CLEAN MONEY: THE NEW SUSTAINABILITY FRONTIER
The newest front in the fight for a more sustainable world is emerging as the hip pocket – or more accurately, the bank statements – of mum and dad investors. This was highlighted in January of this year when anti-coal activist Jonathan Moylan issued a fake press release purporting to pull ANZ’s $1.2 billion loan to Whitehaven Coal’s Maules Creek coal mine. “We want our customers to be assured” said the release, “that we will not be investing in coal projects that cause…unacceptable damage to the environment.”
The hoax was not only successful in highlighting the direct environmental impacts of the mine, but also ANZ’s actions as its financial backer. In the aftermath, which had financial as well as corporate image repercussions – the scam briefly wiped $300 million off the share price of Whitehaven Coal – it raised the question: what is the role of banks in taking responsibility for the indirect impacts of their investments?
But banks aren’t the only financial institutions in the firing line for compromising on ethical or sustainable standards. Australia’s compulsory superannuation system has spawned a plethora of superannuation funds, whose funds under management have surpassed $2 trillion – to put it into perspective, that’s about 50% higher than Australia’s GDP in 2012. These funds own over 40% of the shares on the Australian stock market, so it’s safe to say that if you have a super fund, you have shares as well.
Responsible investment: a layperson’s guide
Bill Hartnett is the Head of Sustainability at the New South Wales-based Local Government Super Scheme (or LGSS), a super fund that is recognised as a prominent advocate for what the industry terms ‘responsible’ investment. He points out that making investment decisions based on non-financial considerations is not new to super funds.
“There’s always been an interest in ethics and ethical investment,” Bill says. “People have always been interested in basic things around excluding tobacco, or boycotts in South Africa in the 1970s due to apartheid for example. It’s always been a strong feeling, because people have ethical values, but it’s always been niche from an institutional investment perspective because of concerns about how it would affect investment performance.”
Nowadays, as highlighted by Moylan’s stunt and other high-profile events such as the ‘rockstar’ US environmentalist Bill McKibben’s recent visit to Australia, super funds are sitting up and taking notice of a broader set of issues. “What I think is new in the 21st century,” says Bill, “is the concept of ‘ESG’: environment, social, and governance. There is an increasing realisation from the finance community that these sorts of things can represent a material investment risk.”
The ESG concept, in short, is about looking beyond the dollars and cents in a company to look at its environmental, social and governance-related indicators. The idea is that a company who is likely to show poor environmental, social or governance performance is likely to be less profitable. For example, a company with high greenhouse gas emissions will probably have to pay for their pollution in one way or another, which will eventually affect their profitability. In social terms, a company which turns a blind eye to poor labour conditions in its offshore manufacturing plant may be accused of having indirect responsibility for harmful working conditions (such as the slave-like conditions found in Apple’s Chinese contractor Foxcomm’s factories in China), leading to a flow-on effect on sales. Governance is a nebulous concept, but can be summarised as ensuring that the checks and balances in a company such as management structure and executive remuneration are working effectively. In short, being a responsible corporate citizen these days means more than putting a recycling bin on each floor or giving your employees a day a year to volunteer at the local dog shelter.
Paul Smith is the General Manager, Strategy and Communications, for Australian Ethical Super, a small superannuation fund that prides itself as a responsible investor. For Australian Ethical, unlike other funds, this means avoiding all investments that cause unnecessary harm, such as coal. Paul agrees that there has been a clear shift in attitudes towards sustainability in the financial sector.
“The new meaning of ‘sustainability’ for super funds is how super funds invest responsibly and sustainably from an environmental and social point of view,” Paul says. “Responsible investment is becoming more and more entwined…and assessing ESG risk factors and their impact on the future of performance of investments has almost become mainstream.”
“It’s an acknowledgement that we [as super funds] can’t escape negative externalities such as pollution,” Bill Hartnett adds. “If you look at the science of climate change and the potential ramifications of it, there are very strong negative consequences. Social issues, too, such as the recent textile factory collapse in Bangladesh. This is all being done for our retail desires – for things to be [produced and] delivered cheaply. These ESG issues are very strong, and they can, although not all the time, be quite material.”
However, just because a super fund says they take ESG considerations into account doesn’t mean their idea of a socially, environmentally, ethically sound investment is the same as yours. Despite ESG gaining industry buzz, most people are surprised to know that the majority of their money is still invested straight into companies on the ASX with little regard for the nature of the stocks being invested in. Unless you’ve checked lately, this means you’re probably building up your retirement savings on the back of questionable industries such as coal seam gas and pokies. Paul agrees that the motivation for addressing ESG issues can vary from fund to fund. “There’s no ethical or values discussion there [necessarily],” he cautions. While he believes that the onus is increasingly on companies to improve their ESG credentials in order to reap investments, he feels we are still shy of a consolidated “ethical values decision-making policy”.
A long time coming…
Whether the motivation for taking notice of sustainability is driven by ethical or financial concerns, it begs the question: why has it taken so long for financial institutions to sit up and take notice?
“Well really, there are several reasons,” Paul offers. “One is complexity: most super funds don’t actually do the investing themselves. They outsource to fund managers. It’s [due to] the bureaucracy involved in the process that they don’t want to do it. Secondly they don’t think people will look at it – generally people are pretty apathetic about their super (and there’s lots of studies around that), although young people seem to be more engaged.”
