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Ethical funds are growing and funds managers are getting out of fossil fuels, at the very least. And yet we’ve got MPs such as George Christensen demanding that banks not penalise fossil fuel companies 

According to Nicolette Boele it’s crunch time for investments in the major polluting sectors of the economy and finally fossil fuels are being screened out by fund managers. This is what investors want, she says. 

Boele, who is executive, policy and standards for Responsible Investment Association Australasia says there’s a growing number of ethical funds across Australia. “Those with ineffective policies and poor processes are being left behind as the capital moves out,” she says. 

Nicolette Boele, RIAA executive, policy and standards

Boele spoke to The Fifth Estate after the RIAA released its 20th annual report, conducted in collaboration with KPMG, that found responsible investments in Australia topped $1281 billion in 2020, up from $983 billion in 2019.

Top of the list driving momentum in the sector was climate change.

Investor concerns over issues such as fossil fuels and social injustice have been prime drivers behind massive amounts of money flowing into funds that set a high benchmark for responsible investing — and out of those that don’t, Boele said.

While funds engaging in leading practice responsible investment saw their assets under management increase 30 per cent in 2020, at the same time the rest of the market shrank by 11 per cent, or $234 billion.

RIAA’s definition of ethical and responsible investment encapsulates a range of strategies, from simply including ESG considerations in investment decisions, to impact investing, specifically intended to achieve positive social and environmental outcomes. 

“Fossil fuels is actually the one place where we’re starting to see a convergence between what consumers have said they want to screen out of their products and what the investment managers are doing.”

Across seven levels of responsible investing defined by RIAA, impact investing was the smallest, with $29 billion worth of assets, up from $20 billion the previous year. 

Green bonds made up 88 per cent of impact investments in 2020, among which was Investa’s $100 million loan taken with HSBC, Commonwealth Bank, and Westpac, to finance greening its portfolio of buildings.

Ms Boele told The Fifth Estate the focus on climate change was highly represented in both the desires of investors and the strategies increasingly being taken by ethical funds. 

A higher awareness of the risk exposure associated with assets such as fossil fuels has seen more investment strategies screening them out of portfolios. 

“We’ve seen a big jump in investment managers that are looking more closely at screening out pure play fossil fuel companies, as well as considering how to get aligned with net zero,” Ms Boele said. 

“Fossil fuels is actually the one place where we’re starting to see a convergence between what consumers have said they want to screen out of their products and what the investment managers are doing.”

The Australian Prudential Regulation Authority (APRA) had led a push for industry to properly manage the financial risks of climate change, in April released a draft of non-binding guidance called Prudential Practice Guide CPG 229 Climate Change Financial Risks (CPG 229).

“The regulator’s been talking about it since 2017 and I think investment managers are starting to heed that and start to look through their portfolios and work out where the risks are in terms of climate,”

“Investment managers want to have portfolios that will remain financially profitable. When they’re investing on behalf of 18 and 20 year olds that are going to retire in 45 years time, they’ve got to think about the long term financial profit for their beneficiaries.”

George Christensen and Co don’t like where the banks are heading

Not everyone is on board with this thinking; they’re particularly concerned with Australia’s big four banks steering away from investment in fossil fuels. 

Among the outspoken critics of the big banks decisions to lessen their exposure to the fossil fuel industries, has been resources minister Keith Pitt who referred to it as “corporate activism.”

This year a federal Joint Standing Committee on Trade and Investment Growth chaired by Queensland MP, George Christensen, included in the scope of its inquiry the impact of APRA’s advice on financial risk exposure to climate change. 

Mr Christensen grilled APRA chair, Wayne Byres when he appeared in front of the committee earlier this month, asking if the regulator directly specified any sectors in which APRA regulated institutions should not invest. 

Mr Byres replied that it did not, however his institution had been undertaking work with Australia’s five largest banks to measure the financial risks to their organisations, the financial system and the economy at large posed by climate change.

Representatives from the big four banks will appear at the inquiry for a second time this Friday, at the behest of Mr Christensen who says there are outstanding issues that need to be canvassed.

All four banks made submissions to the upcoming hearing pointing to climate related financial risks and their responsibilities to customer preferences and best outcomes.

Former Nationals senator Ron Boswell drafted a submission for the hearing calling on the committee to consider amending the Australian Competition and Consumer Act to “prohibit banks from engaging in practices which have the purpose or effect of denying credit and other financial services to the coal industry.”

Referring to the fact that most of the ethical investments based in Australia, were managed by offshore firms, Boswell described a “push by European and US banks, fund managers and insurance companies to deny finance, investment and insurance to companies in the Australian resources sector.”

“This is a clear example of foreign multinationals dictating the economic policy of this country.”

In a separate angle to the inquiry delivered last month, Resource Industry Network general manager Dean Kirkwood said denying companies in the mining equipment, technology and services (METS) industry access to insurance and lending based on their supply connections was unfairly hurting small businesses. 

“METS businesses work across a diverse range of sectors including renewables. They are the key to the development of technology critical in reducing emissions,” Kirkwood said.

“They also are actively pursuing, creating and deploying solutions across the entire resources value chain to provide the building blocks of low-emission technologies and are well entrenched in the decarbonising journey.”

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