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Wider acceptance of ESG principles in Australia

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Launched in April 2006 the United Nations Principles for Responsible Investment (PRI) initially had a modest impact in Australia, with only two pension funds signing up as founding signatories. Two years later, and Australia has more funds under management committed to the UNPRI, as a percentage of total assets, than any other country. Over 50 Australian-based institutions have endorsed the PRI. The question is, will Australia’s acceptance of the PRI actually change investment practices in the country?

Unlike Europe and the U.S, Australia’s investment industry did not have a deep-rooted ethical investment industry. This is at least partly due to the nature of Australia’s superannuation system. Up until the 1980’s Australia’s pension system was dominated by the old mutuals, AMP, Colonial Mutual, and National Mutual. They provided a relatively small number of Australians with pensions in retirement. By the late 1980s, workplace superannuation began to emerge out of the industrial award system, with the building and construction industry leading the way. By the early 1990s, the Federal Labor Government legislated to provide all Australian employees with workplace superannuation, heralding the rise of the industry superannuation funds. Over this same period, the old mutuals demutualised, their dominance replaced by retail master trusts offering investors a suite of investment choices.

With the market divided into two product streams, and in some respect ideologies, the Federal Government legislated a few years ago to introduce choice of fund, enabling Australians to choose which style of investment suited their needs. The introduction of choice of fund resulted in a battle for consumer loyalty between not-for-profit industry superannuation funds and retail funds. This battle has mainly focused on the traditional areas of fees and investment performance. But some super funds are realising that in future they will need to differentiate themselves in other areas. It was in the midst of this battle that the UNPRI came into being.

The industry superannuation funds support for the PRI has been largely driven by the Australian Council of Superannuation Investors. So far, 18 ACSI members have signed up, including the majors Hesta, ARIA, Australian Super and Cbus. ACSI’s embrace of the PRI was by no means a guaranteed step. Despite their strong links to the trade union movement, industry super funds have been extremely cautious about ‘activist’ approaches to investment. Industry funds were also concerned as to whether their fiduciary duties allowed funds to consider environmental, social and governance issues - an issue that has now largely been satisfied.

A recent survey by the NSW Department of Environment and Climate Change has revealed that Australians believe that climate change will impact on their food, water supplies and household budgets and that the impact of climate change is already being felt. The survey revealed that more than half of Australians (54%) believe that climate change is impacting them, while 82% believe that climate change will impact within 20 years.

The support for the PRI by the industry super funds and retail master trusts has also led a number of boutique investment funds, who rely on distribution from the master trusts and investment mandates from the industry funds, to make the decision to commit to the PRI. Boutique fund managers such as JF Capital Partners and Herschell Asset Management have recently endorsed the PRI, as has Goldman Sachs JBWere.

With large scale support for the PRI over the last year the question for the investment industry is what this will mean in terms of practical actions? Will turmoil in investment markets re-focus the energies of retail master trusts and industry super funds on short term investment returns to the detriment of engagement on responsible investment issues? Louise O’Halloran, the Executive Director of the Responsible Investment Association Australasia thinks that this is unlikely: “There is no doubt that in the past it’s been harder to sell the concept of responsible investment when the markets are down. I think the reason for this is that for many, many years now responsible investment practices have been falsely associated with compromised returns. While the bulk of research reports show strong correlations between the financial performance of companies and their corporate responsibility practices, the markets have been somewhat skeptical about whether or not these correlations can really be quantified.”

O’Halloran believes that with this imminent downturn, we are more likely to find investors moving toward, rather than away from, responsible investment practices. The reason is that the correlations are becoming so obvious and so quantifiable.  “A raft of regulations are now emerging which will force companies to absorb costs which had previously been absorbed by the government or individuals,” she says. “Carbon pricing is one example, but there are many others as well, such as increasing regulation associated with waste, site contamination, toxic products, foodstuffs which lead to obesity, the list is long. Once those price signals are factored into company valuations, we are sure to see a greater interest from analysts on issues which may not be apparent on a spreadsheet, but nevertheless have serious financial consequences.”

Angela Manning, chairperson of Goldman Sachs JBWere’s corporate super fund, says, “By incorporating the UN principles into our investment philosophy we are ensuring that we do not invest in companies that solve one problem yet create another. Particularly for a long term superannuation time-frame, we feel the investment decisions of the GSJBW Superannuation Fund will be improved by considering the impact of ESG issues on our investments”.

ACSI has recently launched new guidelines to assist its members to consider ESG issues in investment processes. The guidelines indicate that as a first step ACSI members may ask their current fund managers to provide details of the manager’s ESG policies and to report to funds about the manager’s ESG activities, including research, voting and engagement with companies.

Over time, ACSI’s guidelines anticipate that members may evaluate their current and new fund managers on their ESG competencies and activities as part of the overall review and selection process. With ACSI members managing AUD $250 billion it is likely that a movement toward evaluating managers on their ESG competencies will drive investment managers to improve their performance.

While Australia’s investment industry has embraced the Principles for Responsible Investment the work is now beginning to implement responsible investment practices across investment portfolios.  In the end it will be the work that signatories do, not the number of signatories that sign up, that will determine whether Australia is able to claim that it is taking a leading role in the development of responsible investment practices in its investment industry.

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