We now know why so many listed public company directors are more concerned with social and environmental virtue-signalling than focussing on their good old-fashioned duty to make a quid for shareholders. It’s because increasing numbers of shareholders want it, according to a study released last month. They seek a moral as well as a financial return by incorporating non-financial factors into their investment decisions. The ‘unprecedented growth in ethically responsible investing’ in Australia revealed in a report by the Responsible Investment Association of Australia (one of many pressure groups providing their brand of ‘ethical guidance’ to corporate boardrooms), means that while less than five per cent of Australia’s financial assets under management (like superannuation funds) are now being invested in core ethical investment products, this jumps to about 50 per cent when extended to some sort of ‘responsible investment strategy’ – a rate double the world average. This ranges from negative screening of ‘unacceptable’ investments such as fossil fuels to the full range of environmental, social and governance (ESG) demands. ‘RIAA’s research shows Australians want financial markets to play a socially constructive role in the economy’. It is no surprise that this research does not deal with whether Australian shareholders may prefer to put Australia’s national interest, particularly in matters like reliable and affordable energy and export earnings ahead of these social and environmental issues which have suddenly propelled Australia’s assets managers to rank third in an international survey by the Asset Owners Disclosure Project on accounting for climate risk.
A recent study by Monash University for the National Australia Bank acknowledged that the major driver for Socially Responsible Investing is concern about climate change, with universities prominent among the organisations responding to internal pressure by divesting from fossil fuels while many investors reduce their carbon-intensive holdings to focus on renewables – and so do their bit to help kill off what’s left of Australian manufacturing industry. On top of climate issues like clean energy and the Barrier Reef, other environmental issues include pollution, water and sustainable agriculture. Then there are the social agenda demands on corporations, like worker safety and labour relations, child labour, diversity, gender bias, community development, poverty alleviation and human rights. And investor activists are increasing their pressure over governance issues like executive pay, corporate political donations, board diversity, anti-corruption and board independence.
But it is not only the growing number of investors that are demanding ESG action; bureaucracies are in for their chop. The Task Force on Climate Related Financial Disclosure is developing recommendations about the disclosure of financial risks of climate change to add to the Howard government’s requirement that issuers of financial products must disclose the extent to which labour standards or environmental, social or ethical considerations are taken into account – not doing so involves criminal sanctions and exposure to civil actions. ASX listed entities must disclose any material exposure to economic, environmental and social sustainability risks along with their intended management.
So let’s hear it for the naughty shares, the ‘unethicals’, that would make up an excellent politically incorrect portfolio. In what looks like a Green Party manifesto, Australian Ethical bans all fossil fuels, weapons, tobacco, natural forests exploitation, gambling, human rights abuses, and ‘harmful products’ like nuclear power (and maybe soft drinks, fast foods, genetically engineered crops and alcohol?). Local research suggests that the financial results of ‘ethical’ funds have not been disadvantaged by their screening out mining baddies like BHP and Woolworths (with its thousands of poker machines in its pubs) so there has been no transaction cost in going ethical. But as more Australian investors do so, there will be a significant withdrawal of available investment funds for the unethicals that are the generators of the great bulk of Australia’s wealth. The cost to the rest of us for this ‘ethical purity’ is too high.
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