Confusion among investors as funds wait for ESG labelling clarity

Save articles for later

Add articles to your saved list and come back to them any time.

A lack of consistency in the labelling of sustainable investment options is contributing to confusion among investors as the $3.5 trillion superannuation industry responds to increasing demand from people looking to pivot their funds towards sustainable products.

Colonial First State chief investment officer Jonathan Armitage said few Australians understood what specific environmental, social, and governance (ESG) investment options were trying to achieve.

Colonial First State chief investment officer Jonathan Armitage said less than one third of Australians were aware of sustainable investing.Credit: Dominic Lorrimer

“There’s no real consistency around terminologies, methodologies and, to use a fancy word, taxonomies,” he said. “The lack of consistency and commonality around acronyms and descriptions around certain investment options and what they really mean is at the heart of why there is confusion and a lack of understanding about what specific investment options are trying to achieve.”

In a survey of 1400 Australians conducted by Colonial First, less than a third were aware of ESG investing and sustainable investing, and less than six per cent understood it. Half didn’t understand the term “net-zero” and only 38 per cent understood the term “greenwashing”.

That needs to change for the country to meet its targets, including reaching emission levels below 2005 levels by 2030, according to Armitage. “I think the industry as a whole is looking for some greater consistency,” he said.

As green finance has become more popular, regulators such as the Australian Securities and Investments Commission (ASIC) have cracked down on companies overstating or lying about their environmental credentials – a practice called “greenwashing”.

But ASIC deputy chair Karen Chester said the antidote to greenwashing would be a disclosure framework that met international standards: a mandatory climate change-related disclosure regime in Australia based on the global baseline being developed by the International Sustainability Standards Board (ISSB).

In December, the government released a consultation paper on the development of an Australian climate risk disclosure framework. About 87 per cent of published submissions expressed support for the introduction of the climate-related financial risk disclosure (CRFD) framework. “These reporting requirements are expected to be mandatory for large entities and phase in over time,” treasurer Jim Chalmers said.

In June, a second round of consultation on the design of legislation began, with ASIC chair Joe Longo urging the corporate world to ready itself for major changes to financial reporting and disclosure standards, saying “preparation for that should be starting now.”

The third consultation process on the draft bill to be introduced to parliament is expected to commence later this year.

Armitage said he believed demand for ESG-related funds would increase over the next five years. “There’s increasing awareness of the importance of these types of issues from an investment perspective, and you’ve got a sort of shifting demographic,” he said.

While the company’s sustainable growth investment option has clear prohibitions on a number of areas including tobacco, pornography and thermal coal, Armitage said he didn’t foresee an expansion on exclusions in fossil fuels.

“The view that we take is that there are other companies involved in the extraction or refining of fossil fuels, but those are also businesses we think will be very important constituents in the process of energy transition,” he said. “To exclude companies which are going to be absolutely critical in that process seems to be a bit counterintuitive.”

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.

Most Viewed in Business

From our partners

Source: Read Full Article