Dilan Ashton

The launch of ChatGPT has led to heightened investor attention on generative AI over the past year and pushed AI regulation into the spotlight for governments around the world, notes Dilan Ashton General Manager of Responsible Investing at Equity Trustees Asset Management

“In Australia we do not currently have any specific regulation,” she says. “However, it is on the cards as per the recent announcement of the creation of an AI expert group to advise Government and help ensure the development and deployment of AI is done safely and responsibly.”

Ms Ashton says while it is still unclear when AI regulation will be finalised and come into force, “we are already seeing a number of ASX companies report their use of AI in their operations, highlighting benefits such as enhanced productivity, improved efficiency and reduced costs.

“The use of AI can also have a negative impact on ESG performance in areas such as social licence, trust, and data privacy and security if not adopted responsibly,” she notes. “It will be increasingly important for users to design responsible AI frameworks and governance practices to guard against some of these impacts and future regulatory changes.”

Ms Ashton adds that the CSIRO has partnered with Alphinity Investment Management (one of the investment manger’s in the EQT Responsible Investment Global Share Fund) to design a framework to help investors assess responsible AI through an ESG lens and Equity Trustees looked forward to the release of this tool later in the year.

Introduction of an Australian Climate Border Adjustment Mechanisim (CBAM)

Ms Ashton also notes that the Australian Government has announced a review into the feasability of an Australian CBAM policy with the findings expected to be released this September 2024.  The mechanism is effectively a carbon tax on imports, aimed at protecting domestic industries by preventing ‘carbon leakage’ which occurs when carbon-intensive production is moved to low cost countries with weaker carbon reduction policies.

The review follows Europe’s lead where a transitional phase of the EU CBAM started in 2023 and is  expected to be fully phased in by 2026. The US have also introduced a CBAM policy, and if passed will start in 2025 and will be a potential catalyst for other countries to follow.

Ms Ashton suggests the introduction of a CBAM in Australia will have implications on the most emissions-intensive industries. “Although it is designed to shield these industries, it also has the potential to expose them to higher input costs (if importing emissions intensive products) and increased competitive pressures which could result in an acceleration of green capex investment.

“It is still very early days and the development and implemetation of a CBAM in Australia will take time, however the outcome of the feasbility review and developments in this space will be interesting to watch over the coming months and years,” Ms Ashton notes.

Equity Trustees Asset Management have a strong belief that ESG factors have the potential to impact the performance of a business over the longer term, and companies managing it well prove to have more sustainable and robust busines franchises. Our objective is to better understand how the issues above evolve, and how they will impact on the companies we invest in and are key topics which will shape our engagements and discussions with companies this year.

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Dilan Ashton

Over the last 12 months we’ve seen ASIC clamp down on greenwashing, particularly amongst fund managers and their product offerings which has increased scrutiny on ‘true to label’ advertising and marketing, writes Dilan Ashton, General Manager for Responsible Investing at Equity Trustees.

A wave of green has rolled across the local and global investment markets, with Bloomberg estimating that global ESG assets will represent nearly a third of all assets under management by 2025. Regulators and financial advisers alike are being kept on their toes ensuring that sustainable financial products being sold to consumers are well understood and more importantly do what they say they are going to do.

Greenwashing is the practice of misrepresenting a financial product or an investment strategy to be either environmentally friendly, sustainable, or ethical – put simply, when someone puts a lot of effort into advertising to make a product greener than what it actually is. It’s an area where advisers need to be continually vigilant when it comes to personal advice on product recommendations.

With ASIC’s increased focus on greenwashing, we have seen funds increasingly choosing not to publicise or downplaying their sustainability goals to avoid allegations of greenwashing and unwanted scrutiny. This practice is referred to as ‘green hushing’ and has emerged as a new trend, even in cases where goals are well intentioned, reasonable, and backed by process.

What to look for

ASIC’s Information Sheet 271 provides guidance around what greenwashing is, the current regulatory environment around sustainable products, and nine questions to consider when offering or promoting these products. The questions are drafted based on ASICs recent reviews on greenwashing and designed to facilitate truth in promotion and clarity in communication.

Clarity is imperative when creating marketing and communications strategies around a goal statement. We often find the most common way managers get into hot water is simply by making gratuitous statements.

