Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
More to come on ESG in YFYS: Jones
Speaking to the Australian Council of Superannuation Investors’ (ACSI) conference, financial services minister Stephen Jones said that the government would continue to work on the Your Future, Your Super (YFYS) benchmarks to ensure that funds aren’t punished for investing sustainably.
“I support holding trustees to account for the performance of their funds,” Jones said on Wednesday. “But we want to ensure that there is an alignment between what we’re expecting in the short-term and where we know markets are going in the long term, and we want to ensure that there are not unintended consequences or perverse outcomes in the way we’re currently measuring fund performance.”
The current YFYS benchmarks have been criticised for disincentivising ESG or sustainable investing by punishing funds that move away from pollutive indices like the ASX200 (funds can incur significant tracking error by not perfectly replicating or improving upon the performance of a benchmark). There are also concerns that they promote a short-term view of investing that is incompatible with the long-term thinking required for funds to protect member money against direct and indirect effects of climate change.
Jones also said that Australia and other countries risked being left behind in “all the significant economic transformations” of the century if they don’t match the efforts of other countries in what has become a frenzied global competition for transition capital.
“If you’re not in the game, or you’re lagging and dragging the chain, then you’re going to be left behind. Countries that move quickly and decisively will have an advantage, and those that malinger will be punished. If you ever doubt this, think about the consequences of the passage of the US’ Inflation Reduction Act… Doing nothing is not an option.”
Jones touted the Albanese Government’s changes to the carbon safeguard mechanism, its electric vehicle policy, and its issuance of sovereign green bonds as three areas where Australia was keeping up. But he also flagged the introduction of a sustainable finance strategy to be introduced in the second half of the year, as well as a new sustainable finance taxonomy that will align with global standards but have “an Australian accent”.
“Capital markets can’t work effectively unless there’s transparent and credible information,” Jones said. “Australia can’t sit back, as with so many other areas, when new rules are being written about what is green and what is sustainable and those rules are written offshore without our engagement.
“That will provide a common and agreed standard and definitions about the sustainable characteristics of different investments… It’s complex and it’ll take time and collaboration to get it right, so partnership is essential.”
ASIC will also be given an extra $4.3 million in funding for ASIC to combat greenwashing, with Jones saying that the practice “corrodes the credibility of sustainable financial markets”.
“Sustainable business strategy has to start in the boardroom and in investment decisions, and not in the marketing department,” Jones said. “It has to be real. The funding allows ASIC to increase its existing surveillance of suspected greenwashing by listed companies, super funds and investment managers. It will also be able to pursue larger and more complex matters, further clarifying market expectations and deterring misconduct.”
