ESG integration and stronger stewardship support long-term value creation

Reform of Australia’s framework for investment stewardship would support investors in responsible stewardship, says the Australian Council of Superannuation Investors (ACSI).

ACSI CEO Louise Davidson said, “Businesses and their boards need to rebuild trust with Australians. Investors can support this process through the responsible management of assets.”

“A stronger stewardship framework would support the quality and integrity of our financial markets and contribute to sustainable, long-term value creation for beneficiaries.”

ACSI has developed two proposals to acknowledge the importance of environmental, social and governance (ESG) considerations to investment risk and returns and to strengthen investment stewardship by making it more consistent.

ESG considerations have a material financial impact on investment value over the long term.

Stewardship requires active ownership by asset owners and asset managers of the assets in which they invest. Stewardship activities include monitoring assets and service providers, engaging with companies and holding them to account on material issues, and voting and publicly reporting on the outcomes of these activities.

Consideration of ESG factors and effective stewardship are complementary. Together, they can protect and enhance the long-term value of investments.

The key changes that ACSI is calling for are:

  • Revise APRA guidance to reflect the importance of ESG integration

    Revise APRA’s investment guidance to explicitly recognise the importance of ESG issues in the formulation of investment strategies.

    Existing APRA guidance is limited in its coverage of ESG principles and confuses ESG integration (which is a tool for managing financial risk) with ethical investing (which uses ethical or social principles as its primary filter).

    Davidson said, “Australia’s regulatory framework lags behind other developed economies in recognising the importance of ESG factors. There is significant opportunity to bring Australia up to date by clarifying that ESG risks and opportunities are financially material and should be taken into account in risk and return analyses.”

  • Review the regulatory framework for stewardship

    Review the regulatory framework for stewardship. The review should consider appropriate minimum standards and reporting, the appropriate regulatory framework, and a stewardship code that applies to all institutional investors.

    In 2018, ACSI developed the Australian Asset Owner Stewardship Code, which investors may adopt on a voluntary basis. The Code provides principles and guidance to promote higher stewardship standards and increased accountability to beneficiaries, consistent with global best practice. The Code has received strong support from ACSI members.

    Davidson said, “We think it’s time to start a discussion about a framework that would apply across the market to all institutional investors, including asset owners. This would promote stronger stewardship, which in turn supports the quality and integrity of our financial markets and contributes to sustainable long-term value creation.”

Today’s announcement is the third in a series of policies that ACSI has released in recent weeks. The first and second address corporate accountability, and culture and diversity, respectively. Together, they respond to issues identified by the Royal Commission.

Davidson said, “The momentum for change is strong following the Royal Commission. Australia’s policy makers and regulators have a significant opportunity to improve regulatory settings in ways that are good for consumers and investors, good for sustainable business practices, and in line with growing demand for investment stewardship ESG integration.”

 

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