Australia: Mainstreaming the Sustainable Development Goals Across the Investment Industry | Policy Report

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The ability of investors to generate financial returns depends on the stability and sustainability of the environmental and social systems upon which the economy is based. As a result, many institutional investors now accept that acting in the best financial interests of their clients and beneficiaries requires them to consider the positive and negative impacts of their activities and proactively shape the sustainability outcomes of those activities.

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

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

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

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

Policy recommendations

  1. Update standards and guidelines to clarify investor duties to address system-level risks related to sustainability.
  2. Adopt a comprehensive corporate sustainability reporting framework.
  3. Strengthen regulatory support for effective stewardship.
  4. Implement an Australian Sustainable Finance Taxonomy.
  5. Discuss the effects of product heatmaps and financial performance testing of investor actions on sustainability outcomes.

Policy areas for further consideration

  1. Explore ways to enable investors to accommodate beneficiary sustainability preferences.
  2. Address the treatment of sustainability results in investment management agreements.

Our seven recommendations build on the Australian roadmap for sustainable finance by the Australian Institute of Sustainable Finance. Further work should be undertaken by policy makers and regulators to determine how the proposed options should be implemented.

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