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SUSTAINABLE INVESTMENT hit Australian headlines
with the announcement by the Australian National University
(ANU) that it will shed holdings worth A$16m in seven
ANU’s divestment decision is based on a policy to invest in
companies that “do not manifestly cause social harm”.
It is not an isolated case, but rather the result of a global
campaign aimed at financial divestment out of coal and
other fossil fuel related activities. The divestment campaign,
launched in the US in 2012, has rapidly gained momentum.
In New Zealand last year, Dunedin City Council announced
that it would remove investments of almost NZ$2m from the
fossil fuel industry and would no longer use its NZ$75m fund
for these types of investments in the future.
Universities are one target of the campaign, which is
lobbying institutional investors to adopt a more ethical
approach to investing. Climate change is firmly in its sights
but in the past attention has been focused on investment in
the tobacco and gambling industries, among others. It seems
that ethical investment is no longer a fringe activity but is
inching its way into the mainstream.
However, the fact that ANU’s decision has been widely debated
in the media, including attracting fierce criticism from no less
than the Australian Prime Minister, Tony Abbott, suggests that the
journey to the mainstream is likely to be a rocky one.
How important are social and environmental concerns to
investors? Apart from committed individuals and institutions
likely to suffer reputation damage as the result of ongoing
lobbying from highly vocal activists, do investors really care
about anything except the bottom line?
It seems that, while most investors remain fixated on
financial returns, a small but growing proportion are looking
for value creation in the long term, to be achieved from the
minimisation of environmental, social and governance (ESG)
risks. A recent study funded by Chartered Accountants
Australia and New Zealand digs deeper by asking how ESG
disclosures influence investors’ decision making.
Dr Maria Balabat is from the UNSW Australia Business
School and joint director of the Centre for Energy and
Environmental Markets. She examined the initial public
offering (IPO) prospectuses of 47 Australian firms and found
that at least 80% of the equity raisers provide sustainability-
related disclosures. This suggests non-financial information is
becoming more relevant in the capital markets.
Perhaps not surprisingly, most disclosures relate to
environmental issues. Environmental disclosures were
focused on environmental impact and policy with many
prospectuses highlighting exposure to water risk. Fewer
disclosures were provided in relation to environmental
performance, biodiversity, chemical safety and pollution
convictions. Governance disclosures were probably provided
because of the Australian Securities Exchange’s guidance rule
on corporate governance practices.
While a number of IPO firms engage with stakeholders,
there were no disclosures on equal opportunity, job creation
and security and engagement with trade unions and
employees. Human rights issues, including disclosures relating
to bribery and corruption, political donations and the number
of women on boards, were absent.
This research supports the view that it is crucial for firms
planning to raise equity capital to be aware of the ESG risks
relevant to their business prior to the IPO process and to
communicate how these challenges can be transformed into
However, Balabat believes this won’t happen overnight.
“What we hear from socially responsible funds managers is
that there are clients who want to invest in organisations that
are proactively managing their ESG concerns but it is a small
proportion. Most analysts are focused solely on financial
returns,” she says.
That this change will take place is undeniable, according to
Balabat. She points to research by KPMG on the ten megaforces
that will impact corporate growth in the next two decades.
The KPMG study, Expect the Unexpected: Building Business
Value in a Changing World, suggests that organisations which
manage these ESG concerns better than their competitors will
survive by creating value in the long term. Balabat agrees and
argues that “the earlier business realises this, the better”.
A more ethical approach to investment can help combat climate change and avoid causing social harm.
BY FIONA CRAWFORD
acuity | FEBRUARY 2015
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