Australian investors are increasingly interested in the environmental, social and governance (ESG) standard of companies when it comes to constructing their portfolios suggested participants in a panel held as part of the Financial Services Council Leaders Summit in Sydney.
Investors turning to values for value
By Mark Eggleton
Australian investors are increasingly interested in the environmental, social and governance (ESG) standard of companies when it comes to constructing their portfolios suggested participants in a panel held as part of the Financial Services Council Leaders Summit in Sydney.
In a brief presentation before the discussion, the Head of ESG at the $150 billion Future Fund, Joel Posters, said with trust in institutions having been eroded so significantly in recent years, a company’s commitment to protecting its social license to operate has become an imperative.
He said the Future Fund’s investment decision-making is driven by factoring in ESG risk.
“ESG considerations can tip the balance and we have rejected investment opportunities on ESG and reputational risk grounds in the past.”
Yet while the Future Fund has rejected opportunities, it generally doesn’t believe in exclusions because it goes against their mandate to maximise returns given to them by Government.
Having said that, Mr Posters said “we do apply a small number of exclusions across all of our funds related to matters that contravene specific international treaties that Australia has signed on to which in practice is companies producing cluster munitions and land mines.”
No more tobacco investments
Furthermore, he said the Future Fund also decided to cease investing in companies producing finished tobacco goods.
According to AMP Capital’s Head of ESG, Adam Kirkman, the company’s investment committee discussed what the exceptions are when investing a client’s money, because by excluding particular investments there’s a risk of suffering a performance hit.
“We asked ourselves a series of complex ethical questions around what actions are actually acceptable for a fund manager in discharging our fiduciary duties and chasing investment returns? Should we dismiss immoral activities and just wait for government regulation?
“We finally asked ourselves whether we just mutual cypher… where money flows through mutual funds and out into the broader investment community, and we have no accountability where that money gets allocated?”
After asking that question, the company decided in certain exceptional circumstances it will exclude a company on purely ethical grounds.
Following in the Future Fund’s footsteps this meant AMP Capital excluded tobacco products and certain weapons.
Guiding frameworks
Yet while it’s easy to exclude companies manufacturing tobacco products and weapons both Mr Posters and Mr Kirkman agreed the ESG discussion and the reasons for exclusion is much broader.
Dr Bronwyn King who is the Founder and CEO of Tobacco Free Portfolios said it was important to apply a framework where you can justify taking a strong position on a company.
Her framework consists of three simple questions:
- Can the product made by the company be used safely?
- Is the problem caused by the company so significant on a global scale that it’s subject to a UN treaty or UN Convention?
- Is there any way you can interact with that company to create change?
Dr King said when addressing these questions the tobacco industry basically answers each one of these questions negatively. It can’t be consumed safely, there’s a UN treaty signed by 120 countries and the tobacco industry can’t be engaged because the only acceptable outcome is it ceases to exist.
Changing customer values
Mr Kirkman said when they discuss with clients what they want, “they increasingly don’t want to be invested in products that cause harm.”
Moreover, AMP Capital’s internal research found they can meet client investment objectives without tobacco investment.
Interestingly, Mr Posters said there is a geographical difference when it comes to this willingness to exclude particular companies.
He said in Europe, investors are willing to exclude weapons, tobacco and even beyond those categories, whereas there’s a greater reluctance to implement exclusions in the US.
The argument in the US “is often all about that fiduciary duty” to investors rather than exclusions.
Then again, Mr Kirkman said there is a growing need in the US to develop products which measure ESG considerations more seriously.
Put simply: the panel agreed that “consumers are demanding values” whether that be around excluding the tobacco industry or addressing climate change or even corporate governance issues.
This conversation was part of the 2017 FSC Leaders Summit in Sydney on 26 July.