ESG investing has hit the mainstream

By

04/05/2017

OPINION | Every year in May, the leading experts in ESG investing gather for the Australian Council of Superannuation Investors’ annual conference, and each year the audience coming to hear from them grows bigger.

It’s been said before, and sometimes prematurely, but the philosophy of aligning investment strategies with environmental, social and governance principles really is in the mainstream now.

The industry has come a long way since ACSI was founded in 2001 and we held our first annual conference in 2002. But there is still so much more to do, both in our traditional areas of focus and on emerging issues of concern.

It’s hard to believe that, in the second decade of the 21st century, Britain would have to enact a law addressing modern slavery, and that the Australian Parliament would start an inquiry to see if we need to do the same here.

Yet, according to the UN’s International Labour Organization, there are 21 million people around the world estimated to be victims of forced labour, and their labour in the private economy generates US$150 billion ($200 billion) in illegal profits every year.

Modern slavery is real and it exists in domestic and global supply chains of companies operating in Australia. This is something ACSI has been working on for years, and we’re certainly making a submission to the inquiry urging the introduction of a tighter legal framework.

In human terms, slavery and forced labour are clearly abhorrent and should have been relegated to the history books long ago. In business terms, a company with slavery in its supply chains faces huge reputational risks that have the potential for major impact on its share price.

Slavery and CEO pay in focus

Long-term investors know the measurable impact ESG issues have on the sustainability and profitability of listed companies. And Australians more broadly – those whose retirement savings are at stake here – are on board, too. The issues we deal with every day at ACSI aren’t just good for profit, they’re good for people.

One perennial hot topic on the ESG agenda is chief executive pay. In the United States, the average S&P500 chief executive earns about 350 times the amount an average worker does. Under rules meant to go into effect this year as part of the Dodd-Frank reforms, US companies will have to disclose the ratio of the median pay of their employees to the pay of the chief executive.

Simply disclosing the ratios won’t necessarily bring those salaries more in line with community expectations, but it will certainly give investors an idea as to which companies are putting their profits back into shareholder hands, and we hope also give the remuneration committees of listed companies pause for thought.

The challenges to come

Modern slavery and outsized chief executive pay are miles apart on the spectrum of issues ACSI advocates on but have two things in common.

First, the average person would consider both to be unfair and unreasonable. Second, in investment terms, both can be linked to short-term profit taking at the expense of long-term sustainability, and both carry reputational risk, which may put the company’s social licence to operate in jeopardy.

The World Economic Forum’s Global societies” ranked first and third, respectively, among the underlying trends that will determine global developments in the next 10 years. In second place: climate change.

All of these issues have the potential to cause massive disruption around the world.

Rising inequality certainly influenced the political upheavals in the UK and US in 2016. Governments around the world have committed to a zero-carbon future under the Paris Agreement, and to reducing poverty to zero under the UN’s Sustainable Development Goals.

The Principles for Responsible Investment, which is the global hub for responsible investment, is focusing on these two themes as it helps investors come to grips with the enormous challenges ahead.

It is in everybody’s best interests to rise to those challenges.

Louise Davidson is the chief executive of the Australian Council of Superannuation Investors.