The Role of Australia's Financial Sector in Sustainability
PricewaterhouseCoopers
Environment Australia, 2001
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About the study
Sustainable development and the finance sector
The finance sector has the potential to promote the principles of sustainable development through its lending insurance and investment activities, as well as its internal policies and processes. Internationally, financial institutions have begun to respond to this opportunity by actively participating in global forums, developing and promoting socially responsible investment products and greening their internal operations.
Purpose of the study
Recognising the growing opportunities for the finance sector to contribute to sustainable development, the Minister for the Environment and Heritage commissioned this high level study, which aims to:
- identify international trends (in North America and Europe) in sustainable development in the finance sector
- evaluate the Australian finance sector (investment, superannuation, credit and lending and insurance) in the context of these trends; and
- identify barriers and opportunities for the Australian financial sector to contribute to sustainable development.
This study was conducted over a three week period, with the support of an industry advisory group and gives an overview of recent developments. It provides a basis for further discussions between government and business on enhancing the role of the Australian financial sector in sustainable development.
For the purposes of this study we have adopted the definition of sustainable development used by the World Business Council for Sustainable Development:
'...the delivery of competitively-priced goods and services that satisfy human needs and bring quality of life, while progressively reducing ecological impacts and resource intensity throughout the lifecycle, to a level at least in line with the Earth's estimated carrying capacity.'
Study findings
International developments
The findings of this study indicate that leading international finance sector organizations are responding positively to sustainable development and, in the process, enhancing stakeholder and shareholder value. Financial institutions in North America and Europe are involved in the following activities:
- commitment and awareness - participation in international sustainable development forums such as the UNEP Financial Initiative, the World Business Council for Sustainable Development and United Nations Framework Convention on Climate Change.
- Socially Responsible Investment (SRI) - rapid growth of the SRI market in the US and UK. This has been a significant positive reaction by the finance sector to the business opportunities associated with sustainable development
- climate change - the prospect of a carbon constrained economy and subsequent adoption of market-based trading mechanisms as a result of the Kyoto Protocol (yet to be ratified), has stimulated significant awareness and response from the financial sector which suggests that it is well positioned to play a significant role in solving environmental problems.
- products and services - a growing number of environmental products and services have been developed in response to market demand.
- greening of own operations - in keeping with other industry sectors, an increasing number of financial institutions are implementing company-wide environmental management systems and have also published separate public environmental reports.
Notwithstanding the above developments, a significant barrier to the further contribution of the finance sector to sustainable development is a prevailing view held by financial analysts that environmental and social risks, whilst important, are not material to company financial performance.
Australian developments
Our findings indicate that in many respects the interface between the finance sector, industry, government and advocacy groups in Australia in relation to sustainable development mirrors the trends in the international arena. In some areas however the Australian finance sector is not as advanced as its international counterparts:
- commitment and awareness - until recently, at an industry level, little interest had been shown in sustainable development. Unlike its European peers, only two financial institutions are signatories to the UNEP Financial Initiative
- products and services - there is less demand for and supply of SRI products. However, products and services have been developed in response to the issues of climate change and community banking needs.
- greening of own operations - most financial institutions appear to have implemented environmental risk assessment procedures and undertaken energy efficiency and recycling programmes. However few have implemented company-wide environmental management systems or published public environmental and/or triple bottom line reports.
Barriers and Challenges
There are number of barriers and challenges unique to Australia which explain why the finance sector may not be as advanced as its North American and European counterparts in responding to sustainable development. These include:
- legislation - the enforcement of environmental legislation and the disclosure requirements for companies and superannuation trustees in relation to environmental and social issues is less onerous than North American and European systems
- market size - the supply of financial products that incorporate sustainable development principles, such as SRI, is restricted by small market size
- awareness - despite a high level of concern about environmental and social issues in the community, this has not been translated into a significant investment in 'green' products or active campaigning to promote sustainable corporate practices
- public disclosure - the voluntary disclosure of environmental and social information is less developed than in North America and Europe. The only mandatory disclosure requirement, namely s299(1)(f) of the Corporations Law is under review and may be repealed.
Opportunities for further development and recommendations
In the context of the international trends outlined in this report and given the extent of some of Australia's sustainable development challenges, there are a number of key areas that could be addressed to further engage the finance sector. The most important of these are:
Finance sector industry commitment and awareness
In addition to the initiatives currently undertaken by individual finance sector organisations, there is scope for the finance sector as an industry to evaluate its role in sustainable development. The objectives of this would be to:
- demonstrate to stakeholders that the finance sector is aware of and is examining its role in contributing to sustainable development
- identify opportunities that could have good commercial and sustainable development outcomes, which require collaboration between the finance sector, industry, government and NGOs
- identify, evaluate and provide a finance sector industry response to sustainable development 'hot spots' such as biodiversity, climate change, salinity, land degradation and water resources, especially with a regional context, such as the Murray Darling Basin.
Recommendation 1 - the Commonwealth Government should encourage the financial sector to provide continued support to the Australian UNEP Financial Initiative, thereby demonstrating its commitment to the principles of sustainable development.
Materiality
There is a need to increase the awareness in industry and the finance sector about the growing body of evidence that shows a positive relationship between improved environmental and social corporate performance and financial performance. There is also a need to develop case-study material to demonstrate this in the Australian context.
Recommendation 2 - the Commonwealth Government, in association with the finance sector and industry, commission specific academic research into the financial value for business of investments in sustainable development in Australia.
Environmental and social disclosure
Noting the international trend towards increased voluntary public reporting and in some instances, mandatory disclosure, additional consultation between government, industry and other stakeholders should be pursued to identify an optimal reporting and disclosure regime.
Recommendation 3 - the Commonwealth Government, in consultation with key stakeholders (the finance sector, industry, ASIC, the ASX, the accounting profession, state EPAs and peak environmental groups) should commission a review of the excisting mandatory and voluntary environmental and social disclosure requirements, in order to establish an optimum reporting and disclosure regime.
Performance metrics
To ensure that environmental disclosure by industry addresses the information requirements of the financial sector, there should be closer dialogue between financial analysts and industry.
Recommendation 4 - the Commonwealth Government, should establish a working group to investigate ways to enhance the relevance of public environmental and social disclosure for use by financial analysts.
Management and reporting
International financial institutions are adopting company-wide approaches to environmental, and increasingly, social issues management, in order to demonstrate their commitment to sustainable development and differentiate their services.
Recommendation 5 - the Commonwealth Government should work with the UNEP Financial Initiative's 'Operational Environmental Management' advisory committee to develop ways of promoting the adoption of environmental/social management and reporting guidelines by financial institutions.
In outlining the above recommendations we acknowledge that the Commonwealth Government will need to consider how it will expediate the carriage of these. Additionally the government will no doubt wish to develop a vision of the outcomes it would expect from the further engagement of the finance sector and ensure that it can appropriately foster that relationship.
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