Australian and Global ESG Update as at 2 April 2019

Australian and NZ ESG Updates

Financial services and the Modern Slavery Act - time’s up
The Australian Council of Superannuation Investors (ACSI) recently published a report identifying Australia’s financial services industry as high-risk for modern slavery.

As of January 2019, under the Modern Slavery Act companies, including superannuation funds, must report on their exposure to modern slavery risk in their operations and supply chains. Companies with over $100 million in consolidated annual revenue must produce a public annual report, a Modern Slavery Statement, and report on their efforts to manage these risks. Companies must report after one full financial year after the implementation of the new legislation, which will mean most Australian statements are due in June 2020.

‘Modern slavery’ includes acting to coerce, threaten, or harm people, or abuse power to exploit and deprive people of their freedom. These practices include human trafficking, labour or debt bondage, deceptive recruiting for labour or services, and child labour.

While Australian superannuation funds typically have a highly skilled immediate workforce, areas that may require examination include any offshoring of jobs like e-waste disposal services and IT services, and more practical jobs like waste disposal and building services.

According to the International Labour Organisation, over 40 million people live and work in slave-like conditions across the globe, with estimates that about 15,000 of these people are living in Australia.

SuperRatings - research into how Australia’s sustainable investment funds are performing
Recent SuperRatings research published shows that ESG-based investment funds aren’t performing as well as regular balanced options. Fees have been highlighted as an issue, with lower returns. A few funds, however, have performed very well, and some funds have lower fees than other regular balanced options. For example, HESTA’s Eco Pool balanced option has ranked as a top performer over a decade with 11.1 per cent outperformance annually, which is considered higher than the SR50 Balanced (60-76) Index return of 8.9 per cent. Other top performing ESG funds have been developed by VicSuper, Australian Super, WA Super, and UniSuper.

Since each fund measures ESG investment criteria differently, figuring out costs has been difficult, the report says, ranging from a simple screen on certain industries to more in-depth analysis on an individual business.

NZ investors take action on tech giants over terror attacks
Some of New Zealand’s biggest investors are calling on tech giants to take more responsibility for what gets published under their umbrellas after the recent Christchurch terror attack was live-streamed on social media. The tech giants include Facebook, Google and Twitter.

A joint shareholder engagement with big kiwi investors with combined assets under management of NZ$90 billion urged the tech giants to fulfil their duty of care to prevent harm to their users and society. The investors involved include:

  • New Zealand Super Fund

  • The Accident Compensation Corporation

  • The Government Superannuation Fund Authority

  • The National Provident Fund

  • Kiwi Wealth

These funds are calling on other global investors to join them, saying collective action sends the strongest message. Responsible investment decisions are guided by New Zealand law and major policy positions of the New Zealand Government, with any breaches by big tech companies being investigated.

After the terror attack, New Zealand’s Prime Minister Jacinda Ardern said that Facebook ‘… are the publisher, not the postman. There cannot be a case of all profit, no responsibility’.

Globally, ethical investors have been forced to re-examine Facebook stocks in their portfolios, questioning whether the social media giant truly has a place in their books. Australian Ethical has revealed it is monitoring its Facebook investment and may conduct a review, and they are not alone in reassessing possible liabilities in their tech stocks. Almost all Australian superannuation funds have some Facebook investments to a larger or lesser degree.

The Australian Sustainable Finance Initiative launched
An unprecedented collaboration between big banks, superannuation funds, insurance companies and industry bodies has resulted in the Australian Sustainable Finance Initiative. The aim of the initiative is to modify the Australian economy so it prioritises environmental issues, human wellbeing and social equity, while maintaining financial stability.

The new group comes after the creation of similar initiatives in Europe and the United Kingdom, the European Union’s High Level Expert Group on Sustainable Finance, and the UK’s Green Finance Taskforce.

The group will start to develop recommendations to help the finance industry transition to a more resilient and sustainable local economy, creating pathways, policy signals and frameworks to help Australia deliver on international commitments like the Paris Agreement on Climate Change and the UN Sustainable Development Goals, while keeping us well-fed at home.

IAG Group executive Jacki Johnson and Responsible Investment Association Australia’s Simon O’Connor will co-chair the initiative. Members include Cbus chief executive David Atkin, Principles for Responsible Investment APAC director Matthew McAdam, Australian Ethical managing director Phil Vernon, and Pendal Group CEO Richard Brandweiner.

Industry Super Holdings under the pump to divest weapons supplier
A company that supplies weapons technology to Saudi Arabia, Electro Optic Systems (EOS), may be re-assessed at Industry Super Holdings (ISH) portfolios. Pressure is mounting after research was released by consumer watchdog and activist group, SumOfUs, revealed the significant investments - 5.86 per cent (5.4 million shares).

ISH released a statement saying it has been assured that EOS platforms will not be deployed in Yemen, and that it sought external advice and investigation into the company, and performed its own research.

Germany and Finland have both suspended trading arms with Saudi Arabia after human rights atrocities were reported as part of the ongoing conflict. SumOfUs said that ‘Australia's top defence officials last week refused to rule out that these weapons will be used in Yemen’.

Australian superannuation funds that have confirmed they are not exposed to EOS stocks include CareSuper, HESTA, Media Super, Cbus and Australian Super.

EOS is an ASX-listed company operating in the military and space sectors. ISH is owned by other industry funds, including AustralianSuper.

Global ESG Updates

Disabilities-focused Dutch fund introduces bespoke index
A €9 billion Dutch fund for workers living with disabilities, Pensioenfonds Werk en(re)Integratie (PWRI), invests in around 50 Dutch and international companies that promote employment for people living with disabilities.

PWRI is introducing a bespoke index for its 35 per cent equity allocation for companies with strong health and safety, labour and climate ESG scores in developed and emerging markets.

The new index was created with the fund’s fiduciary manager, BMO Global Asset Management, to avoid using an ‘off-the-shelf’ ESG benchmark so that it could comply fully with its own values as benchmarks. PWRI is aiming to improve its overall ESG score by 1.5 per cent compared to the MSCI ESG Universal Index, with initial results showing the targets ‘can be more than met’ on carbon reduction and health and safety.

The fund is targeting reducing its carbon footprint by 20 per cent compared to MSCI World, and looking to its investee companies to score 10 per cent better than MSCI World constituents in labour rights and health and safety.

In emerging markets, the fund is looking towards a 10 per cent increase in overall social scores. PWRI will eventually integrate ESG across its full portfolio.

ESG Research Updates

Research Report: Sizing the Impact Investing Market
A new whitepaper published by the Global Impact Investing Network (GIIN) presents the first rigorous analysis and estimate of the size of the impact investing market globally.

The GIIN is soon launching the ‘Core Characteristics of Impact Investing’ report, outlining the elements that define impact investing and distinguish it from other complementary investment approaches. Watch this space.

Summary of the report findings

  • Over 1,340 organisations currently manage US$502 billion in impact investing assets globally

  • Over 800 asset managers account for about half of industry assets under management and investing globally

  • Thirty-one development finance institutions manage a quarter of total industry assets

  • Most impact investing organisations are relatively small, with around half managing less than US$29 million each

  • Many large investing organisations manage over US$1 billion each

  • A significant amount of capital is at work to address global social and environmental challenges

  • The market is growing rapidly

Download the full Sizing the Impact Investing Market report