Money is a powerful lever to drive change; or to stymie it.
It feels like the responsibility on the finance sector to be a driver of change has never been greater.
As the world grapples with the challenges of climate change, depleted natural resources and entrenched inequality it is incumbent on us to ensure the financial system has the right structures, codes and language to encourage the flow of capital to where it will do good. Further, we are now conscious that failing to address these risks adequately jeopardises the very health of that system.
To paraphrase former Bank of England Governor Mark Carney, these issues have moved swiftly from being niche corporate social responsibility issues within finance, to fundamental value drivers.
It's been energising over the past year to watch the collaboration initiated by the Sustainable Finance Forum and see a collective vision for New Zealand emerge.
It's fair to say the investment sector hasn't always been a friend to sustainability.
Some issues highlighted by the investment community in recent workshops include unearthing reliable, comparable data on environmental and social performance; and the terminology we use may be difficult for consumers to navigate.
The need for transformation is clear if we are to achieve a sustainable future.
The forum's emphasis on education, has potential to be transformative; encompassing the twin aims of improving industry capability on environmental, social and governance (ESG) as well as boosting consumers' ability to engage knowledgeably. Imagine how powerful it would be if we were to integrate understanding of sustainability at the very earliest stage of financial education; to weave it into the DNA of our profession.
Extending financial literacy to include ESG is evidence of a fast-maturing responsible investment ecosystem.
As the RIAA NZ noted in its recent report, our toolkit is getting sharper and more nuanced.
Instead of blunt instruments like exclusions or negative screening, we are seeing ESG integration become de rigueur and positive impact investing is starting to accelerate.
Maintaining that momentum will require a corresponding jump in investors' financial literacy. How do we make sure that, where ESG opportunities are pursued and capital allocated towards solutions, investors understand the trade-off isn't necessarily a corresponding hit to financial return?
Supporting consumers' financial literacy should extend to the resilience and sustainability of a portfolio or underlying asset — and we should be able to make it clear how ESG considerations are reflected in the pricing of that asset.
ASB launched its Positive Impact Funds in 2019, giving consumers the option to invest in line with their environmental and social values.
The global equity portion of the funds pursues companies creating a positive difference — such as reducing waste, promoting renewable energy, or improving schooling in developing countries. Global frameworks including the UN Sustainable Development Goals are used to verify impact. Overall, the funds are significantly less carbon-intensive than other passive funds. A portion of the fund is managed passively, so includes some holdings in sectors people might not associate with a "green" product. Communicating distinctions such as this to interested investors can take some work.
Throughout the product lifecycle, ASB has been intentional about the language used to communicate the funds; transparency and investor-friendly language were identified at the outset as a priority.
In New Zealand, the industry is seeing KiwiSaver balances growing and an increasing number of engaged, active retail investors — who would have thought a global pandemic would lead to a surge in share trading? Being able to clearly communicate where funds are invested at any point in time is now central to the partnership between investor and investment manager. Add to this a growing demand for non-traditional data (such as ESG). The industry must ensure this is conveyed in ways that are easily understandable.
Complicated communication has the potential to result in poor investor outcomes and can muddle investment decisions and send the wrong signal to markets.
Transparency of course, is critical. Some recent international efforts of note are the EU's Sustainable Finance Platform — which aims to create a "green list" and common language to classify sustainable economic activities. The Australian Climate Measurement Standards Initiative is another positive initiative to help standardise our approach to topics such as climate scenario analysis. I was interested to learn recently of international moves to develop a Taskforce for Nature-Related Financial Disclosure — looking at impacts on biodiversity, water and ecology, wider than solely climate change.
Here in New Zealand, ASB welcomed the Government's announcement of mandatory climate reporting standards. This year we are analysing climate transition risk across all of ASB's managed funds, in preparation for disclosure.
One of the interesting insights that emerged during the Sustainable Finance Forum workshops was the importance of ensuring definitions for long-term and social purpose do not just become a "tick box" exercise.
If greater transparency and communication are to do the job they're intended to, it's not sufficient to simply report clearly on our current state — but to hold ourselves accountable for the change we intend to catalyse.
● Adam Boyd is ASB's Executive General Manager, Wealth and Insurance on the bank's executive leadership team.