Sustainable Investment

Articles Written by Austin Bell (Partner), Jared McLachlan (Associate)

From an investment funds perspective, the consideration of environmental, social and governance (ESG) factors is most clearly present in the creation of investment objectives and in determining the investment mix that will achieve that objective. For many funds managers, ESG factors represent another qualitative element considered in making investment decisions. This note provides an overview of the intersection of ESG considerations with the regulation of investment funds in Australia.

Fund Establishment and ESG Units

The establishment of ESG focused managed investment schemes (a form of investment fund structure utilised in Australia) represents a way to capitalise on the growing demand for ESG investments. Some product issuers have also opted to establish a separate class and pool of assets within an existing fund aligned with ESG investment objectives, rather than establish a separate fund. The creation of different classes of units referrable to a separate pool of assets within a fund allows a fund manager to employ different strategies within the same fund, including where one of those strategies effectively has an ESG overlay.

ESG elements in Investment Management Agreements (IMAs)

IMAs and investment mandates are the most common form of agreements that specify the guidelines to be followed by managers when managing assets. These agreements usually set out, among other things, the permitted investments and asset classes, risk tolerance levels and benchmarks. These agreements tend to include, at least some, ESG considerations and not simply negative filters (such as no tobacco or coal investments). IMAs may also require the manager to obtain the client’s consent before particular transactions are completed (thus giving the client a veto right in relation to particular ESG considerations). An IMA can also require a manager to give the client additional reporting on ESG factors, including current holdings, performance against benchmarks and ESG market conditions.

Fund disclosure documents

In Australia, there is a separate regulatory regime for persons who acquire financial products other than securities. Whilst Chapter 6D of the Corporations Act 2001 (Cth) (Corporations Act) applies to securities, Part 7.9 of the Corporations Act applies to listed and unlisted management investment schemes, margin lending facilities, derivatives and other similar financial products.

Division 2 of Part 7.9 of the Corporations Act provides that a product disclosure statement (PDS) must be provided to a person before they acquire a financial product where that person is acquiring the financial product as a retail client. A PDS must contain all of the information that might reasonably be expected to have a material influence on the decision of a reasonable person, as a retail client, whether to acquire the product. This means that a PDS ought to contain information about the issuer, the significant benefits and risks and the costs associated with acquiring and holding the financial product.

Specifically, interests in investments funds offered under a PDS are subject to the following ESG disclosure requirements:

  • Subsection 1013D(1)(l) of the Corporations Act requires a PDS to set out the extent to which labour standards or environmental, social or ethical considerations are taken into account in the selection, retention or realisation of investments. Regulation 7.9.14C of the Corporations Regulations 2001 (Cth) requires a PDS to contain more detailed disclosure about the considerations the issuer takes into account in relation to the ESG purposes of an investment and the extent to which those considerations impact the selection, retention or realisation of that investment or investments.
  • ASIC Regulatory Guide 65 Section 1013DA disclosure guidelines (RG 65) sets out the Australian Securities and Investments Commission’s (ASIC) interpretation of how financial product issuers can meet these ESG disclosure requirements in their PDS. In particular, RG 65 attempts to outline the level of detail that ought to be provided in relation to ESG disclosures, which, under Part 7.9 of the Corporations Act, includes the disclosures relating to what is known, and what a person would reasonably require to know, in relation to these features of the product. ASIC states in RG 65 that the issuer of a financial product must not give the impression that all of the ESG factors are taken into account if only some are considered in relation to the financial product.

Task Force on Climate-related Financial Disclosures

In December 2015, the Financial Stability Board established the Task Force on Climate-Related Financial Disclosures (TCFD) at the request of the G20 Finance Ministers and Central Bank Governors. One of the TCFD’s mandates was to assist in identifying the information required by investors, lenders and underwriters to assess and price climate risks and opportunities.

In June 2017, the TCFD issued its final report outlining its climate-related financial disclosure recommendations. The recommendations focused on the disclosure of governance practices, strategy, risk management and metrics and targets. Companies may wish to take into account the recommendations of the TCFD when drafting disclosure documents.

In June 2021, CDP, the Investor Group on Climate Change and the Principles for Responsible Investment released a roadmap titled ‘Confusion to clarity: A plan for mandatory TCFD-aligned disclosure in Australia’. The plan outlined global and domestic developments in the climate disclosure space, made a case for mandatory TCFD-aligned disclosure and outlined a number of proposals for the implementation of mandatory climate risk disclosure in Australia. One such proposal was the amendment of existing ASIC regulatory guidance to ensure that listed companies, large non-listed companies and fund managers report in accordance with the TCFD recommendations.

Draft Prudential Practice Guide CPG 229 Climate Change Financial Risks

On 26 November 2021, the Australian Prudential Regulation Authority (APRA) released Prudential Practice Guide CPG 229 Climate Change Financial Risks (CPG 229) which applies to APRA regulated entities. Although fund managers are not regulated by APRA, superannuation fund trustees are. Given that superannuation trustees are the client of a fund manager, the requirements imposed on APRA regulated entities are likely to impact on the service providers (including fund managers) of those entities.

CPG 229 states that “beyond any statutory or regulatory requirements, a prudent institution would likely consider whether additional, voluntary disclosures could be beneficial to the institution by enhancing transparency and giving confidence to the wider market in the institution’s approach to measuring and managing climate risks.”[1] CPG 229 goes on to state that “APRA considers the framework established by the TCFD to be a sound basis for producing information that is useful for an institution’s stakeholders,”[2] and that “APRA anticipates the demand for reliable and timely climate risk disclosure will increase over time”.[3] CPG 229 also notes that institutions with international activities will need to be prepared to comply with mandatory climate risk disclosures in other jurisdictions. According to APRA, a prudent institution “would continually look to evolve its own disclosure practices, and to regularly review disclosures for comprehensiveness, relevance and clarity, to ensure it is well-prepared to respond to evolving expectations in relation to climate related disclosures”.[4]

ESG Considerations for Financial Advisers

ASIC has raised the possibility that financial advisers may need to take into account ESG factors when providing personal financial product advice. In ASIC Regulatory Guide 175 Licensing: Financial product advisers – conduct and disclosure, ASIC states that financial advisers must determine whether section 961B of the Corporations Act (the statutory best interests duty) requires an adviser to take into account ESG considerations when providing personal financial product advice. If an adviser determines that the best interests duty requires them to take ESG factors into account, then the adviser would have to do so when providing their personal financial product advice. Presumably, subject to the particular circumstances, an adviser could determine that section 961B of the Corporations Act will require a consideration of ESG factors for some clients, but not others.


[1] Australian Prudential Regulation Authority, ‘Prudential Practice Guide – CPG 229 Climate Change Financial Risks’ (Practice Guide, 26 November 2021) 19.

[2] Ibid.

[3] Ibid.

[4] Ibid.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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