Responsible Investment Association Australasia (RIAA) 2023 Conference Brief

Morrow Sodali recently attended the RIAA 2023 Conference to hear from some of the leading voices amongst institutional investors, academia, industrial leaders, superannuation funds and asset managers, as they shared their insights about developments in ESG and looked to map a path forward.  

The conference was held in the Melbourne Convention and Exhibition Centre (MCEC) on 11th and 12th May 2023 and brought together over 700 people in person with more than 150 attending online. 

ESG’s interpretation in the leading market. 

Early on day one, Fiona Reynolds, an independent director and advisory board member, noted that, to keep it plain and simple, ESG is about incorporating environment, social and governance issues into the investment process from both a risk and opportunity perspective.  

She believes that the term “woke” is political framing and advocates for ESG professionals to be encouraged to use the language of responsibility, materiality, risks, and opportunities. Ms Reynolds shared her observations of the various approaches taken by European and American clients’ to integrating ESG in their investment decisions. European clients tend to weigh ESG more in their investment decisions as hygiene type factors. Whereas some American clients say “we shall not” consider ESG factors in their fundamental analysis.  

Following Ms Reynolds’ speech, Jens Peers, CIO at asset management company Mirovai, reiterated that traditionally people in the US focus on the balance sheet. He believes that ESG factors impact raw financial numbers which, in turn, influence future financial performance. Mr Peers also acknowledged that ESG plays a impactful role in politics reiterating that American politics made ESG very political. In addition to the political view in the US, he argued that fund managers tend to look at individual asset classes rather than the entire portfolio, which leads to a short-term benefit but potentially puts long-term returns at risk. 

The majority of the panellists agreed that the ESG landscape in Australia is showing ‘no sign of a backlash over ESG‘. The Federal Government’s 2023-24 Budget, with its numerous ESG-related initiatives, reinforced this sentiment. 

“Divestment should be the last solution” in addressing modern slavery issues.  

Tomoya Obokata is a Special Rapporteur on contemporary forms of slavery at the United Nations. Mr Obokata introduced the recent interventions between the UN working group and countries and/or regions with a high-risk of modern slavery such as China, Africa, and Latin America. In Australia, the potential victims are likely to be low-skilled workers with temporary visas.  

Mr Obokata shared some examples of products with the potential for modern slavery associated risk. These included laptops produced in China, clothing manufactured in South-east Asia and rice farmed in India. More countries are implementing or have implemented nation-wide modern slavery regulations including Japan, the UK and Australia. Mr Obokata recommended a few key actions for businesses and investors to address such issues along the supply chain.  

• Conduct due diligence effectively. 
• Be more active in using indicators. 
• Joining investor led human rights initiatives. 
• Sharing good practices and knowledge. 
• Working with civil organisations and international bodies (including the UN). 

Mr Obokata noted that it is not uncommon to see divestment when asset managers are addressing human rights issues in their portfolio, however this is not recommended as a priority solution. It is understandable that divestment reduces or eliminates the portfolio risks, but the consequences of immediate divestment may result in more forced labour. There are a few more steps to take before considering divestment.  

Investors are encouraged to be highly engaged with the companies and then climb an escalation process ladder. Along with engagement with the companies, investors are encouraged to establish initiatives or join in the existing initiatives to collaborate with local communities and international bodies.  

Cultural and political factors are taken into consideration in modern slavery cases. Different interpretations of child labour in Asia and Western countries are well recognised. Utilising the local community is an effective way to approach tackling culturally sensitive issues.  

Regarding Australian practices in human rights protection, Mr Obokata pointed out a few sectors associated with a higher risk of human rights violations including agriculture, construction, cleaning and hospitality. Mr Obokata shared some insights into the depth and length of Australian companies’ modern slavery statements which, to some extent, reflect the entities’ attitudes to dealing with these issues.  

Good stewardship plays a vital role in building a sustainable future. 

The representatives of BNP Paribas, HESTA, Stewart Investors and KPMG Australia collectively emphasised that stewardship enables investors to build on a sustainable future.  

Jane Karen Ho, head of stewardship at BNP Paribas stated that examining fiduciary duty is very important to all investors. This duty includes prudence, care, loyalty, confidentiality, good faith and disclosure. BNP takes climate change into account in its fiduciary responsibilities.  

