ANU's wise goodbye to fossilised companies

ANU's divestment decision has been politicised but mounting evidence shows the responsible investment industry - which touches $1 trillion in Australia - is delivering enhanced risk adjusted returns.

On October 6, the first trading day after Australian National University announced its decision to sell its stakes in seven companies, the ASX recorded 430,000 equity trades, few of which would have been foreshadowed to the companies traded. 

Despite recognition that $16 million across seven stocks exited by the ANU will have “little practical impact”, the companies were apparently "blindsided" by this decision. 

The ANU story has brought welcome attention to the $1 trillion (funds under management) domestic responsible investment industry and its rich diversity of philosophies, processes and products.  

Underpinning this sizeable proportion of the investment industry who have declared themselves responsible investors is the hefty weight of evidence demonstrating that explicit attention to environmental, social, governance and ethical issues can enhance investment performance. 

Unfortunately, the list of examples of companies losing value due to mismanagement of issues that have traditionally been seen as non-financial – community issues, environmental issues, worker health and safety, corporate governance – is long.

Like their traditional investment peers, these investors respond to risks and opportunities with many different methods to refine their investment universe. While in some cases, this reflects an ethically driven preference, in others it is simply risk management. For many, it’s about developing products for a growing consumer demand as well as reflecting the best interests of their ultimate beneficiaries.

Importantly, global research from groups such as Mercer, Deutsche Bank and our own 13 years of researching this industry have found these funds perform as well or better than mainstream funds over most time periods, but particularly the long term. There is now a mountain of evidence that by investing with a responsible investment approach enhances the delivery of strong risk adjusted returns.

As an example of how this growth in responsible investment approach is playing out, a number of investors have recently chosen to shift investments out of fossil fuel related companies.

This is reflecting the acknowledgement by investors of the significant investment risks posed by climate change. Some investors have chosen to exit stocks where they conclude the risks simply no longer justify the exposure, or to reflect their members’ clear desires not to support particular industries.

Exiting investments in fossil fuel companies is only one of a number of ways investors are responding to climate risk. Chief among responses include: assessing portfolio carbon risk; growing investment into low carbon assets; encouraging companies to develop robust strategies responding to climate risk; visiting companies and communities to understand the risks; and advocating for stronger policy settings.

The extent of the investor response was on show at the recent New York climate summit where investors managing $24 trillion came out strongly in support of stronger climate action.

But beyond just investors, some of the best managed companies have also identified climate change as an issue: a look at the capital expenditures of large diversified miners indicates a shift away from the highest emissions assets towards lower emissions intensive assets. This is a key reason why many of these large miners turn up in the major holdings of some ethical funds as well as mainsteam funds.

Global investment brokers including UBS, Citi, HSBC and Bloomberg have been reporting on an unprecedented structural shift underway in the way our energy is produced, citing the evidence of tightening global regulations on carbon emissions and the rapid drop in cost of producing renewable energy.

So substantial is the evidence base now that ignoring future climate impacts on investment portfolios represents a legal risk to trustees, a message that has been outlined by lawyers Baker McKenzie and Minter Ellison.

In addition to investment risks, we recently reported the strongest demand in a decade for ethical and socially responsible investment options off the back of an inexorable rise in public scrutiny of how investments are managed – a trend that is being recognised globally. It is absolutely right that the public has access to funds that reflect their own personal values, whilst also delivering strong financial returns.

The fact is companies rarely know why an institution bought or sold their stock. Continuously disclosing evidence of a robust approach to environmental, social, ethical, and governance challenges offers the best chance for companies interested in selling their story to this growing investment audience.

The ANU announcement seems to have struck a nerve. But the reality is this is but one element of a growing responsible investment sector that will continue to execute on their mandates, no matter what the headlines.

Simon O’Connor is chief executive of the Responsible Investment Association Australasia.