Consider headings or graphics to see whether these might detract from the more qualified statements that appear in the material itself. Some marketing material is very well crafted in terms of appropriate qualifications and information, but the major headings can be misleading, and very different to the much smaller ‘fine print.’

Similarly, regarding sustainability related metrics, managers need to be careful around how sufficiently they are explained. For example,  product issuers that state they are committed to reaching net zero carbon emissions across their investment portfolios need to ensure they provide investors with the information around what this means and how they are going to achieve those targets.

One way to gain assurance that a fund is delivering on its responsible investment (RI) claims is to seek out offerings that have been independently verified by a third party.  The Responsible Investment Association Australasia (RIAA), a leading advocate for RI in Australia and New Zealand have a certification program that distinguishes quality, true to label RI products and services which is a good starting point for advisers.

Read between the lines

We have seen a clear shift in the ESG environment over the last five years, and it is no surprise that some product issuers across the financial services industry have tried to capitalise on the thematic. ASIC’s recent clamp down has once again reinforced the need for clear communication and marketing, and to create a fair environment for investors.

With the Federal Government announcing a further $4.2 million injection towards ASIC for sustainable finance misconduct, it is important now more than ever to look for clear messages and conduct all ESG representations with detailed explanations and substantiated evidence.

By Dilan Ashton, General Manager for Responsible Investing

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The 100 research which examines the most recent funds launched by the country’s leading provider of independent Responsible Entity and Trustee services to fund managers found the majority of funds they brought to market were still global equity funds, accounting for almost a quarter (22%) of funds launched.

This was down from 43% of funds in The 100 in 2022.

“Domestic equity funds accounted for just 15% of funds launched,” said Johnny Francis, General Manager of Business Development and Custody at Equity Trustees.

Mr Francis said: “The next most popular funds were fixed income, with domestic accounting for 19% of funds launched, compared to 15% for global fixed income.”

“These included corporate and government bond funds, asset-backed securities and notes coming to market. We also saw several private debt and credit funds being launched.”

“This was clearly a reflection of tightening market conditions spurred by tightening fiscal policy and rising interest rates in response to rising inflation and geopolitical volatility.”

He noted that the majority of the latest 100 new funds were directed towards retail investors (47%), with less than a third (31%) directed towards wholesale investors.

He also pointed out that there was a significant increase in funds being developed by boutique managers coming out of larger organisations.

And that more than half (51%) were registered funds compared to just over a third (34%) being unregistered.

Alternative products remained popular and included commodities, infrastructure, foreign exchange, and quant strategies. Exchange Traded Funds (ETFs) accounted for 12% and Real Estate Investment Trusts (REITs) only 1%.

Dilan Ashton, General Manager of Responsible Investing at Equity Trustees, added that 13% of funds had an environment, social and governance (ESG) theme or were sustainable development goals focused.

“Generally in the market, there were record inflows into Responsible Investment offerings, reaching $1.54 trillion in assets under management (AUM), representing 43% of all professionally managed funds.

“AUM in sustainability-themed investments has more than doubled to $161 billion over the 12 months ending 31 December 2021,” noted Ms Ashton.

Mr Francis added: “Over the last year we saw a significant majority of funds launched that were hedged (84%) versus not hedged (16%). The nature of erratic rising and falling markets has created an appetite for funds to use a variety of strategies including the leverage of non-traditional assets to help manage volatility.”

Interest in digital assets stalled pending clearer regulation.

Read the report.

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Dilan Ashton, General Manager for Responsible Investing for Equities Trustees Asset Management, said: “We are dedicated to preserving and growing our clients’ wealth, while ensuring the way we direct and manage capital is aligned with the values of our clients and progressing positive ESG outcomes.

“We believe that well-managed companies that exhibit strong corporate governance and develop and maintain a ‘social licence to operate’ through strong Environmental, Governance and Social policies and behaviours, will overwhelmingly prove to have more sustainable and robust business franchises and potentially be better investments over the longer term.”

The PRI support its international network of investor signatories in incorporating environmental, social and governance factors into their investment and ownership decision. The Principles were developed by investors, for investors and in implementing them, signatories contribute to developing a more sustainable global financial system.

As a signatory to the PRI, Equity Trustees Asset Management has consolidated its commitment to working with local and global industry bodies to remain at the forefront of developments in responsible investing.

Equity Trustees’ Responsible Investment Policy can be viewed here and the listing on the PRI directory here.

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