Australian sustainable finance at ‘a fragile and critical stage’, says RIAA’s O’Connor

Outgoing CEO of Australia's long-standing investment industry sustainability association talks to RI about regulation, enforcement action and ESG product labels.

Simon O’Connor

In more than two decades working in sustainable finance in Australia, including 10 years at the helm of the Responsible Investment Association Australasia (RIAA), Simon O’Connor has both witnessed and helped to drive a dramatic shift in the market.

“When I started in this role, RIAA was still banging on the door to make sure the financial sector understood responsible investment was financially material, and critical to delivering the best financial outcomes for beneficiaries,” he tells Responsible Investor.

O’Connor, who steps down from his role at RIAA at the end of the year, joined the investment industry body in 2013 from the Australian Conservation Foundation, where he was an economic adviser.

He will be replaced by Estelle Parker and Dean Hegarty, who will serve as co-CEOs.

They are taking over at a time when the industry is finally in a “stable” place, says O’Connor – in part thanks to support for the sustainability agenda from the government under prime minister Anthony Albanese.

A sustainable finance strategy, incoming mandatory climate disclosure rules, and a taxonomy are all currently in the works. Work on the taxonomy is being coordinated by the Australian Sustainable Finance Initiative (ASFI), which O’Connor helped establish during his tenure at RIAA.

“In the last year we have seen a dramatic shift in consideration of ESG as a priority across financial services firms, to the point that it is front and centre of risk management, compliance, consideration from boards and investment committees,” he says.

Regulation

In the past five years, O’Connor says local investors have come to accept ESG as a critical part of fundamental analysis and valuations, as well as good investment practice.

“In Australia, we have finally flipped into a position where this is no longer just an industry opt-in part of the market,” he says, noting that ESG has evolved into a compliance issue driven by law, regulation and codes.

“This is a much more recent phenomenon in the Australian market where, in the last two decades, it has been an industry-led and opt-in practice, as opposed to top-down led by policymakers.”

The next phase of work will be a strong legislative and regulatory phase, says O’Connor, whereby a lot of the sustainable finance work from the past two decades will get written into standards and regulation over the next two or three years.

“This is a really important, fragile and critical stage of this industry’s maturation and professionalisation,” he says. “Australia needs to ensure it gets the policy settings right in order to hardwire the industry standards into law and regulation, such that this becomes standard practice here.”

The aim is not just to mandate ESG considerations in investment markets, he notes, but also to ensure that this delivers more capital flow into sustainable and low-carbon assets, and businesses which are needed to transition the economy.

“If this doesn’t happen, there is a risk there will be more regulatory burdens, but not much advantage for the broader economy and our national sustainability goals.”

On the plus side, O’Connor notes that Australia is not starting from scratch and that the government is “not being precious” about owning and creating everything.

“There is clear recognition we can draw from the International Sustainability Standards Board (ISSB) and the Taskforce on Climate-Related Financial Disclosures (TCFD), and that the taxonomy can use existing work and adapt it to an Australian context,” he says.

There is also a strong local awareness that policies need to be largely interoperable with global regulatory developments, he adds, since most of the market is already navigating ISSB, TCFD, and EU regulation, such as the Sustainable Financial Disclosure Regulation (SFDR).

“Our Treasury and officials within the securities regulators have had to learn very quickly to get up the curve, so have very wisely been looking and learning from international counterparts. This gives us the opportunity to move fast as we play catch-up.”

Enforcement action

The Australian Securities and Investments Commission (ASIC), in particular, has moved rapidly from guidance to enforcement on sustainable finance – probably more so than regulators in any other markets, according to O’Connor.

Since July last year, the financial watchdog has secured 23 “corrective disclosure outcomes”, issued 12 infringement notices and started its first civility penalty proceedings with Mercer Super.

It also this year launched greenwashing cases against Vanguard Investments and Active Super over misleading sustainability statements, and announced this month that greenwashing will continue to be an enforcement priority in 2024.

While O’Connor acknowledges that this has sent a “strong signal” to the market, he cautions that the aim should not be to scare funds. “The worst-case scenario would be for firms to step back from their net-zero commitments and be too nervous to invest or create products, or to allocate capital to sustainable funds.”

He also notes that, as sustainable finance standards and greenwashing guidance are still evolving and being adopted, there is some nervousness in the market that enforcement is moving too quickly.

RIAA, along with its international partners, is working to “fill this gap”, he says.

“We would ask that enforcement action be balanced out with policymaking and standard-setting work. Our objective is to improve the practices of the industry, not just to find the more egregious practices of the market.”

Product labelling

In response to the demand for better greenwashing guidance, RIAA is developing a sustainability classification initiative to complement its existing certification programme. The new labels will allow clients to distinguish between sustainable and responsible funds.

“We’ve worked extensively to map this classification initiative to various global regimes such as SFDR, SDR and the SEC’s fund names rule,” says O’Connor.

The certification programme, which will be officially launched next year, was referenced in the Treasury’s sustainable finance strategy released this month. In the latter, the government recognised the need for fund-labelling regulation for sustainable funds, which is expected to draw strongly on SFDR and SDR.

O’Connor notes that product labelling has emerged in the last three years as a consumer priority.

“The demand from asset managers and super funds has been really high, but the real interest has come from the demand side – financial advisers, wealth management firms and investment platforms – who want high-quality, responsible investment products and offerings,” he says.

What next?

O’Connor feels “confident stepping back” from RIAA. The organisation is in the strongest position it has been since he joined, he says, with more staff, members, a diverse product and programme offering, and a mature board that is helping it to “punch well above our weight in terms of impact”.

Until now, the association’s role in the market has been to push for sustainable finance policies to be endorsed by the industry and eventually encoded into law.

Now that much of this is coming to fruition, O’Connor says RIAA will need to identify where the market needs to focus next.

He adds that it will continue to “lift stewardship practices” across the market, as one of the “single most important responsible investment strategies to effect the change” to shift entire economies onto a trajectory which will see them hit the Paris Agreement targets.

“As an industry, we’ve spent more than two decades refining the tools and practices of responsible investment. Going forward, it’s time we put these practices to work in a manner that is commensurate with the global challenges we have in front of us.”