Superannuation funds are increasingly flexing their muscle through considerations of ESG in investment decision making as a result of lobbying from trustees and members themselves (ESG refers to environmental, social and corporate governance issues). Tobacco companies are not the only ones seeing investors depart their firms as a result.
Recently, two articles were published on ESG matters which we think you will find interesting. The first focusses on moves by some large super funds in recent times to act on ESG in investment decisions. The second looks at how members are requiring funds to be transparent about their investments as they become ever more involved in social activism.
These articles first appeared in Supertalk (Edition 14, December 2013) the member newsletter of the Australian Institute of Superannuation Trustees (AIST) – republished with permission.
ESG – why some funds take action
When the Future Fund moved to sell down its holdings in tobacco stocks earlier this year, it may have made a big noise in the media, but it is by no means the first superannuation fund or large institutional investor to do so.
UniSuper has been screening tobacco stocks from its funds since 2011, First State Super since moved from screening tobacco stocks to totally excluding them in mid 2012. They have since been joined by Sunsuper and HESTA.
Local Government Super has always screened for socially responsible issues, Christian Super is also well known for its active screening and First Super, the industry super fund for the timber, pulp & paper and furniture & joinery industries, was socially active when it decided to no longer invest in News Corporation early this year, citing corporate governance concerns.
Co-chair of First Super, Michael O'Connor, says their fund had long been lobbying News Corp for changes – such as splitting the role of chair and chief executive officer and appointing more independent directors – with other Australian super fund investors.
"We certainly supported other industry funds and other investors to improve the governance of News Corp," O'Connor said.
"At the last AGM there were very concerted efforts by a number of investors."
But deliberate goading of unhappy investors by Rupert Murdoch to like it or lump it – which included the following tweet just prior to the AGM: "Any shareholders with complaint should take profits and sell!" – led First Super to realise things weren't going to change in the immediate future and their response was to sell.
"We didn't make the decision in a rush. We got advice from our asset consultant as well," O'Connor said.
But the bottom line, according to O'Connor, is that if you don't ensure the corporate governance standards of your investments then you're putting your investments, and your members' fund balances, at risk.
First Super will continue to be diligent when it comes to corporate governance and O'Connor does not rule out taking similar decisions around other companies in the future.
"What we will do is look at investments," he said.
"If we think the investment is at risk because of governance then we've got no choice."
"We do have a policy about a range of issues but we haven't been as active on it as maybe some other funds. But I think some of things we would be concerned about is a range of health and safety issues as well as some environmental issues as well," he said.
No Smoking Allowed
Speaking about Cbus' decision to stop investing in tobacco funds at AIST's Australian Super Investment Conference in September this year, the fund's ESG investment manager, Louise Davidson, said the decision to divest from the super was taken because "tobacco kills". Davidson noted that unlike alcohol and gambling, it was impossible to use tobacco safely. "We don't see tobacco as being a sustainable, long term investment," she added.
The Future Fund, which announced that it was excluding primary tobacco holdings in February this year, took a similar view. The Fund's chair, David Gonski said at the time: "The Board noted tobacco's very particular characteristics including its damaging health effects, addictive properties and the fact that there is no safe level of consumption".
A month later at ASIC's annual dinner, Gonski said he believed institutions had an obligation to exercise the rights they hold in listed companies in their home territory at least.
"It doesn't matter how diligent the management of a listed company, if its major shareholders don't participate in voting on resolutions and don't put their views to management from time to time, an important protection for the ongoing good of the company has been removed," he said.
"My observation is that wise companies listen to the views of their shareholders and respond positively – either by taking on the views or explaining why they have a different opinion."
When he announced that the $43 billion First State Super scheme would exclude tobacco manufacturers from its portfolios in July last year, CEO Michael Dwyer said the decision was partly member driven. "Following the merger with Health Super, 40% of our membership works within the health sector. Many health professionals have a strong view in relation to tobacco being held as an investment."
"[The decision on] tobacco was almost symbolic of the merger," Dwyer said. "We did quite a lot of modelling with our portfolios to make sure there would be no loss to members," Dwyer said. "The new joint Board agreed that it was in the best interests of members, both financially and ethically."
