Today, the Principles for Responsible Investment (PRI), UNEP FI and the Generation Foundation publish a new report on the policy barriers limiting the ability of institutional investors in Australia to pursue sustainability objectives, providing recommendations for policy reforms. 

This publication, “A Legal Framework for Impact, Australia: Integrating sustainability goals across the investment industry”, builds on the groundbreaking 2021 report “A Legal Framework for Impact” (LFI) which analysed, across 11 jurisdictions, the extent to which investors can pursue sustainability objectives from a legal standpoint and options for policy makers seeking to support investors in doing so.  

The 2021 report, authored by law firm Freshfields Bruckhaus Deringer and commissioned by the PRI, UNEP FI and the Generation Foundation, found that in all 11 jurisdictions, including Australia, investors are broadly permitted by their regulatory environment to consider shaping the sustainability outcomes of their investments where doing so would support their financial return objectives. However, the report noted a lack of adequate clarity, guidance and tools to support investors in shaping sustainability outcomes. The LFI project is now developing roadmaps for reforms in five jurisdictions – Australia, Canada, the EU, Japan and the UK.  

The latest Australia-focused report provides recommendations for such reforms, with the goal of helping mainstream investors get behind an effective, whole-of-economy net-zero transition and tackle critical sustainability issues, in the best interests of clients and fund members. 

Commenting on the report, David Atkin, CEO of the PRI, said: “Australia is yet another G20 country that is taking on climate change. With a new government on board, we expect a lot of policy reforms this coming year that will bring the Australian market closer to leading economies on sustainable finance reform. Sustainable finance is not optional, and climate change cannot be put on hold.” 

Fundamentally, fighting climate change and building a prosperous and resilient future start with reform of the law: of how investors’ duties are understood by market participants; of how active ownership is facilitated; and how beneficiary interests are understood and managed. This is one of the key aims of the Legal Framework for Impact project – to propose policy changes that will shift the baseline of financial regulations, and that can help responsible investors reorient capital flows on a workable, inclusive path to net zero.” 

The report dives into the Australian context, exploring the policy barriers in Australia that limit institutional investors’ ability to pursue sustainability goals. In doing so, the PRI makes five recommendations to Australian policymakers: 

  1. Update standards. Update standards and guidance to clarify investors’ duties to address sustainability-related system-level risks.
  2. Adopt a reporting framework. Adopt a comprehensive corporate sustainability reporting framework.
  3. Strengthen regulatory support for stewardship. Strengthen regulatory support for effective investor stewardship.
  4. Implement a taxonomy. Implement an Australian sustainable finance taxonomy.
  5. Address the effects of heatmaps and financial performance tests. Address the effects of product heatmaps and financial performance tests on investors’ actions on sustainability outcomes. 

Moving forward, the report identifies two policy areas that necessitate further study by Australian policy makers: 

  1. Ways to enable investors to take beneficiaries’ sustainability preferences into account;  
  2. Ways to address the treatment of sustainability outcomes in investment management agreements.