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At the Responsible Investment Association Australia (RIAA) annual conference a top line up of experts gave valuable insights on the critical role that investors play in driving change and promoting ethical and sustainable practices to shape a sustainable future. Climate risk expert, Senior Consultant Gregor Theinschnack discusses four trends in responsible investment practices from the conference stakeholders in the finance industry should be thinking about, as momentum increases for the industry to shift to more sustainable practices.
1. Responsible Investment Practices: Active Stewardship
A strong focus of all the panel discussions in shaping a sustainable future was how important active stewardship is. This includes individual investors as well as large organisations. Stewardship in this sense is more than merely trying to influence investees’ decision-making processes and governance but rather a vital step in ensuring values are upheld. The word “divesting” was often used in this regard as only a last resource of active stewardship when other avenues of escalation are exhausted.
What is active stewardship in more detail?
Active stewardship refers to the proactive and responsible management of investments by institutional investors such as asset managers, pension funds, and insurance companies. It involves engaging with companies in which the investors have stakes, with the aim of influencing their behaviour to achieve better long-term financial returns and positive social and environmental outcomes. Active stewardship may include activities such as voting at company meetings, engaging in dialogue with company management, and collaborating with other investors to influence corporate behaviour. The goal of active stewardship is to promote sustainable and responsible investment practices, improve the management of risks, and create and preserve long-term value for current and future generations. More on active stewardship in RIAA’s report ‘Unpacking Stewardship in Australasia in 2022’.
2. Responsible Investment Practices: Collaboration
Stewardship cannot work without a level of collaboration between investors but also institutions and every stakeholder involved in the process. Another overarching theme of the panel discussions was the importance of collaboration to establish an industrywide, functioning stewardship culture that is outcome focused and creates necessary change.
A culture of collaboration enables all stakeholders to work together to create positive social and environmental outcomes. A culture of collaboration can also promote transparency and accountability among investors, helping to build trust and facilitate effective engagement with companies. Ultimately, a culture of collaboration is essential for active stewardship because it allows investors to work together to achieve their shared goals of promoting sustainable and responsible investment practices, managing risks, and creating long-term value for all stakeholders.
3. Responsible Investment Practices: Data to assist with Transparency and Standardisation
Standardisation is a top priority when it comes to Industry codes and regulations. Many initiatives, such as the International Sustainable Standards Board (ISSB) framework, have addressed and influenced this space, but more needs to be done for investors to fully automate ESG screening and due diligence processes; a vital component in driving responsible investments.
According to Karen Chester, Deputy Chair at the Australian Securities and Investment Association (ASIC), transparency – “greenwashing” is the key word here – is high on the regulator’s agenda, which also includes investment funds’ product labelling.
Both these key issues require an enormous amount of reliable and consistent data which is presented in a way that is easily understood and can be included in investors’ decision making; a task that is getting more complex when adding certain elements such as the below into the ESG mix.
- Nature – in form of the recommendations by the Taskforce on Nature related Financial Disclosure (TNFD) and
- Social Sustainability – namely Modern Slavery
4. Responsible Investment Practices: The shift to long-term thinking
Rick Alexander, CEO at the Shareholder Commons, mentioned that “in order to drive change (towards sustainable investments) we, as the investors’ community, need to ask ourselves whether we would be willing to accept lower short-term returns from one particular portfolio or asset if we notice that these harm our long-term objectives”.
What does long-term thinking look like in shaping a sustainable future for arguably the most prominent current issue within ESG, the E – or environment?
As we know, thinking long-term is crucial for responsible investment practices when considering the impacts of climate change on the finance industry for both transitional and physical risk. Climate risks have the potential to significantly affect financial stability and the long-term sustainability of investments. Climate change is already causing physical risks such as floods, wildfires, and storms, which can damage infrastructure, disrupt supply chains, and cause loss of life and property. It also creates transition risks as economies shift towards lower-carbon models, which can lead to stranded assets and reduced profitability for companies that rely on high-carbon business models.
Thinking long-term, investors can identify and manage climate risks effectively, and take advantage of opportunities arising from the transition to a low-carbon economy. It is also essential to consider the broader impacts of climate change, such as social and environmental risks, which can affect a company’s reputation and license to operate. Investors who fail to consider these risks may be exposed to financial losses, reputational damage, and regulatory intervention.
Finally, thinking long-term is also crucial to achieving the goals of sustainable finance, which aims to promote investments that are financially sound, environmentally responsible, and socially beneficial. By taking a long-term view, investors can make informed decisions that not only provide continued financial returns but also contribute to positive social and environmental outcomes, such as reducing greenhouse gas emissions, promoting sustainable development, and supporting the transition to a low-carbon economy.
It will be interesting to see the choices investors make here over the coming years to use their power to accelerate the transition to a lower carbon economy and more responsible investment practices.
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