Note: This piece was contributed by Jacki Johnson and Simon O'Connor, co-chairs of the Australian Sustainable Finance Initiative and solely reflect the writers' opinion
Many will opine on the lessons learnt from 2020, but the seismic shifts that occurred in the finance sector over the year are worth a look under the hood, as they will deliver a new normal for Australia's financial system in 2021 and beyond.
We are in the midst of significant social, economic and climate related upheaval. This is resulting in a significant reorientation of global capital in recent history, and with the momentum of 2020 far from reaching its peak, Australian businesses and financiers need to sit up and pay attention.
Capital is now shifting en masse towards supporting businesses and assets that will prosper in a world rapidly working to reduce global emissions by 2050, and at the same time, moving to avoid exposure to those failing to articulate how they can be sustainable in a net-zero world.
In the final months of 2020, we witnessed a wave of public commitments by finance companies to align to net-zero emissions by 2050 - from our largest banks, insurers and super funds - supported by moves to work with large clients and companies within their portfolios to aid and assist in this transition. ASX companies are also moving in this direction, with ever greater numbers setting long-term climate targets in 2020.
The case has been made strongly by our regulators, that climate change is now a foreseeable and actionable risk that finance and business needs to be able to demonstrate they are managing, like any other risk.
Globally, regulators are upping the ante on the expectations of directors and executives of finance organisations to be able to demonstrate a strong preparedness around climate change, but also broader systemic societal risks as have been revealed in this year of the pandemic. With peak global regulatory bodies ramping up their formalisation on these expectations, we will see increased focus continuing in 2021.
As our tools and frameworks mature, allowing us to get better at measuring and managing broader non-financial risks, greater levels of climate-related disclosures from companies in 2020, aligning with the Taskforce for Climate-related Financial Disclosures (TCFD) will occur. Recent research by the Australian Council of Superannuation Investors (ACSI) found a fivefold increase of adoption of the TCFD by ASX200 companies.
A critical part of fulfilling the aforementioned net-zero commitments will be getting access to this climate data, and so we expect ongoing pressure on companies to disclose, a trend that is also increasingly being embedded into regulatory regimes, such as NZ's recent announcement to legislate mandatory TCFD disclosures.
All of which is the precursor to a major shift in capital flows towards more sustainable assets, effectively lowering the cost of capital for clean businesses, and increasing that cost for those who can't articulate how their business fits in this sustainable future.
Already, the money is moving. 2020 saw strong issuances of green, sustainability and social bonds, as well as a rapid emergence of sustainability linked loans, lowering the cost of capital for businesses who can achieve positive sustainability objectives. Furthermore, responsible and ethical investing continued its strong growth reaching over $1 trillion in funds in 2020, supported by strong inflows, and compelling performance of these funds against their mainstream counterparts.
Last year's momentum was not a one-off coincidence - it reflects the accelerating shift underway globally towards sustainable finance, a means of doing finance that not only better manages for all risks, but also aligns to the global trajectory to combat climate change in line with the Paris Agreement and improve important social goals that are captured in the Sustainable Development Goals.
The determination by the global community to achieve these goals has gathered pace in the last months of 2020, with net-zero emissions commitments coming out in a flurry of activity from our major trading partners including Japan and China. In addition, the US election outcome will rapidly shift the direction of the second largest global emitter. Now well over half of global GDP is from countries covered by net-zero emissions targets according to the UK's Energy and Climate Intelligence Unit, and approximately 70% of Australia's trading partners.
For Australia too, a significant body of work wrapped up in late 2020 that laid out how this momentum is more than just ad hoc activity in the market, but rather signals the start of a coordinated plan to shift the entire Australian financial services sector to support this transition.
The Australian Sustainable Finance Roadmap, an output that involved nearly two years of work with input from 140 people from 80 organisations across banking, insurance, investment, government, academia and civil society, joins the dots to articulate the pathway forward for financial services.
For those wanting to read the tea leaves for the year ahead, this Roadmap should be on your summer reading list. Most significantly, as an output of the sector, it signifies that the changes above are far from ad hoc coincidence, but rather are the beginning of a new normal for finance in Australia that will only continue to accelerate in 2021.
There is now an unstoppable global momentum underway that will drive the direction of capital. Australia must be on the front foot in this movement, with much to gain, and much to lose by inaction.