Boundary lines on world maps might seem immutable, but the power of nation states has vastly waned since neo-liberalism came to the fore in the 1970s, with institutional investors ascending as a force, influencing and shaping economies and societies.
The last time the international political and economic paradigm shifted to such an extent was following the signing of the Westphalia treaties a little over 360 years ago, when the power structures transformed from feudalism to nation states.
“But we now know no national government has the levers to solve the problems we are facing, whether they are business investment or attracting it, whether it’s climate change, whether it’s terrorism, or whether it’s a global epidemic,” says Tim Costello, chief executive of World Vison Australia.
“You can’t build a wall and say if there’s trouble elsewhere we are unaffected, as we once could with a nation state, because the world is a global village.”
Costello, who will be delivering the closing address to Australia’s top institutional investors at the Fiduciary Investors Symposium, says institutional investors need to realise they have much more leverage than they think and need to be braver than they have been.
This is not a moral argument.
“It is very clear that shared value, which is doing good through business, is good for business. While we make a profit, we can also be solving social and ecological problems. This is the proper framing of stakeholders, not simply shareholders, in our investment decisions,” Costello says.
“You only need to see how the developing and emerging economies in Asia, if they are both assisted and have the right policy settings, can benefit us.”
According to the World Bank, East Asia and Pacific East Asia will continue to be the main growth drivers of the world economy, accounting for nearly two-fifths of the growth.
Super funds are also reporting encouraging results from engaging with social and ecological issues, though it is still early days. LGS Super has had positive results with its high-carbon screen delivering 16 basis points over its first year.
Elsewhere, Christian Super has one of the highest allocations to impact investing, with a target of 10 per cent. The balanced fund has returned 7.78 per cent over five years and 9.74 per cent over three years.
The idea of shared value is epitomised in the concept of universal ownership, which First State Super has internalised.
Ross Barry, the head of research at First State Super, says at the core of this concept is that the money does not belong to fund managers, nor does it belong to the super fund’s investment team, nor is it even the board’s money; rather, it belongs to the millions of average Australians whom the super funds collectively represent (hence the term “universal”).
“It’s that close connection with the member that makes it natural for us to consider the investment footprint we leave in our wake – on markets, on the environment, on companies, and on the communities in which they operate,” Barry says.
“I would describe it as the tragedy of the commons working in reverse. If people do collaborate there is the potential to create a return dividend over time through social and environmentally sustainable outcomes.”
Costello picks up this theme of universal ownership.
“It’s certainly true that every economic financial choice has an impact. That’s true of me as a consumer, of me as producer and as an investor,” Costello says.
“And we are very aware of the negative impacts about child labour and slavery and climate change – that’s why mining and forestry have been in the gun – but institutional investors are influential because major corporations are very sensitive to their leadership.
“If we look at the institutional investors group on climate change in Australia and New Zealand it is managing $1 trillion, North America and Europe are each managing more than $30 trillion. So you are actually seeing [that] institutional investors can help set agendas that are both profitable for their investors, and good for the planet and good for the poor.”
Mercer’s research into climate change gives a clue into why climate change is such a concern for institutional investors.
It found, for example, the average annual returns from the coal sub-sector could fall by anywhere between 18 per cent and 74 per cent over the next 35 years, with effects being more pronounced over the coming decade (eroding between 26 per cent and 138 per cent of average annual returns over the next 10 years).
Conversely, the renewables subsector could see average annual returns increase by between 6 per cent and 54 per cent over a 35-year time horizon (or between 4 per cent and 97 per cent over a 10-year period) depending on the climate scenario.
This shift is being driven by changes in demand and regulation, which in turn are rooted in societal outlook.
Super funds need a social licence to operate
According to Stanford University’s Social Innovation Review (SSIR), part of this comes from the values of millennials (those born between 1980 and 2000). The SSIR quotes a study by Spectrem Group that found “45 per cent of wealthy millennials want to use their wealth to help others, and consider social responsibility a factor when making investment decisions”.
