Australia risks being snubbed by rising climate-aware capital

The recent decision by the $1.1 billion ANU Endowment Fund to divest $16 million in holdings from several Australian companies has created more controversy than it should and also displayed a worrying domestic tendency to shoot the messenger, with arrows aimed both at the university and its ESG (environmental, social and governance) consultants CAER.

The condemnation from the Prime Minister, Treasurer, MPs, mining and energy voices along with some sections of the media is out of proportion with the ANU decision and reflects either a misunderstanding of, or hostility to, fiduciary duty when it is exercised in a manner with which they are uncomfortable. 

Would this level of attention been received if the decisions did not involve resource sector companies?

Trustees of endowments, pension/superannuation funds and sovereign wealth funds make regular decisions to invest or not, allocate, or re-balance or disinvest capital. That's their job, to assess on an intergenerational basis opportunities and potential risks, to consider investment strategies in accordance with their investment beliefs, and make decisions accordingly.

Repetition of a pejorative term like “blacklisting” to characterise a particular fiduciary decision is a clumsy attempt to delegitimise –  it is unhelpful, but is symptomatic of the growing divergence between international trends and local acceptance of their inevitable extension into Australian capital markets.

Globally, institutional investors are increasingly seeking to incorporate ESG principles in their investment governance to take greater account of externalities and mitigate against longer term risks. Climate, carbon, wider sustainability, supply chain and tax issues increasing figure in this equation. Divestment is but one of a number of options being used by big investors in managing a host of longer term risks.

In September this year, 321 investors, with $US24 trillion in assets under management, issued a statement calling on governments to take action on climate change, thereby reinforcing their commitment to low carbon assets.

Improving corporate governance, encouraging a several decades' long perspective on value creation is at the heart of the ESG process. Trustees face a difficult balancing act, but their responsibility is clear, namely, the best interests of multigenerational groups of beneficiaries and members.

A domestic political and business environment where high profile leaders portray climate and carbon risk as a minor or side issue, where carbon based energy options are given active preference and clean energy innovation is actively discouraged is seriously out of step with the direction of mainstream investment thinking on common global risks.

In response to the IPCC Synthesis Report released on November 2, UN Secretary General Ban Ki-moon urged institutional investors like pension funds to “Please reduce your investments in the coal- and fossil fuel-based economy and [move] to renewable energy.”

It is up to those sectional political and business interests in Australia who continue sailing into the growing global headwinds on climate to look at their positions more closely.

In the meantime, it may preferable for the loudest of voices criticising the ANU and CAER to consider less browbeating and more understanding of how ESG considerations are mainstreaming into investment criteria. Fiduciary duty isn't about making decisions based on daily headlines or critical editorials –ESG advisers are delving into deeper considerations than a snapshot of the share price or a wishing for the old ways.  

Institutional investors are becoming more active. They are looking for ESG considerations to become fundamentally embedded in company value creation strategies and risk management outlook over longer and longer timeframes.   

Business leaders who don't understand the shifts taking place and are slow to react may well be left behind.  Those who adapt their business models to reflect 21st century thinking and scientific realities may well prosper. One thing is clear – those who listen to asset owner concerns are more likely to attract and retain capital allocation and support. 

It's as simple as that.

Fiona Reynolds is managing director of the Principles for Responsible Investment.