Australia: Integrating sustainability goals across the investment industry

Investors’ ability to generate financial returns depends on the stability and viability of environmental and social systems, on which the economy relies. Accordingly, many institutional investors now accept that acting in their clients’ and beneficiaries’ best financial interests requires them to consider the positive and negative impacts of their activities and to proactively shape the sustainability outcomes of those activities.

With this objective in mind, leading investors are increasingly setting sustainability impact goals across their portfolios. Often these are intended to contribute to the achievement of global objectives, such as the Paris Agreement goals, the UN Sustainable Development Goals and other international commitments on human rights. Investors are pursuing these goals through a combination of asset allocation, increasingly forceful stewardship, and direct engagement on key public policy issues.

The question of to what extent the law permits or requires institutional investors to take such actions is tackled in a July 2021 report, A Legal Framework for Impact (LFI), authored by Freshfields Bruckhaus Deringer and commissioned by the PRI, the United Nations Environment Programme Finance Initiative and the Generation Foundation.

The authors found that in the 11 jurisdictions analysed, including Australia, investors are broadly permitted to consider shaping sustainability outcomes where doing so would support their financial return objectives. However, they also found that the policy and regulatory landscape, including in Australia, does not always provide investors with adequate clarity, guidance and tools to support them in shaping sustainability outcomes.

Building on the LFI report, this paper explores the existing policy barriers and gaps in Australia that may limit institutional investors’ ability to pursue sustainability objectives, in the best financial interests of their beneficiaries and clients. It then provides recommendations for policy and regulatory reforms that could help address these gaps and highlights two policy areas for further consideration.

Policy recommendations

1. Update standards and guidance to clarify investors’ duties to address sustainability-related system-level risks.
2. Adopt a comprehensive corporate sustainability reporting framework.
3. Strengthen regulatory support for effective stewardship.
4. Implement an Australian sustainable finance taxonomy.
5. Address the effects of product heatmaps and financial performance tests on investors’ actions on sustainability outcomes. 

Policy areas for further consideration

1. Explore ways to enable investors to take beneficiaries’ sustainability preferences into account.
2. Address the treatment of sustainability outcomes in investment management agreements. 

Our seven recommendations build on the Australian Sustainable Finance Roadmap by the Australian Sustainable Finance Institute. Further work would need to be undertaken by policy makers and regulators to determine how the proposed options should be implemented.