The key tools Ms Ho advocates for are voting rights, corporate engagement and public policy engagement. Referring to voting rights, Ms Ho declared that BNP Paribas does not delegate any voting rights and has a consistent record of voting against board proposals. In 2022, BNP Paribas voted against over 1,000 resolutions regarding ESG. For high carbon emitters, BNP Paribas expects companies to set a net-zero commitment by 2050.  

Grover Burthey, head of ESG Portfolio Management at PIMCO believes that stewardship is not only about today but assessing the way forward, particularly on a two or five year pathway to decarbonisation.  

Debby Blakey, CEO of HESTA, explained that HESTA has a fiduciary duty to think of their members’ financial futures. HESTA surveys members alongside the deep dive research they conduct. Considering their fiduciary duty helps HESTA to know what the material issues are for their members.  

Regarding prioritised topics, it was agreed by all speakers that climate change and carbon emissions rank very highly. Other issues closely watched by investors include labour relations and Indigenous relations. Participating in global initiatives enables investors to play a better role in stewardship. BNP, HESTA and PIMCO all shared that they collaborate with global and regional initiative such as PRI, Climate Action 100+ and 40:40 Vision, amongst others.  

Pablo Berrutti from Stewart Investors shared their somewhat different approach to stewardship, which is a bottom-up method. They usually question if they can trust the stewardship within the companies the invest in, with the intent of building a long-term relationship. When collaborating with companies tackling ESG issues, Stewart Investors asks specific questions. For example, rather than asking broader questions about biodiversity, they will focus in on pollution.  

Furthermore, cultural awareness was raised during the discussion as an important consideration. In particular, in the Asia market, understanding particular ESG focus areas can help investors overcome what might otherwise be culture barriers. For example, in China they talk about a “30.60” carbon roadmap, which refers to a carbon peak in 2030, and carbon neutrality in 2060. 

ASIC warns of ongoing actions on greenwashing. 

Karen Chester, deputy chair of Australian Securities and Investments Commission (ASIC) gave a keynote address on greenwashing in Australia from the regulator’s perspective. She provided three collaborative and effective antidotes to greenwashing which were:  

• Transparency, through disclosures that comply with today’s law and ultimately a quality, global baseline for sustainability-related disclosure standards. 
• Policy-installed ‘bright lines’ to support disclosure, and 
• Regulators doing their job and working together in doing so. 

She discussed a short report – ASIC’s recent greenwashing interventions - released on 10 May 2023 which detailed the 35 interventions undertaken by ASIC from 1 July 2022 to 31 March 2023 in response to greenwashing activities. One highlighted case relates to a court action ASIC launched against Mercer Superannuation for making misleading statements about the sustainable nature and characteristics of some of its superannuation investment options.  

Ms Chester said, "Where we have seen potentially misleading disclosures, we have taken regulatory action. Our interventions range from securing timely corrections, issuing public infringement notices through to commencing civil penalty proceedings."  

The recently released 2023-24 Federal Budget allocated A$4.3 million to ASIC to ensure the integrity of the sustainable finance market. Ms Chester also pointed out that no regulator is an island, and the collaboration between ASIC and Treasury will increase to fill the gap in greenwashing surveillance with a more effective framework and strategy for taxonomy and ESG labelling, rather than a case-by-case approach. Ms Chester further touched on the TCFD reporting framework, encouraging more ASX companies to incorporate it into their reporting. To help companies establish a fact-based climate target, she suggested a few questions to ask: 

• How to progress the company to meet the target?  
• What is the target objective, mitigation, or alleviation?  
• How does the target compare to global agreements? 
• Whether the target is validated by a third party?  
• Are there any milestone or interim targets?  
• And over what period/s do the target/s apply? 
• If there is offsetting, is that subject to third-party verification? 
• What is the type of offset being used? 

In summary, the RIAA 2023 Conference gathered ESG-focused professionals to bring different angles to the development of capital market, companies and communities.  

Morrow Sodali, as a leading Corporate Governance and ESG advisory firm, provides bespoke ESG advisory services to help companies manage shareholders’ expectations on ESG risks, opportunities and disclosures. Morrow Sodali notably helps clients benchmark their ESG disclosure, with reference to their institutional shareholder base and advise on best ESG practice including how to engage effectively with investors on key topics. 

For more information, please reach out to our Sustainability team.  

Contact: Jana Jevcakova, +61 452 061 779, j.jevcakova@morrowsodali.com