The power of capital to create change

Dr Stuart Palmer
— 1 minute read

The Governance Institute of Australia’s latest green paper, Shareholder resolutions: Is there a case for change?, revealed almost two-thirds of survey respondents are opposed to legislative change that would give shareholder activists a greater voice at AGMs on environmental, social, and governance issues.

Stuart Palmer

Apparently, their view is ESG matters are for the board to manage and shareholders have sufficient avenues to raise concerns .

Giving shareholders the opportunity to create a two-way dialogue is crucial to upholding effective corporate governance and responsible business practices. Recent AGMs, such as AMP’s held in May this year, showcase the importance of shareholders, both institutional and self-directed, having a platform to voice concerns.

Following the revelations from the royal commission, many AMP shareholders used this forum to raise concerns, not only about the financial impacts of the organisation’s actions but also the governance issues that seemed to plague AMP’s corporate culture. Following AMP’s AGM, Australian Ethical made the decision to divest.

The proposed changes to allow shareholders to propose resolutions to express their opinion would not upset the rights and responsibilities of directors for company business decisions. It would simply give all shareholders an opportunity each year to use their votes to give boards a signal of what shareholders think about material matters in an efficient and transparent way. Many countries already allow this.

Despite the apparent reluctance to give shareholders a legislated right to propose resolutions which raise ESG concerns at AGMs, Australian Ethical is seeing a greater willingness from companies to engage with ethical investors on environmental and societal issues, even when the investor is not a significant shareholder. For many years, Australian Ethical has used nominal ‘advocacy holdings’ of shares to give us a voice on shareholder resolutions and at company AGMs, and to engage with companies which are excluded from investment under our ethical charter. While this continues to be an important tool in our investor advocacy, we find companies are increasingly willing to enter into dialogue on ethical and sustainability concerns without the requirement for a shareholding in the company.

We’re finding companies are more alive to the risk of an adverse response from customers, regulators, politicians, and responsible investors if the company fails to operate sustainably or, to use the language of the royal commission, fails to meet community expectations. Companies see the views and voice of investors as important to understanding and influencing what fair and sustainable business practices look like. They are joining not avoiding the conversation.

This engagement is particularly important in the superannuation sector. Australia’s growing pool of superannuation savings currently stands at $2.6 trillion, ranking Australia fourth in the world for pension savings . By 2035, according to industry reports, that figure will balloon to a staggering $9.5 trillion. With such a volume of capital comes the power to influence corporate behaviour and decision making and spark positive change. This is not just at an institutional level. With almost $700 billion managed by SMSF investors, there is a real opportunity for self-managed funds to make a meaningful positive impact .

The myth that responsible investing means sacrificing returns has been busted. The Responsible Investment Association of Australasia’s (RIAA) latest Responsible Investment Benchmark Report shows Australian ‘core’ responsibly invested share funds and balanced growth funds outperformed against mainstream funds over three, five, and 10-year periods .

Considering ESG factors as part of the investment process is important to ensuring stable, long-term returns. Companies that focus purely on financial gains can overlook substantial long-term risks for short-term rewards. The financial risks associated with climate change are no longer “fake news”, with the $50 billion REST super fund facing a law suit for failing to advise members about the long-term impact climate change may have on their bottom line.

Globally, the 194 country signatories to the Paris Agreement are working towards limiting global warming to below two degrees, and companies and industries that aren’t considering how this commitment will impact their business model are ignoring critical financial risks and opportunities for their investors.

The push for boards to take investor concerns about ESG matters more seriously is a growing global phenomenon. European financial authorities have recently announced the introduction of an eco-labelling system for pension funds and financial products. This climate disclosure label will offer a simple way for investors to assess the “green” credentials of financial products and may become a requirement for all European funds in the future.

This has several implications for Australian investors. Firstly, many funds have a presence in Europe and their investment strategies will be impacted by this legislation. Secondly, history shows that codes applying elsewhere are often replicated in Australia and this will mean a greater focus on responsible investing for funds.

Ethical investing goes beyond ESG to carefully investigate the way companies are or are not contributing to the wellbeing of people, animals, and the environment, and the business models which will allow companies to make that contribution profitably. Ethical investors bring a credible and distinctive perspective to the table; that of an investor with long-term interests and obligations across society and the economy. The distinct ethical investor voice offers a powerful complement to the voices of interest groups, which can be more narrowly focused, and is more difficult to dismiss as having a special interest.

Increasingly, companies are seeking a responsible investment perspective as they grapple with challenges to the way they remunerate their staff, the way they market and sell their products, and the way they manage human rights risks in their supply chains. An ethical perspective also helps to communicate the answers to these challenges to their customers, employees, and the communities they operate in.

ESG is no longer a “nice to have” but is a minimum requirement; ethical investing extends this further to protect investors against long-term sustainability risks. Through taking an ethical investment approach, SMSFs can protect and grow their wealth while also making a broader positive impact on people, planet, and animals. With or without additional legislated rights, shareholder dialogue and activism will continue to grow and to ensure future success, companies must pay attention to the expectations of all their stakeholders.


The power of capital to create change
Stuart Palmer
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