- A global campaign for companies to shed investments that may cause social harm is gaining momentum.
- The education sector is leading the way in adopting a more ethical approach to investment.
- How important are environmental and social concerns to businesses wanting to raise equity capital?
Sustainable investment hit Australian headlines with the announcement by the Australian National University (ANU) that it will shed holdings worth A$16m in seven resources companies.
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.
Divestment impacts fossil fuel industry
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 former 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.
Capital markets not just about profit
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 business opportunities.
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.
Climate change and ROI
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”.
The value creation potential of managing ESG risks brings into the spotlight the push from within the accounting profession for a more “integrated” approach to reporting. Integrated reporting can bring benefits both to managers within organisations and to investors. But these benefits are not necessarily realised, according to Balabat.
In terms of internal benefits, integrated reporting should mean integrated thinking.
Corporations are more likely to reflect on the value of their non-financial capitals and to mitigate threats to these. In terms of investment and capital raising, non-financial information provides an opportunity to assess long-term survival, not just short-term gain.
Ultimately, this is the position adopted by the ANU. Vice-Chancellor Professor Ian Young argues that divesting fossil fuel holdings is first and foremost an economic decision: “What will our industries be in 20 or 30 years’ time? I am confident they will not be in producing fossil fuels.”
It’s this understanding of risk and opportunity that goes to the heart of the matter. “Sustainable” is in its very essence a long-term concept.
Balabat sees a role for regulation in relation to what sort of information is provided in prospectuses. For example, in 2008 China launched a green securities policy requiring companies listed on the stock exchange to disclose environmental information in prospectuses.
However, regulation, according to Balabat, can also render disclosure meaningless: “It just becomes a box-ticking exercise”.
More valuable, says Balabat, is growing awareness as a result of social media, activism and media attention, which will increase demand for sustainable investment products and non-financial disclosure. Most of all, she argues, education is the key.
Fiona Crawford is an experienced editor and writer, and founding member of The Editorial Collective.This article was first published in the February 2015 issue of Acuity magazine.