventionist role on the issue for its head of state King Charles for example. 

Australia’s sustainable finance strategy  

Albanese’s stance is also reflected in the fast-moving pace on sustainable finance policy in Australia, helped by the finance sector’s commitment to the agenda during the years of government indifference, explains Reynolds.

“Under the previous government, that was around for about 10 years, there really was a lot of stagnation on sustainability. Compared to countries like Europe, Australia was doing very little. Thankfully the finance industry didn’t do that.” 

ASFI started back in 2021 on a sustainability roadmap for Australia, including a taxonomy and other sustainable-related policy initiatives.  

“It was a really smart move,” says Reynolds. “When the government came in a year ago, the finance industry under ASFI which covers the banking sector, the insurance sector, the investment sector and the superannuation [pensions] sector liaised heavily with the new government on this.” 

There was already a first draft of a sustainable finance taxonomy, explains Reynolds, and now the Australian government is providing funding for the next stage of the taxonomy’s development. She says ASFI will be learning from what other countries have done on “what to do and what not to do”.
She adds that Australia’s taxonomy must have as much interoperability as possible with others, while also being mindful of its resource-focused economy and the climate transition underway.  

Kirsty Graham, inaugural CEO of ASFI, which was established by 21 financial institutions including super fund Hesta and insurer QBE, agrees that the financial sector recognised the need to keep up with global developments on sustainable finance and established ASFI to act as a bridge to government.   

“We are very much modelled on the UK’s Green Finance Institute,” explains Graham. “And what’s recently shifted is the new Australian government being elected in May last year, which has made clear that sustainable finance is a key part of the Treasurer’s agenda, with the government now willing to play a leadership role.”  

Graham says at an ASFI event in December the Australia’s Treasurer Jim Chalmers announced a sweeping sustainable finance agenda. It includes mandatory climate-related disclosures of which the consultation paper came out this month, Australia launching a sovereign green bond, regulator Australia Securities and Investments Commission (ASIC) stepping up greenwashing enforcement, work on the sustainable finance taxonomy and a scaled up international agenda.  

The Investor Group on Climate Change (IGCC), which includes Australian and New Zealand institutional investors, works closely with government and financial regulators on managing climate risk and opportunities. Amy Quinton, Senior Manager, Policy at IGCC, says this also helped lay the groundwork that the Australian government could build on for policies. On the proposed mandatory rules on climate disclosure, the IGCC is engaging closely with the government to make sure its globally consistent and aligns with new international standards such as the International Sustainability Standards Board (ISSB).

Product labelling

Australia is expected to launch a formal consultation on a Sustainable Finance Strategy in the coming weeks. A person close to the Australian Treasury understands that the ‘Finance Agenda’ consultation is likely to include disclosures, taxonomy, transition planning and greenwashing, including financial product labelling.  

Parker from RIAA welcomes the potential for a product labelling system in Australia. RIAA already runs a responsible investment label through its 16-year Responsible Investment Certification Programme, which she says has become the industry norm in Australia and New Zealand.  

“We would see great value in the government coming to a decision to have a labelling system that provides real value to investors as they’re developing products, whether it’s an impact investment product, or an ESG product etc.”  

Parker also says scenario modelling is being looked at by the country’s climate change authority, with a nature repair bill recently tabled where the finance sector is especially interested in nature credit markets and the finance sector is also interested in a mooted First Nations cultural heritage protection law.  

But as is the case with many other jurisdictions, joined-up policy thinking on sustainability is far from perfect in Australia. Parker points to reforms to the country’s ’Your Future, Your Super laws’ act, aimed at improving the accountability, transparency and performance of superannuation funds. A new review on the performance tests will include a mandated test of a super fund’s performance against a benchmark of prescribed industry indices.  

“The indices are weighted according to the fund’s strategic asset allocation, which basically means that every year the default super funds are stood against a benchmark that could provide a disincentive to some of the climate financing that the government wants,” says Parker.  

She says the government hasn’t settled on how it might reform the benchmark test to allow for super funds who want to take account of ESG factors in their decision-making. “A climate transition benchmark is one option,” she says, noting that climate is not the only sustainability issue that super funds are interested in.  

In contrast, recently introduced regulatory guidance on investment governance for superannuation funds in Australia sends a clear signal that factoring in ESG issues, and tracking how companies perform against them, is integral to how super funds should be operating, according to RIAA.  

NZ leadership 

While Australia races to embed sustainability across its financial system, New Zealand has been a leader for many years as the first country to mandate Taskforce for Climate-related Financial Disclosures (TCFD) reporting in 2020.   

Explaining the decision, New Zealand’s Minister for Climate Change Shaw tells ESG Investor the country had the opportunity to show leadership on climate disclosure and seized it.  

“We believe taking a lead in this area enabled New Zealand to leverage work in the clean and green tech space and allowed us to show the way among OECD countries in particular on the decarbonisation goals set in the Paris Accord as well as wider Sustainable Development Goals (SDGs).”   

