Capital markets are increasingly focused on Environmental, Social and Governance (ESG) risks and opportunities in their portfolio and investment strategies. Investment value is now at risk as new standards, regulations and legislation move industries to a more sustainable footing.
Beneficiaries, governments and civil society are looking to investors to have a long-term view on their investment decisions with respect to ESG risks, whist still generating returns. Research conducted by KPMG and RIAA adds to existing evidence that it is possible to focus investments on ESG while not compromising on returns. At the same time, it shows that growth in the responsible investment market in Australia is outgrowing mainstream investment growth.
The global context in which these investment decisions are made continues to change with investors having to understand the exposure and investment impact of a broad range of issues such as climate change, natural capital, energy transition, modern slavery, social license and social inequality.
The process of integrating the financial and the wider environmental and social risks and opportunities into investment strategies can be described as Responsible Investment (RI) or more broadly, Environmental, Social and Governance (ESG) driven investment.
There is a growing number of factors that are moving capital markets towards a greater focus on ESG risks and opportunities in their portfolio and investment strategies, including:
- Risk management and Fiduciary duty – Fiduciaries need to look at anything that may materially affect the financial returns of their funds – Climate risk as well as other ESG factors clearly belong in this conversation as an indicator of downside risk.
- The Australian Sustainable Finance Roadmap Initiative – the development of which will deliver policy, legislation, regulation and practices that align finance with delivering a sustainable and resilient economy.
- Regulation – Increasing risk of litigation associated with greenwashing claims.
- Regulation – regulators both at home and overseas are increasingly focused on the management of climate risk across portfolios.
- The Task Force on Climate-related Financial Disclosures (TCFD) – there is a growing expectation that investors are able to understand and report the financial exposure to climate risk across their portfolios.
- Impact Reporting – asset owners and managers are beginning to report the environmental and social impact of their portfolios in line with the Sustainable Development Goals (SDGs).
- The United Nations Principles for Responsible investment (UN PRI) Commitments – signatories need to report how the principles of responsible investment have been applied across portfolios.
- Green Finance – significant growth in green and social bonds that deliver positive carbon, energy or social impact as well as sustainability linked loans.
- Asset owner demand – The Responsible Investment Benchmark Report 2021 shows that asset managers are increasingly demanding their investment and asset managers invest responsibly. Simultaneously, thy are also looking for investments that align with their mission and values.
- Member demand – Australians want their investments to have a positive impact. 86 percent of Australians expect their superannuation or other investments to be invested responsibly and ethically. Two thirds of Australians (67 percent) who do not currently invest in ethical companies, funds or superannuation funds would consider doing so in the next 5 years.
- Solid Responsible Investment performance – RI strategies allow outperformance over the longer term and increasingly ESG/RI funds perform as well or better than benchmarks.
How KPMG can help
KPMG can provide bespoke Responsible Investing and ESG services to suit the needs of individual clients ranging from policy and strategy to implementation and monitoring.
Our services include the following:
Strategy and policy
- Development or analysis of ESG and climate strategies / policies
- Implementation of TCFD/CPG229 recommendations including gap analysis, risk identification and reporting
- Benchmarking ESG disclosures and approach against competitors
- Integration of ESG and Responsible Investment principles into business processes and operations
- ESG assessment of investments across asset classes
- Assurance of green finance instruments, including green and social bonds and sustainability linked loans
Reporting and assurance
- Preparation of Responsible Investment and impact reporting, including gap analysis of current reporting practices
- Assurance of ESG disclosures and Responsible Investment and other industry assessments (e.g. PRI, GRESB)