Australia Agrees to Disclose Sovereign Bonds’ Climate Risks

Investors can comment on the settlement until the court approval hearing, scheduled for October 11.




The Commonwealth of Australia will for the first time disclose climate risk in sovereign bonds following the settlement of a world-first class action lawsuit.

The case was filed in 2020 by Kathleen O’Donnell and centered on the fact that climate risk was not disclosed when she chose to invest approximately A$1,000 in exchange-traded Australian government bonds through the CommSec app earlier that year. O’Donnell and other plaintiffs she represented did not seek damages.

The case was settled on August 7 by O’Donnell and the respondents, the Commonwealth of Australia, the Australian Office of Financial Management CEO and the secretary of the Australian Department of the Treasury.

A court hearing on the settlement approval is scheduled for October 11, and other bond investors have been invited to put forward their views on the settlement for the court to consider, a process which  occurs in all class actions in Australia.

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If approved, the settlement will require the government to publish a statement on the Department of the Treasury’s website acknowledging that climate change is a systemic risk that may affect the value of its government bonds.

In a statement, O’Donnell commented: “As an investor, I am pleased with the proposed settlement. This is the first time a country with a AAA credit rating has acknowledged climate change is a systemic risk when talking about risks to government bonds.

“When I purchased these bonds as a 23-year-old in 2020, the government did not mention climate change. This was remarkable, given that my bonds mature in 2050, and by that time, Australia will be facing increasingly serious climate impacts,” O’Donnell said. “The settlement is an important recognition in the context of recent research that suggests Australia risks losing its AAA credit rating due to climate change. The settlement is an important first step in realizing the risks of climate change. The government must now prioritize effective action on climate change to mitigate those risks.”

Clare Schuster, an associate at Equity Generation Lawyers, the firm that represented O’Donnell pro bono, says, “When this case was filed in July 2020, the government referred investors in Australian bonds to the budget to assess the government’s fiscal position. At the time, the budget did not make any specific mention of climate change nor its economic impacts.

“Since then, Australia has better incorporated climate change into legislation, policy and in the budget, which now details the fiscal impacts of climate change,” Schuster says. “The settlement is an important step forward as part of a broader contextual shift. In the settlement, the Australian government provides better disclosure and commits to continued engagement with investors and other stakeholders on climate change risks.”

This article initially appeared in our sister publication, FS Sustainability, which, like CIO, is owned by Institutional Shareholder Services Inc.

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How Investment Advisory Firms Can Follow SEC Marketing Rule

The SEC concluded its first enforcement action under the new marketing rule last week.



The Securities and Exchange Commission’s new adviser marketing rule, finalized in November 2022, saw its first enforcement action on August 21, when a $1 million fine was levied against Titan Global Capital Management USA LLC, an investment advisory firm, for deceptive marketing materials related to hypothetical performance.

The marketing rule applies to all communications delivered to more than one person and offering or describing an adviser’s services, unless it is “extemporaneous live communication”—off-the-cuff or “truly bespoke” communication—according to Dan Bresler, a partner in the law firm Seward & Kissel LLP. Even if the same talking points are delivered to individuals one at a time, it still counts as more than one person, and would also qualify as prepared remarks and would therefore be subject to the rule.

Communication involving hypothetical performance, though, is subject to the marketing rule even if communicated only to a single person. Bresler says the SEC believes that “hypothetical performance raises significant enough concerns from a misleading and conflicts perspective that those communications should go through the required compliance oversight.”

Hypothetical performance can include forward-looking projections, but it more commonly features hypothetical application of past data to a new product, portfolio or strategy that did not previously exist. 

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Advisers should avoid looking for creative ways to evade the marketing rule’s restrictions on hypothetical performance and instead find ways to follow it, Bresler recommends. For example, advisers should not worry if what they are saying is technically hypothetical or not, or what the size of their audience is or might be in the future. Instead, the “more common approach is just to accept that it is an advertisement.”

Bresler says advisers should “have a process for preparing materials” that would meet SEC marketing requirements and, “once you have that process running, you can generate materials pretty quickly, and you don’t need to worry if you get into hypothetical performance.”

Even though the SEC charged Titan with violations related to hypothetical performance, Titan was cited for infractions that would have been problematic under the previous marketing rule, according to Bresler. Specifically, citing a 2,700% annual return without mentioning that the figure was based on a cherry-picked three-week window extrapolated to one year was “egregious” and “under any regime, that would be misleading.”

Bresler says the SEC avoided some of the more controversial elements of the marketing rule in the Titan settlement, such as the requirement that marketing materials featuring gross performance must also show net performance by accounting for related fees.

Bresler explains that some advisers may advertise performance of a portfolio by sector or by region and may struggle to aggregate the fee structures among various investments into one number in order to calculate net performance. Because of this ambiguity, “enforcement for those issues would be a big concern for market actors,” and he believes advisers are hoping for additional “guidance before enforcement.”

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