- Investors who see themselves as company owners want boards to be socially responsible.
- Analysing the long-term interests of a business can lead to better outcomes for all.
- Environmental and social issues such as climate change now inform company strategy as part of integrated reporting.
By Leo D’Angelo Fisher
When Westpac announced its new Climate Change Action Plan in April its importance was lost on no one.
The policy, which will guide future Westpac lending for energy projects, limits the bank to providing finance for coal projects in “existing coal producing basins”. With that policy, Westpac ruled itself out as a potential funder of Indian conglomerate Adani’s controversial Carmichael coal mine in Queensland’s untapped Galilee Basin.
Westpac CEO Brian Hartzer explains the bank’s decision was part of its commitment to supporting climate change solutions that will drive the transition to a more sustainable economic model.
“Westpac recognises that climate change is an economic issue as well as an environmental issue and banks have an important role to play in assisting the Australian economy to transition to a net zero emissions economy,” Hartzer says.
Westpac had now become the fourth of the Big 4 banks to distance itself from the proposed Carmichael mine in central Queensland. This was a win for environmentalists who argued that the proposed coal mine was a threat to thousands of hectares of pristine landscape, the local water table and the Great Barrier Reef, and that coal produced by the mega-mine would destabilise global efforts to rein in emissions of carbon dioxide.
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Westpac’s decision led to an extraordinary outburst by federal Minister for Resources Matthew Canavan who accused the bank of “turning their back on… the job-hungry people of North Queensland”.
“May I suggest those Queenslanders who are seeking a home loan or a long-term bank deposit or some such in the next few months might want to back a bank that is backing the interests of Queenslanders,” he fumed, adding “some corporations unfortunately today are wimps in regard to standing up to [environmental] activists”.
What stewardship really means
Someone who sees Westpac’s decision in a very different light is London-based capital markets reformer, board member of the UK’s Financial Reporting Council (FRC) and former CEO of the International Integrated Reporting Council, Paul Druckman.
He believes the principal lesson of the global financial crisis is that companies need to take a long-term perspective on value creation. He also champions the concept of “stewardship”, whereby investors and boards share an interest in the long-term health and sustainability of the business.
While Canavan and other Turnbull Government ministers accused Westpac of being more interested in avoiding a bunfight with environmentalists than do its job as a bank, Druckman believes the decision will come to be viewed as best practice in stewardship.
“Stewardship is about looking at the long-term interests of the business. [The Adani decision] was a stewardship issue for Westpac The decision was not about short-term benefits to shareholders, but the long-term health of the bank,” Druckman told Acuity during a visit to Australia.
“For Westpac the decision was not just about the financial merits of funding the project, it was also about social and environmental impacts.”
How does the UK Stewardship Code work?
The UK FRC promotes long-term value creation and investor confidence through improved corporate governance and investor stewardship. It oversees the UK Corporate Governance and Stewardship Codes as well as standards for accounting, auditing and actuarial work.
The UK Stewardship Code, first published in 2010, aims to enhance the quality of engagement between investors and companies. In publicly listed companies responsibility for stewardship is shared.
The primary responsibility rests with the board, which oversees the actions of its management. Investors in the company also play an important role in holding the board to account for the fulfilment of its responsibilities.
For engaged investors, stewardship is more than just voting. They are equally interested in monitoring and engaging with companies on matters such as strategy, performance, risk, capital structure and corporate governance, including culture and remuneration.
“The adoption of stewardship codes is a big change happening throughout the world. Stewardship codes encourage investors to invest not as traders but as owners of the business,” Druckman says.
“Enlightened investors appreciate their stewardship role. They take an interest in how business works and how the business is going to create value over time as opposed to how the company has performed in the past year. They are interested in the business itself.”
The change in thinking and behaviour away from an unrelenting focus on short-term factors towards the longer term horizon has been a key development over the last five yearsHand in hand with value creation and stewardship is the role of company reporting. Druckman believes “integrated reporting” is critical for companies that believe in the importance of an informed and engaged investor base.
“Engaged investors – and superannuation funds are a good example of this – want to understand the fundamentals of the business, they want to understand the business model and how it connects with the overall strategy, they want to understand the long-term value that the business is creating,” he says.
“To gauge the long-term success of the business, shareholders need to know how that business deals with employees, stakeholders and the environment.
“Integrated reporting articulates how the business creates value over time, not just how much money it made last year. Its focus is on company health, not shareholder wealth: it’s about long-term value for shareholders.”
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Druckman says integrated reporting reflects that environment and social issues now inform company strategy and need to be embedded in the way a business operates. He also wants to see other value drivers such as brand value, intellectual property, human resources and customer relations.
Reflecting on his five years (2011-2016) as CEO of the International Integrated Reporting Council, Druckman says “an increasing number of businesses in the world are [now] explaining their purpose and providing information in context, a key way of securing the trust and confidence of dedicated stakeholders”.
“The change in thinking and behaviour away from an unrelenting focus on short-term factors towards the longer term horizon has been a key development over the past five years,” he says.
Druckman says the need for resilient business models and a sustainable economy make it is essential for companies to show “respect for the full range of finite resources that sustain our planet and society” while building the long-term value of their businesses.
Canavan and his ministerial colleagues may not agree but there’s a certain banker who almost certainly does.
Leo D’Angelo Fisher is a journalist, writer and commentator.