October 15, 2016 Populism: a boil which must be lanced

Australian Financial Review 29th September 2016

Populism is corrosive and risks a nation’s economic standing.

As Asher Judah wrote in the Australian Century, Australia risks taking the Argentinean road to ruin if we let populism take hold.

One hundred years ago, Argentina was one of the world’s ten richest countries. Subsequently its economy and governance was beset with short term policies, protection, and ultimately the economy was hollowed out and crashed.

Fighting off populism in Australia’s largest industry, financial services, will be a litmus test if we are to avoid the Argentine disease.

There are two examples of populism which must be skewered:

  1. Ongoing calls for a royal commission into financial services
  2. A divestment campaign against financial institutions

A royal commission into financial services could only be contemplated if nothing else had been attempted. Australia has amnesia on financial services reviews and reform. There have been no less than 15 reviews into the financial services industry over the past decade and subsequently, an enormous volume of reform is sitting in the pipeline.

For every argument supporting a royal commission there is an answer in David Murray’s Financial System Inquiry.

For instance, if the argument is that there are too many examples of poor financial advice, Murray said planners should have university degrees and be subject to a new system of professional standards.

If the argument is about high upfront commissions in life insurance, Murray and another review by former APRA commissioner John Trowbridge recommended an end to high commission rates.

Both higher standards for financial planners and lower life insurance commissions have been formulated into legislation which has bipartisan support.

If the argument is there is insufficient competition and strong governance standards in superannuation, Murray recommended structural changes which await passage through Parliament.

Murray also focused strongly on enforcement. Unless the law is enforced, it doesn’t matter how good it is. The regulator, ASIC is being equipped with new powers, structures and funding to focus on enforcement. This includes a new Commissioner to focus on prosecution.

All of these changes are underway. Yet if you only listened to the echo chamber of uninformed commentary, you wouldn’t know. In August, Greens’ senator Peter Whish Wilson said: “Australians overwhelmingly support a royal commission into the financial services sector and are tired of the excuses and inaction from the Turnbull government.”

With dozens of bills and changes to be made to strengthen the financial system, the call for another review ignores the fact that virtually all of Murray’s 44 recommendations are being progressed along with reforms from Trowbridge.

Other populism-driven misinformation continues.  

“Divestment day”- initiated by 350.org, an apparent grassroots campaign with origins in the United States, but actually backed by the Rockefeller family, is a stunt to be pulled on 7 and October in Australia.

The campaign is designed to pull customers and capital from banks and super funds which invest in coal and gas sectors.

As custodians of two trillion dollars in retirement savings, Australia’s superannuation funds don’t need a stunt like this. They are acutely aware of the need to consider all environmental risks as economic risks. They have a legal responsibility to take a long term view.

For over a decade the investment industry has been building environmental, social and governance (known as ESG) risks into the investment screening process. Ethical funds are also widely available.  

Pursuing long term, sustainable investment returns is to adjust portfolios periodically. So-called “divestment” on a single arbitrary day in October is simply cheap populism which, if effective, would damage investment returns.  Worryingly, in recent weeks, Queensland’s University of Technology and the City of Sydney have made supportive sounds on the divestment campaign.

The Chairman of the Future Fund Peter Costello provided a reality check on how investors should manage these issues - through an economic lens. Costello says “…we'll continue to invest in companies where there is an investment case, whether they are banks or fossil fuel companies or banks lending to fossil fuel companies."

Investors should take environmental risks into account. From a solely economic viewpoint, an oil spill is as bad as a fraud.

Rather than running populist campaigns, the divestment advocates should put their efforts into progressing the economic frameworks for environmental investment costs. The latest iteration of the ASX corporate governance principles requires all listed companies to disclose their approach to environmental risks. Elsewhere, investors support broader financial reporting guidelines through the global initiative Integrated Reporting - accounting standards which capture long term value creation.

The divestment campaign is a populist stunt which has nothing to do with policy. If successful, it would pull investor capital from banks and super funds which invest in energy industries with no consideration of the risks to investors or the economy. The 150,000 Australians working in the coal industry will not thank them, nor will the 240 million people in India living without electricity.

Though different in nature, both a royal commission and immediate, arbitrary divestment from energy sectors are examples of populism which could do Australia harm. Argentina shows the brightest outlook can be ruined with bad national policy.