The FSC spoke with Rakhi Kumar, Senior Managing Director, Head of ESG Investments and Asset Stewardship at State Street Global Advisors, about Australia's current ESG and Corporate Governance environment.
Q: Australia’s ASX (Australian Stock Exchange) recently released its newest Corporate Governance Principles and Recommendations. What do you think is the biggest hurdle for today’s businesses in terms of compliance in the area of Corporate Governance?
A: Companies and their boards really need to recognise that meeting the requirements of corporate governance ‘codes’ is the minimum expectation of the market. Many investors may have different expectations, which may go beyond those of the code and often that can go into qualitative expectations around oversight of culture and conversation. Corporate governance is not a black and white issue, it is dependant on how it’s being practiced and there needs to be conversation around it. People tend to move to a ‘check the box’ approach when it comes to corporate governance and related codes, but it’s the spirit of the rule and the expectations of the investors that should really be driving behaviour, not just a code’s requirements.
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Q: Australia’s ASX (Australian Stock Exchange) recently released its newest Corporate Governance Principles and Recommendations. What do you think is the biggest hurdle for today’s businesses in terms of compliance in the area of Corporate Governance?
A: Companies and their boards really need to recognise that meeting the requirements of corporate governance ‘codes’ is the minimum expectation of the market. Many investors may have different expectations, which may go beyond those of the code and often that can go into qualitative expectations around oversight of culture and conversation. Corporate governance is not a black and white issue, it is dependant on how it’s being practiced and there needs to be conversation around it. People tend to move to a ‘check the box’ approach when it comes to corporate governance and related codes, but it’s the spirit of the rule and the expectations of the investors that should really be driving behaviour, not just a code’s requirements.
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Q: From your global experience, where does Australia need to make strides in the ESG investment space?
A: What I have not heard much about here is integrating ESG as a signal into the investment process. I have heard about exclusionary and I have heard about climate-thematic investments, but actually integrating and acting upon ESG scores or insights on companies is something I haven’t heard much about. And I think part of that is because of the problem around data and also around the lack of understanding around materiality methodology of scoring that is opaque. So, this needs to be addressed. It is a universal problem, but I do feel that Australia and the US are in the same boat, when it comes to making sure what we are acting upon is material to the business. And I think what we have had to do as an asset manager is create our own scoring methodology based off the Sustainability Accounting Standards Board (SASB) (sasb.org) so that we can engage with companies and tell them ‘this is your score and if you want to improve your score, please improve disclosure of material ESG risks as defined by SASB framework
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Q: The FSC launched the first Asset Stewardship Code for Australia in 2017 () – in your opinion, how important is it for the industry to have codes of practice to follow in this space?
A: I think it’s very important for the investment industry to have a stewardship code because it is our responsibility. And I think, just like corporate governance codes layout the responsibility and expectations of companies, we should be defining minimum expectations of investors. And that’s why I think stewardship codes are important, where there’s transparency around your processes as to how you conduct your stewardship, how you provide oversight of vendors, and I think most important is how do you mitigate conflicts in the voting and engagement process – particularly for asset managers.
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Q: In your opinion, is culture still not being addressed enough by the boards of today’s finserv businesses? What lessons could we learn from the international experience?
A: I think all global board members are in the same boat here, everybody knows the importance of culture in the success of a company, its very well-documented. However, it’s such a complex issue and its very hard for boards to articulate, to talk about and to oversee. But just because it’s hard, it doesn’t mean we shouldn’t do it. We must focus on it because once we start exploring how we address culture in a systematic manner we will start coming up with what to watch for and watch out for. Understanding that culture and strategy are interlinked and that very well-know quote around culutre eating strategy for breakfast – it’s so true, and I think what boards do today is focus on strategy and having the right strategy. What they forget to do is to assess is if their current company’s culture can pivot, especially in this challenging environment we are in, to a changing strategy and if the culture can support that strategy. That’s where a lot of failures can happen, or delays can happen in achieving strategy.
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Q: Lastly, is there one final message on corporate governance and the future that you would like to share with Australia’s business community?
A: I think integration is the future of ESG. Whether its stewardship or investments and it’s about directors knowing their ESG score, because you are getting rated as a company whether you like it or not or whether you’re providing disclosure or not, whether you’re giving material information or not and I think what is also happening is investments are being driven off that score – and the market perception of your company. By just saying ‘it’s not my responsibility’, you’re not going to be able to hide from it. It actually will drive share price because it will drive investments in your company and so you need to educate yourself on ESG and you need to understand what your score is, and you should understand what is material to your business so you control your own score in the long term.
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