Assess risks, not causes, in divestment debate
Australian Financial Review 12 January 2015
Divestment is a word we'll often hear during 2015. Large investors such as universities and superannuation funds are being encouraged to divest from companies involved in industries such as fossil fuels, poker machines or tobacco.
However, the discussion on whether large investors should divest certain companies or industries is at risk of becoming marginalised and yielding nothing.
Rather than relying on populist views, the reason for considering environmental and social factors in the investment process of a university endowment or super fund can be found in deeply rooted in investment principles. This is where the debate on investment and even divestment must head.
And it’s a debate that Australia's $2.3 trillion funds management industry is happy to lead.
Divestment advocates should firstly find the economic basis of their agenda. Secondly, they should collaborate with the investment industry, policymakers and global reporting initiatives on improving the information available to investors when making decisions about companies.
This is needed so investors can understand company risk profiles beyond the traditional financial disclosures.
The concepts underpinning traditional investment methodology, apply equally to all matters of environmental, social and governance (ESG) risk factors.
For example, an oil spill, which requires costly environmental rehabilitation, is no different to a reduction in demand or sales − a risk faced by any resources company.
Therefore, the argument for the proponents of divestments should be simple − environmental and social factors are as important as traditional risks.
Unfortunately, many proponents are inadvertently pushing this agenda into the fringe through symbolism and populism. We saw an example of this in late 2014 when my alma mater ANU issued a written apology to Santos after slurring the company.
The fact is, an environmental or social externality will generally have an economic cost. Therefore, issues surrounding fossil fuels, mining, poker machines, tobacco and farming should be considered through an economic lens.
Divestment is one element in a process which superannuation trustees and investment managers must consider in acquitting their fiduciary duty for portfolio construction and screening.
The divestment debate should therefore be led by the superannuation and funds management industries. It has started and will continue to grow this year.
As long term investors, often with a 40 plus year time horizon, superannuation trustees should take all risks into account and disclose their risk appetite as it relates to environmental and social factors.
This does not mean that superannuation trustees must consider what is good for the wider economy such as investment in fossil fuels. Instead, they must operate solely for the benefit of members. This is a purity which must be maintainedIt is also consistent with superannuation funds analysing all environmental and social risks faced by investee companies. However, they do not always have enough information about companies as found in traditional financial reports.
That's why divestment advocates should support improving the information published by companies to assist investors understand the wide range of social and environmental risks.
There have been big steps forward in recent times, but there is plenty more work to be done.
The corporate reporting and disclosure landscape in Australia largely comprises the ASX Corporate Governance Principles, the Corporations Act and accounting standards.
A significant new change to Principle 7 of the ASX Corporate Governance Principles will require a listed entityto “…disclose whether it has any material exposure to economic, environment and social sustainability risks, and if it does, how it manages or intends to manage those risks.”
This is a new disclosure requirement, which will apply from 1 July 2015. The onus will be on companies to provide more information on non-traditional financial risks in the next financial year which will make for a better-informed debate on investment in companies listed on the ASX.
However these changes will not assist investors to make decisions on companies, which are not listed on the ASX.
With the average superannuation portfolio allocation at around 30% in international shares, we also need rules beyond our shores.
As investment capital becomes increasingly mobile, a global set of reporting rules will be needed.
This is where initiatives such as "integrated reporting" become important.
Integrated reporting is a global proposal designed to capture “how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term.”
In short, integrated reporting would disclose all risks faced by a company over the longer term in a comparable manner.
This proposal has the support of various listed companies, accountants and investor groups.
These developments provide an opportunity for divestment advocates to productively contribute to a framework which could push environmental and social issues into the mainstream.
Populism and flimsy divestment announcements without an economic and company reporting focus will marginalise this important agenda. This would be a lost opportunity for all Australians.
Andrew Bragg is Director of Policy at the Financial Services Council and a member of the ASX Corporate Governance Council