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ESG Country Snapshot: Investors at work, Down Under

The first in RI’s latest Country Snapshot focuses on sustainable investing in Australia

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Political wrangling over Australia’s energy and climate policy over the last decade, riven by the influence of the coal lobby, has led to what many describe as a policy vacuum in the country. But with law suits, regulatory developments and a rise in ESG resolutions, are things finally beginning to move?

Last year, Australia’s Energy Minister, Angus Taylor announced that the Scott Morrison-led coalition government would not update the county’s renewable energy target beyond 2020.
He claimed that the country would achieve its Paris Agreement commitment to reduce emissions by 26% by 2030 without additional targets and that such “interventions” had driven up energy prices in South Australia.

Votes on this year’s remuneration packages will be particularly interesting because of Australia’s ‘two strike’ rule

This political landscape prompted Simon O’Connor, CEO of the Responsible Investment Association of Australasia (RIAA) – whose 240 members manage more than A$9trn (€5.6trn) in assets – to tell the country’s press that “our hope is no longer in politics”. Instead, he added, it was investors that were “stepping up” on climate change.

An Aussie HLEG: The road to sustainability

One of the most recent examples of O’Connor’s point is the current efforts by Australia’s financial sector to convene a national ‘crack team’ to develop a sustainable finance roadmap.
Sometimes likened to the EU’s High Level Expert Group on Sustainable Finance, the key difference is that this group has no backing from government. The process is being overseen in this instance by National Australia Bank (NAB) and Australian insurer IAG, with the RIAA acting as secretariat.
Its steering committee, which aims to deliver its vision and recommendations to the Australian Government over the next 12-18 months, is expected to be named later this month. O’Connor tells RI that it will include representatives across the insurance, banking, and superannuation industries.
He describes it as “an industry-led initiative” but says it aims to keep the government “closely informed”, adding that the process is likely to include two “key regulators” as observers. He’s hopeful that by the time the committee makes its recommendations, there will be a new, more “receptive” government, following polls later this year.
Neighbouring New Zealand is also working on an analogous sustainable finance initiative. Details of that work, which is being overseen by the country’s Ministry of the Environment, are also expected to be made public in coming weeks. 

Remuneration backlash: A Royal Telling off

This month also saw the release of conclusions from the Banking Royal Commission – an inquiry set up by the Australian Government in 2017 to report on misconduct in the banking, superannuation and financial services industry.
“The Commission is definitely one of the key themes in the market at the moment”, says Andrew Gray, Director, ESG and Stewardship at Australian Super. The final report made more than 80 recommendations, and highlighted remuneration as a key driver of poor conduct at Australian banks.
This last issue has been seized on by institutional investors, who flexed their ownership muscles on the topic this year (Australian’s banks are some of the largest listed companies in the country).As the governance scandal engulfed the sector, pay packages at three of Australia’s biggest financial institutions were rebuffed by shareholders last year, with the largest defeat suffered by NAB – an unprecedented 88% vote against. Westpac’s remuneration package was voted down by 64% and wealth manager AMP’s by 61%.
Votes on this year’s remuneration packages at these firms will be particularly interesting because of Australia’s ‘two strike’ rule, introduced in 2011, which states that company directors must stand for re-election if remuneration packages receive a ‘no’ vote from 25% or more of shareholders two years in a row.
Louise Davidson, CEO at the Australian Council of Superannuation Investors (ACSI) expects “a lot of movement on remuneration” at the banks in the year ahead, as the reverberations from the Commission’s work continue to be felt. 
The tough shareholder stance, however, is called out by Brynn O’Brien, Executive Director at the Australian Centre for Corporate Responsibility (ACCR), who states it was “ludicrous” that it took a Royal Commission for “uninterested and disengaged investors” to “collectively vote against remuneration packages and – in the case of AMP – directors”.
She also slams the “catastrophic impotence and ineptitude” of the country’s regulators, echoing the Commission report, which called on them to broaden their focus beyond “financial soundness and stability” to include “non-financial risks” including “culture, governance and remuneration”. 

The rise of the ESG resolution

But it is not just on remuneration that investors have been more active in 2019. ESG resolutions in general have seen a relative surge this year in Australia.
Anti-climate lobbying was a major theme again, with resolutions on the issue being filed at Rio Tinto, Westpac (withdrawn following commitments from the bank) and Origin Energy.
On this O’Connor says: “Investors have been so frustrated with the political process that this [engagement on lobbying] has become a means to get sensible policy through and effectively neuter the influence of really strong lobby groups”.
Following the success of its resolution at Origin, which gained an impressive 46% support, the ACCR will file fresh climate resolutions this year at two of Australia’s largest gas producers – Santos and Woodside Petroleum – calling on them to disclose how aligned their strategies are with the Paris Agreement.
A similar climate risk resolution filed last year at Australia’s largest coal producer, Whitehaven, cited the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations, and was supported by 40% of shareholders. 
Despite this push around ESG resolutions in Australia, a quirk of the country’s proxy system is creating a “barrier”, says Gray, who is also the Australian representative on the global steering committee of the Climate Action 100+ – a global investor coalition for engagement on climate change issues.
ESG resolutions in Australia require an additional constitutional amendment to be filed to allow them on the ballot, often creating a paradox whereby investors support the resolution but not the constitutional amendment – the means to get it implemented.
Davidson describes the current system as “very clumsy” and ACSI, whose members manage over A$2.2trn (€1.38trn), has led the calls for the introduction of an ordinary non-binding shareholder resolution framework.