Bill Hartnett points to a broader malaise within the industry. “Traditionally,” he says, “the financial service industry has probably been the most conservative and also the least transparent industry going around. You don’t get to see what the portfolios are and where they’re invested. I don’t think that’s been a great connection with people: they see their returns, but they don’t see the underlying investments that generate the returns.”
However, as Paul Smith alluded to, there are emerging signs of a broad-based, grass roots campaign directed squarely towards financial institutions’ complicity in funding irresponsible investments. NGOs, such as the Asset Owner Disclosure Project, have begun to name and shame financial institutions whose funds are tied up in projects that contribute to runaway climate change. The Investor Group on Climate Change, an international group of investors representing over $1 trillion in funds under management is demanding disclosure from fund managers on how ‘carbon-heavy’ their portfolios are due to concern that a potential global agreement to reduce carbon emissions will negatively impact the value of their fossil fuel-intensive investments.
On the domestic front, the NGO Market Forces released a recent report outlining the monetary contribution of the Big Four banks to large-scale oil and gas projects in Australia with a view to kicking off a large-scale campaign to pressure them to reconsider their investments. It’s campaigns like this that will be a key step in educating the public to coalesce around a clear rallying point – in this case, the environmental consequences of their investments and a movement towards divesting from fossil fuel-intensive industries.
Similar campaigns have clocked up some recent wins. Overseas, the San Francisco city’s Board of Supervisors passed a resolution earlier this year urging the managers of the city’s pension fund to withdraw the approximately $580 million they have invested in major fossil fuel producers like ExxonMobil and Chevron. This is one of the dozens of campaigns that the activist group GoFossilFree.org has sparked across the United States that aim to remove fossil fuels from city, school and university pension plans.
Closer to home, the Australian National University in Canberra was recently forced to sell its $1 million investment in controversial coal seam gas miner Metgasco after a concerted student campaign. Students are now demanding that the university disclose how much of their funds are invested in other coal, oil and gas companies. Baby steps, maybe – yet precedents like this carry a lot of currency in public debate.
This grassroots movement is complemented by some movement at the federal government level. A new legislative package called MySuper will require all super funds to offer a simple investment option to their members and, importantly, to disclose what their money is invested in. It’s hoped that this will encourage super funds to improve the transparency of their investments.
This change will revolutionise the way people view their super, according to Paul Smith. “You’ll be able to lift the lid and have a look at your super fund and find out exactly which companies or what debt or what countries they are investing in. Then you can compare ESG or sustainable options, within a super fund or an ethical one and say, you know what, ethics mean a lot to me, and I don’t want to support Rio Tinto, or Woolworths, because of gambling, pokies, cigarettes, dairy farmers, etc…”. It makes you think twice about those unread letters from your super fund – how soon will we start seeing ‘fossil fuel free’ stamps on those hitherto-unremarkable account statements?
The way forward
Not everyone will be convinced to make the switch to responsible investments. But at a time when global and national governance processes are failing – the international negotiations in Copenhagen in 2009 were widely acknowledged as a failure and the carbon price mechanism here in Australia may not survive the next election – empowering consumers to make better choices is becoming more important than ever.
“It’s really going to take consumers [to make this happen],” Paul agrees. “Thanks to superannuation, you and I now own the business. It’s not just a case of boycotting Coca-Cola drinks – you can now boycott Coca-Cola investments, because you own them.”
Bill is optimistic about how the role of super funds is going to change. “This is very much only the first step…but the opportunity is very exciting,” he says. “Governments are broke around the world and super funds can be the funding vehicle for a lot of great technologies, e.g. clean tech, clean infrastructure. While there is a transition from high carbon to low carbon economy, super funds are going to be asked to be at the forefront of that. I think there are a lot more exciting things to happen”.
Surveys consistently show that the majority of the public want to take action on climate change. In a world where we could decide to change our bank and retirement savings from ‘brown’ to ‘green’ with the click of a mouse, do consumers finally have the knowledge and the tools they need to make an educated choice to invest responsibly? An optimistic view, perhaps, but not an unrealistic one.
“It doesn’t require everyone to look at it,” Paul points out. “It requires enough people to start moving. If it works and you get hundreds of thousands of people shifting around and saying, hey, you’ve got Woolworths, or this or that…once that pressure comes, you’ll not only get a shift toward the sustainable funds – you’ll also get [all] funds having to react to it and being forced to become more sustainable in terms of the way they invest”.
“Knowing that you don’t need to compromise your ethics in order to retire comfortably would be a positive start to a conscious decision-making process and one that we are working hard on communicating,” says Paul. However, he isn’t holding his breath. “I would say it’s still going to take a generation and that we’re about five years into that.”
Want to help speed things up a bit? Read up on the Market Forces divestment campaign, sign up to the Australian Youth Climate Coalition’s slick The Vital Few petition, and don’t be scared to use their letter template to tell your super fund where you stand on irresponsible investment. Any views or opinions expressed in this article are the personal views or opinions of the author unless otherwise stated.
Illustration for Assemble Papers by Marc Martin.
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