First State Super worked closely with the Peter MacCallum Cancer Centre, Australia's only public hospital solely dedicated to cancer treatment, research and education, when it was making its decision.
"They provided guidance in the whole area of tobacco that helped us to understand the issues," Dwyer said.
The allocation to tobacco related stocks was approximately $200 million.
Dwyer says the feedback following the announcement, which included letters from government ministers, employers and members was very positive. And the decision may even have provided impetus to the other funds.
"There is no doubt that we certainly have been used as a test case," Dwyer said.
Like all super funds, the First State Super Board has discussions around other ESG decisions.
"These decisions are important and they should not be rushed, they should be deliberate and considered," Dwyer said.
Co-founder of governance adviser Ownership Matters, Dean Paatsch, says that much of the current run of social activism is member driven.
"Tobacco is an obvious one where the downside of doing it [divesting] to your brand is zero, particularly for anyone who is health related," Paatsch says.
There aren't many doctors or health professionals who are too keen on investing in companies or stocks that kill people.
"Health Super (now part of First State) basically had their doctors say 'Why on earth are you doing that?'," Paatsch says.
"What's different here is the constituents have spoken and the governance structure of those various institutes have listened."
As Paatsch says, tobacco is an easy stock to justify selling out of. The next hurdle for social activism will be decisions around other corporate governance issues such as human rights and contentious environmental issues such as coal seam gas.
These may be harder to build a case for exclusion, given funds responsibilities to members to maximise retirement savings.
"There are hard screens in some specialist funds on uranium," Paatsch says.
"[The next issue] could be anti-fracking ... and I wouldn't want to be invested in asbestos."
By Penny Pryor
When the ESG spotlight falls on your fund
Warren Buffet once said: "It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently"
As Australian super funds face increasing regulatory and consumer pressure to disclose more information about where they invest their members' money, what should they be doing to manage their reputational risks?
This question was one of many put to a panel of communication and superannuation experts at AIST's recent Fund Governance Symposium held in Melbourne. In a lively debate facilitated by leading radio personality, Jon Faine, panel members were asked to discuss the potential impact of enhanced portfolio disclosure requirements in an age where social media and member activism are becoming powerful forces for change.
Ann Bryne, the former CEO of Australia Council of Super Investors, said the key to super funds managing their reputational risk as they moved to greater transparency lay in their ability to articulate why they invest
(or divest) in certain stocks.
"Funds shouldn't be afraid of questions about ESG ... but they must be able to explain their investment philosophy as to how they make decisions about where they invest," Bryne said. "The important issue around disclosure is not what you hold, but how you make the decision and some funds are not clear about that."
Peter Lambert, CEO of Local Government Super, said funds who relied on the standard response that their primary responsibility was to maximise members' return were "just asking for trouble". "It comes down to making sure you have something credible to say, you can't just fob people off with a half-baked answer."
Under current plans, super funds will have to disclose every company in which they are invested within the next year. The panel agreed that while these disclosure requirements should be broadly supported, funds were likely to face greater scrutiny from journalists, activists and the fund members themselves.
Communication expert, Peter Lewis, Director of Essential Media Communications said funds should prepare for pressure from 'citizen' journalists through groups such as WikiLeaks as well as campaigning organisations.
"I think there is massive risk from the activist world, more than mainstream media," said Lewis. "With the collapse of the consensus to deal with issues such as climate change at the political level, activists will be looking for new ways to apply pressure and super funds will be fair game".
Bryne said super funds should consider proactively engaging with the media about positive stories in regards to disclosure and ESG issues. "ACSI has done a lot of work on behalf of super funds on ESG issues that has made a profound difference as to how companies are managed. Funds can be proud of this and it's a great opportunity to build a positive story".
Hilary Spear, head of corporate affairs for AustralianSuper, said AustralianSuper was a supporter of full portfolio disclosure and would be proceeding down this track, regardless of whether it became a legal requirement next year. "We think it is important that members have ready access to how their money is invested, so it (portfolio disclosure) is a no-brainer for us," she said.
Peter Lambert said LGS saw portfolio disclosure as a way to engage with younger members. "We have found that young members are particularly interested in where we invest and whether they are comfortable with that."
By Janet de Silva