They aren’t the only ones. Costello says it makes sense to have fiduciary duty aligned with stakeholder values, as the world is no longer financial investments versus social interests.
“This boundary, this wall is collapsing because financial interests are made on behalf of broader citizen interests. Citizens don’t morph into just a financial unit when they invest; it doesn’t displace the fact that they are concerned for their kids, they are concerned for a world where there is stability, for ecological challenges, and bringing poor people and poor countries into the market.”
He adds there are still some “dinosaurs” around who have forgotten the truth that they need a social license to operate.
“I remember when Don Argus, the then chief executive of NAB, gave World Vison a large donation from NAB at the time of the 2005 tsunami. And Philip Curry of the Australian Shareholders Association said ‘What do you think you are doing? Your job is to make a profit and return it as a dividend. We, the shareholders, will decide if we want to be generous or not’.
“And Don Argus stood up and said: ‘Yes, that’s how we all once thought. But not anymore. We now understand the community is a stakeholder that grants our social licence to operate. The community is touched by the tsunami and is responding. We, under that social licence, have to be in step with the community because they are a stakeholder’.
“That view is only getting stronger. In the [investment] cycles and ebbs and flows there will be moments when shareholders say ‘Make me a profit, I just don’t care’, but by and large this is a wave that is building and will carry all before it.”
As an example, Costello points to the COP21 Sustainable Innovation Forum in Paris at the tail end of 2015 that saw a large stretch of institutional investors coming together to commit to action on climate change.
Fiona Reynolds, managing director of the UN-backed Principles for Responsible Investment (PRI) initiative, says the organisation’s signatory base committed $40 billion to low-carbon investments at the conference alone.
“There has been a further $600 billion committed to portfolio decarbonisation through the Montreal Carbon Pledge which the PRI launched, and there was also $10 trillion committed to portfolio carbon footprinting,” Reynolds says.
Expanding on the wave analogy, Costello says it is like swimming at the beach and leaving your towel on the shore.
“You are having a great time swimming and then you stumble out and can’t find your towel,” he says. “And you realise, unbeknown to you, that you’ve actually been carried 100 metres down shore.
“People are in our tide and they should wake up to it. It’s a tide saying this is what the future of investment is about. They should not resist and swim against it, to struggle and expend effort because of an old paradigm. We need to realise we are going to be deposited on a different shore.”
“Paris was the paradigm here. You saw coalitions form, that were in many ways surprising, around a particular issue the world has to address. It is a good paradigm not just for climate change, but for sustainable development goals, for cities – name a social challenge. It showed a global village consensus that encouraged coalitions between people who hadn’t actually done this before.”
A new paradigm
He adds that these coalitions were important, particularly as institutional investors can’t bring change alone. Instead they need to be met halfway by local, national and international policy initiatives that also capture this vision.
Indeed, World Vision Australia’s Economic Development and World Vision report by Dr David Lansley concludes no single organisation working alone has been able to generate sustained economic growth, but puts forward that by having actors (such as nation states, institutional investors, NGOs and civil society) working together at the three levels of international, national and community level, sustained economic growth can be achieved.
Costello points to Singapore as a good example of what can happen when a long-term view is taken across the different levels.
“Singapore took … a 50-year view and something that was a mosquito-infested swamp without natural resources now has $200 billion for 6 million people in a sovereign wealth fund.
“You don’t actually bump into poverty in Singapore. You have policy settings joining local – and in that case city-wide and national – alignment and actually producing remarkable lifts out of poverty.”
He also points to the wider example of Asia, pointing out that if people were stuck experiencing low income and poverty there would have been limited growth opportunities for institutional investors.
Turning his attention domestically, he says Australia is blessed with the amount of funds in super.
“We should be leading, we should be innovative, we should be saying we can solve some of our social problems, and it can be a model for other governments to solve theirs.
“There are real hurdles. But it’s what leadership is about. It’s about seeing where that wave is headed knowing that there will always be resistance, there will be unintended consequences, there will even be setbacks, but deciding that’s actually where that wave is going to dump us, and if we miss it, we really will miss it.”