Modern Slavery

An area wheret the Australian government has introduced firm policy is modern slavery.
The establishment of the Modern Slavery Bill last year, which requires businesses to report annually on their efforts to address such risks in their operations and supply chains, was supported by many of Australia’s largest superfunds. 
O’Connor tells RI that the RIAA’s members were “really engaged” with the “whole policy making process” that led to the creation of the act.
Such “sensible policy advocacy” is an important and increasingly used “investment tool” by investors, says O’Connor, who adds that such an approach will “underpin” the RIAA’s work on the sustainable finance roadmap. 
Many in Australia now expect more investor engagement on modern slavery following the introduction of the policy, while lamenting the lack of equivalent strong policy on climate change.
ACSI this month published a report for investors and corporates offering practical guidance on how to assess and report their exposure to modern slavery.

Superfund scrutiny on climate

Eyes in Australia and beyond will also be keenly watching the development of a pioneering climate lawsuit brought against the trustees of the A$51bn (€32bn) Retail Employees Superannuation Trust (REST), last year.
The case, brought by Environmental Justice Australia on behalf of a member of REST, claims that the fund has breached its duties on climate risk.
It follows a study by Australian non-profit Market Forces that found that 82 of Australia’s 100 largest superannuation funds disclose no or inadequate evidence that they have considered the impact of climate risk on their investment portfolio. 
Will van de Pol, Legal Researcher and Campaigner at Market Forces, tells RI: “If REST, one of the biggest superannuation funds in Australia, is found to have broken the law by not considering climate change risks, how many other trustees around the world are in the same boat?”. 

ASX’s new governance principles

The Australian Securities Exchange (ASX) is currently reviewing its own corporate governance principles, following a consultation with the market.
ACSI’s Davidson, who also sits on the exchange’s Corporate Governance Council, tells RI that the review is likely to bring about “significant changes”, including “a high-level of focus on disclosure and transparency around ESG issues”.
The fourth edition of the principles, which were last updated in 2014, were developed in response to “government enquiries” around carbon risk and emerging issues linked to “values, culture and social licence to operate”, according to an ASX draft document, which also suggests that listed entities with “material exposure to climate change risk” could implement the TCFD recommendations.
The new principles are slated for release this month. h6. Regulators

Both the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investment Commission (ASIC) mentioned climate change their annual reports last year. 
APRA, which oversees Australia’s banking, insurance and superannuation industries, issued a cross-industry climate risk survey in 2018 to 38 of its regulated entities to assess “industry maturity” in relation to “climate risk governance, assessment and disclosure”. The findings are expected to be released next month.

Many in Australia expect more investor engagement on modern slavery, while lamenting the lack of equivalent strong policy on climate change.

Also next month, on March 7, the Reserve Bank of Australia’s Deputy Governor, Guy Debelle, will give a speech on ‘Climate Change and the Economy’ at an event hosted by the Centre for Policy Development in Sydney.
ASIC, Australia’s corporate and financial services regulator, published its own climate risk report in September, examining the annual reports of 60 companies in the ASX300. It found that just 17% disclosed climate change as a “material risk”.

Green investments, the future.

There is widespread concern that without a meaningful climate policy at the federal level, green investment will languish in Australia.
2018 was a record year for investment into renewable energy in Australia, according to the Clean Energy Council, reaching more than A$20bn (€12.5bn).
And in November, the New South Wales Treasury Corporation (TCorp), the region’s central borrowing authority, issued a giant A$1.8bn (€1.1bn) green bond, to invest in low-carbon transport and water infrastructure. 
But O’Connor tells RI that the policy gap has already slowed investment in the transition to a low-carbon economy, adding that: “If there were stronger policies and more certainty about the long-term trajectory Australia is on around emissions, it would unlock a lot more capital, there is a lot of capital wanting and willing to invest in low carbon assets”.
The Climate Bonds Initiative similarly sees Australia as having the “economic conditions” and “potential” to develop a robust green bond market to drive the low-carbon transition in Australia and across South-east Asia.  
Much will depend on the election this year.
But there is cause for optimism too, says O’Connor: “A very hot summer, with lots of fires, and lots of floods has further marginalised the conservative views of the current government on climate change. That view is becoming harder and harder to defend, and I think it is going to hurt them at the ballot box in May”.

This article is the first in Responsible Investor’s latest Country Snapshot series.