Over the last 20 years, the nomenclature used to describe ESG investing has continued to change in Australia. However, the fundamentals of this form of investment remain the same.
Ethical, responsible, sustainable, impact or socially responsible investment (SRI), the various forms of ESG investing boil down to transparency around investment money flows and resultant impacts. To date, action on these fronts has required the world come together and agree on, for example, climate actions to mitigate against warming global land and sea temperatures.
Since Rio in 1992, this process has dragged on and a global response is still not agreed by all countries nearly three decades later. Emergency positioning in the messaging from youth and activists on the street in Australia and across the globe cut to the heart of this form of investment. The message from the street, figuratively speaking, is our ‘house is on fire’ and we must take action. ESG investing is this action.
In Australia, through the end of last year and into the beginning of 2020, climate change became a very real and tangible phenomenon to many who dealt with ongoing bushfire emergencies. The real economic impact of these climate-related disasters is yet to be measured and quantified. The clarion call from this experience in Australia for all to see and hear is that climatic change is very real and we must act because environmental, social, and governance (ESG) boundaries are being pushed to and past physical limits. The ESG impacts in Australia are the harbinger of what could come if we do not act. This impact has global consequences.
We now see the immediate and global threat of COVID-19. The E, S, and G in ESG investing are an opportunity to both navigate and mitigate these uncertain times as ESG investment guides investment flows in a transparent global investment market. At the moment, global markets face both a threat and an opportunity in the face of COVID-19 and in the longer term, climatic changes that are foreseen.
For a country like Australia so reliant on extraction of minerals and ores, many of which have played a part in the problematic climate scenario, transition will require good leadership to steward change in the economy. In Australia this required change is going to need to come from business and investment, as well as government, as witnessed by the current COVID-19 health emergency. It is clear that the social impacts we see in the current COVID-19 crisis have wide and deep implications, unsettling global economic foundations that are interdependent.
Through redirection of investment monies, solutions and opportunity can flourish and change can come. This creates new business and industry. In Australia there will need to be a wholesale rethink of the way industrial processes in mining, agriculture, energy, health, transport and the built environment are undertaken. Today, at hand, we have technologies and systems that close the loop of production processes that are linear and create pollution or waste products (circularity). The future will necessitate the promotion of such circular economies that provide ecosystem services (negative emissions).
These forms of change will be driven by ESG investing. The fundamentals of this form of investment will require low or negative environmental impact, through the reduction of waste or reuse of waste, to produce products or ecosystem services. Sustainable or renewable sources of production and energy can have positive social and environmental impact in Australian society. The governance required to do this will need to ensure climatic consequences of business activity are part of the remit of any Australian corporate board and the business activity for which it is ultimately responsible.
Worldwide today as we witness a global response by governments and business in response to the COVID-19 health emergency, the U.S. Securities Exchange Commission has issued a request for comment on its Names Rule regarding clarity of ESG-themed investment products. Transparency around ESG investing in the U.S. will be fundamental.
Similarly, as the European Union (EU) pushes for a taxonomy to govern sustainable finance, foundational to that push will be a clear understanding of transparency around ESG investing as has been the case in Australia to date. In Europe, the regulatory status for an EU Green Bond Standard is expected to be confirmed Q3 2020.
For Australia and as some continue to deny the need for climate action, ESG investing will be essential to clarify in a coherent and systematic way where investment funds are flowing and to what end. That will result in transparency around what investment funds are financing and what environmental, social, and governance impacts investments ultimately have. ESG investing will be crucial as Australians, as well as citizens across the globe, heed the clarion call for action today.
The global response to the COVID19 pandemic shows that a coordinated call to action will be possible.
About the author
Konrad Knerr. Director of Operations at ISS ESG Australia
Konrad has over 20 years of experience in the ethical investment industry. He worked for the ASX-listed fund manager Australian Ethical Investment Limited from 2000 to 2002 helping to establish Australian Ethical Superannuation Pty Ltd. Subsequently he helped establish the Centre for Australian Ethical Research Pty Ltd in 2002, which was acquired by Institutional Shareholder Services (ISS) in 2019. Konrad continues to work for ISS overseeing operations, compliance and finance in the APAC region. Along with his work in ethical investment, he is an ethical investor with a long-held interest in biodynamics, as well as ‘mindbody’ health and meditation.