Advisers told to brace for low-carbon transition

Australia has lagged much of the world on the climate front, but regulators are currently playing catch-up and likely looking to Europe for ideas on a legal framework that defines which investments are climate-friendly.

Australia finally joined the net zero by 2050 push on 26 October, vowing to get there with technology, not taxes. But, according to a research paper penned by Research Affiliates director of research, Mike Aked, and senior vice-president for Australia, Adam Willis, without the stick of a carbon tax, the government will likely turn to its regulators to encourage investors to drive the focus on green technology.

The consequence, the pair noted, is that climate transition investing is coming to Australia and fast.

As such, Mr Aked and Mr Willis said advisers and investors are “well advised” to take note of the increasing regulatory pressure to measure and report on the sustainability activities of companies held in investment portfolios.

“Now is the time for Australian investors to plan how to align investment policies, portfolio positions, and reporting practices with the impending regulation,” the pair said.

In fact, recent findings by the Responsible Investment Association Australasia (RIAA) have supported claims of an increasing shift towards carbon-sensitive investment products among clients. The research found that 86 per cent of Australians expect their superannuation to be invested responsibly and ethically, while 62 per cent believe ethical or responsible super funds perform better in the long-term.

Probing Australia’s possible course of action, Mr Aked and Mr Willis noted the likelihood of regulators turning to the EU for ideas. 

“European regulatory trends reveal the destination to which the United States and other developed nations, including Australia, are likely now setting their course,” the pair said.

In Europe, the two principal bodies making recommendations for climate transition regulation are the Task Force on Climate-Related Financial Disclosures (TCFD) and the Technical Expert Group on Sustainable Finance (TEG). The latter provides the so-called EU taxonomy to determine whether an economic activity is environmentally sustainable.

Starting in January 2022, all fund providers, insurance product providers, and pension plans that market their strategies in the EU as being sustainable must report using the taxonomy framework. 

Noting that Australian investors should anticipate similar regulation to that adopted by other developed nations, Mr Aked and Mr Willis reiterated that “now is a good time for Australian investors to plan how to align their investment policies, portfolio positions, and reporting practices to be consistent with Australian regulators’ focus”.

“The increasing regulatory pressure to measure and report on the sustainability activities of companies held in investment portfolios will necessitate that investment professionals be aware of and manage climate-related investment metrics as we design and implement investment strategies for carbon-sensitive investors,” the pair concluded.

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