Banks lead the way but there's more to be done: a recent study has shown that the Australian financial services industry must be better prepared for the risks and opportunities of Climate Change

Australian Banking & Finance, July 30, 2008 by Andre Khoury

There is no doubt that Climate Change is on the radar of those in the Australian financial services industry. With the Rudd Government making plenty of noise about ways it intends to tackle Climate Change, it would be hard for the sector not to notice the importance of this issue.

But is the industry doing enough?

According to a recent study, the industry needs to be better prepared for climate change impacts in terms of an understanding of the risks and opportunities generated by the new environment.

The Financial Services Institute of Australasia (Finsia) and Griffith University's Sustainable Business Research Initiative spoke to a number of representatives from large banks, research organisations, and investment and advisory organisations currently engaged in Environment, Social and Governance (ESG) activities.

"The results of the study suggests a significant disparity between Australia's response to climate change to date, compared to competing foreign markets," said Dr Martin Fahy, Finsia chief executive.

"These preliminary findings ... have identified a gap in understanding within the industry regarding the opportunities which climate change initiatives present.

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"Australia's ability to adapt and embrace the opportunity to enter new markets, develop new products, generate and attract new capital and produce long term returns will significantly improve Australia's comparative advantage as a financial services centre."

Key findings of the study also included:

--Different sub-sectors of the finance industry appear to be responding to ESG issues at varying levels; and

--Significant disconnections between profit, performance, remuneration and long term shareholder/client value must be addressed to facilitate engagement with ESG issues.

"It's important to focus on the opportunity which exists for the Australian financial sector to play a role in influencing global developments in ESG activities," Fahy said. "In particular, the opportunities in the Asia-Pacific region are vast and our financial services industry can take a lead position on this."

Who are the leaders and who are less prepared?

The study found that the banking sub-sector was a leader with respect to sustainability integration. "However, other groups in the financial services value chain have varying levels of commitment and this is generally driven by client demands for performance coupled with short term performance incentives," the study's exposition paper said.

"Superannuation funds, particularly the industry funds, were generally recognised as leaders in the area. Parts of the funds management sub-sector were seen as being leaders who are now taking an 'ownership' perspective with a more long term focus. Other fund managers and buy-side analysts still tend to behave like traders because of the focus on short term incentives.

"Most interviewees considered that the financial planning sub-sector is definitely less prepared, due to a lack of understanding, a lack of interest from clients, and their role being one of product receiver rather than driver/innovator. The sub-sector is driven by returns to clients and reward structures that are incompatible with long term ESG issues. Stockbrokers and sell-side analysts are also less prepared for similar reasons.

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"Investment bankers were seen as being driven by short term incentives, leading to an opportunistic approach."

What are businesses doing already?

The study showed that business practices within the financial services industry which already take aim at sustainability issues "varies considerably throughout the subgroups in the sector".

"The banking sector appears to lead the way, with three of the four major banks being recognised as global leaders in their commitment to sustainability," the paper said. "The fourth bank, while less engaged, is now also starting to play a role.

"One interviewee commented that, together with the miners, the banking sector leads the field with respect to sustainability in Australia. However, there have been problems with applying the commitment operationally; for example, with respect to lending practices.

"Views varied on the extent of commitment among other sub-sectors of the financial services industry, although in general it is recognised that these lag behind global best practice. With respect to investment and fund management, it appears that awareness is high, but changing that awareness into action and implementation has been slow. Some of the large superannuation funds and insurance providers also have a high level of awareness, but, again, these sub-sectors are extremely variable in their level of engagement.

"Interviewees identified some significant barriers to the integration of sustainability. These include a lack of leadership commitment, some bad experiences in terms of unprofitable initiatives, a lack of 'ownership' within institutions, a detachment from day-today activities, uncertainty with respect to a connection to returns, a focus on short term remuneration incentives (both individual and wholesale), and a focus on short term portfolio (both investment and lending) performance."