New Zealand has also demonstrated leadership on measurement on climate risk.  

“When the TCFD was set up it was logical for us to show this leadership,” says Shaw. “New Zealand was also relatively quick (through the XRB – New Zealand’s external reporting board) to adopt the Partnership for Carbon Accounting Financials’ (PCAF) methodology financial institutions use to measure carbon emissions.”   

Mandatory climate reporting took effect in New Zealand this year, says Jo Kelly, Chief Executive of New Zealand’s Centre for Sustainable Finance: Toitū Tahua. New Zealand’s Financial Markets Authority (FMA) is currently consulting on how to maintain records by companies mandated to report and has recently published a Climate-related Disclosures Monitoring Plan 2023-2026 and information about the use of third-party providers, she adds.  

New Zealand’s government is also committed to work on a sustainable taxonomy across Australia and New Zealand to enhance interoperability, says Kelly and the NZ Super Fund has shifted about 40% of its overall investment portfolio to market indices that align with the Paris Agreement.  

The country is also upping its game on stewardship, with New Zealand’s inaugural Stewardship Code launching last year with 17 signatories, says Simon O’Connor outgoing CEO of RIAA.  

“The Code was developed collaboratively by the industry and responds to our unique context in New Zealand,” he says. “It gives more prominence to the importance of sustainable outcomes for our environment, our society, and our economy – in that order. Signatories are also encouraged to consider te ao Māori and other cultural aspects when applying the principles of the Code.” 

This could be an especially important development, given that despite New Zealand’s progressiveness on sustainable finance policy, its investment industry is displaying “a keenness for climate action but slow progress”, according to research from the Aotearoa Investor Coalition for Net Zero. It finds that New Zealand is slower even than Australia and “significantly slower” than international leaders, such as the European Union.  

RIAA and KPMG Stewardship research from 2022 on the Australasia region notes that it has a number of barriers to effective stewardship, including a lack of skills and resources and the issue of a separation between those responsible for investment decision-making and those undertaking stewardship activities.  

Another new development in New Zealand is moves to introduce modern slavery legislation. Australia introduced a Modern Slavery Act in 2018, requiring reporting from corporates and investors on slavery prevention in their supply chains. Australia is moving to strengthen this law currently, and Reynolds says she expects to see a lot more happening around anti-slavery in the country.  

2+2 Climate Finance Dialogue 

Commenting on the Australia-New Zealand 2+2 Climate Finance Dialogue, an agreement to convene annually on climate-related policy implementation, Reynolds says: “It obviously makes sense for us to work closely with New Zealand. They’re one of our closet neighbours and there is historic collaboration on sustainability issues such as Responsible Investment Association Australasia, covering Australian and New Zealand.  

“I’m hopeful in a couple of years we also align with Pacific nations within the Asia region.” 

Under the 2+2 agreement the climate ministers and Treasurers from Australia and New Zealand have agreed to convene annually, establish a joint working group to support climate-related policy implementation, and establish a Net Zero Government Working Group to bolster decarbonisation of public services, climate-related disclosures, and sustainable procurement.  

The approach is innovative in foreign and climate diplomacy, explains AFSI’s Graham, where 2+2 formats usually involve a defence and foreign minister. “This is really critical for interoperability of sustainable finance policy and regulation across jurisdictions, which will be critical to unlocking private capital for climate.”   

Graham says ASFI will continue work closely with Aotearoa New Zealand on taxonomies and sharing what Australia has learnt through the process so far as New Zealand considers what a taxonomy might look like for its economy. Work in New Zealand is expected to accelerate after its election in October.  

Another area where the countries have similar ambitions is on nature protection. Along with Australia’s nature protection bill, Parker from RIAA says New Zealand has become interested in nature-related disclosures. “Our industry in Australia and New Zealand has been very engaged with the Taskforce on Nature-related Financial Disclosures (TNFD), and the Australian government is a funding partner of the TNFD.   

“We’ve already had signs from the Australian treasurer and the environment minister that the TNFD will eventually become mandatory in Australia which I think is very unique.” 

And in New Zealand, Climate Change Minister Shaw indicates its leadership is set to continue.  

“Sustainable finance is maturing rapidly in New Zealand. Whereas at one time much of sustainable finance may have been niche, today it has far more breadth and depth both in corporate and capital markets activities,” he says.  “I’d add that whereas at one time it was associated with narrow compliance, today sustainable finance is a part of proper risk management and opportunity identification.  

In addition, the Centre for Sustainable Finance is advocating for the implementation of the Sustainable Finance Roadmap, issued in November 2020, which seeks to drive a just transition to a low carbon economy, says Shaw.

“The just transition or equitable transition is important to support fairness as we move towards a structure where we can lower our carbon emissions without exacerbating inequity across our regions and people.   

“Biodiversity and natural environment issues are a part of this work as well – you may be aware of the TNFD directive coming close behind the implementation of TCFD. New Zealand isn’t as far along the sustainable finance journey as some European countries are, but we’re making real progress.” 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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