AUSTRALIA: SUPERANNUATION FUND INVESTMENTS – ESG AND VALUATIONS

By Jim Bulling and Hugo Chow

The Australian Prudential Regulation Authority (APRA) has released its final revisions to Prudential Standard SPS 530 Investment Governance (SPS 530).

The more significant amendments are in relation to valuation governance, proposed guidance for environmental, social and governance (ESG) risk management and some new issues for stress testing programs.

APRA intends to release draft guidance on these issues for consultation in Q4 2022, ahead of SPS 530 commencing on 1 January 2023.

Key developments in ESG

In response to submissions APRA received from the consultation process for SPS 530, APRA intends to issue guidance on how RSE licensees can demonstrate that they have a clear understanding of:

• ESG risks and how they are managed; and
• reflecting ESG considerations in their investment strategies.

APRA has also flagged that ESG financial considerations are expected to cover matters beyond just financial risk and climate change.

Key developments in valuations

Following its recent Unlisted Asset Valuation review, APRA says there is a need for considerable improvement to how valuations are conducted in the industry.

Accordingly, its revised expectations will address the following:

• Valuation governance – including the use of independent experts, the separation of investment decision-makers and valuers, how valuation methodologies should be developed and the use of stand-alone Board sub-committees and Board reporting
• Valuation methodology – addressing the sources and hierarchies of valuations, methodologies and approaches, the use of assumptions and estimates in these valuations, as well as independent assurances and the triggers for interim valuations
• Frequency and monitoring – addressing how frequently assets should be valued (with an expectation that this would generally occur quarterly), and how the sequencing of valuations would be managed across asset classes
• Types of valuation risk – including a list of the types of valuation risk APRA expects RSE licensees would consider.

We will keep you posted once APRA issues draft guidance for SPS 530.