Hesta’s Transfield dumping highlights ethical focus
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I own a share in an atomic bomb. Chances are you do, too. I can’t say I’m very happy about that, but it will help support me in my old age, assuming nuclear Armageddon doesn’t happen first. And in my defence, I didn’t realise until a few days ago.
It turns out the industry superannuation fund I belong to puts a bit more than 7 per cent of the money I compulsorily give it into shares in Westpac Bank. Westpac, in turn, is a significant shareholder in Honeywell Inc, a giant American-based multinational conglomerate that, among other things, is engaged in the design and production of nuclear weapons. Among the many components it produces are the detonator assemblies for the bombs.
As Simon Sheikh, former director of GetUp!, now founder of the ethical investment outfit Future Super, points out, the investment portfolio of just about every other major super fund in Australia holds shares in the big four banks. Therefore, he says, millions of Australians own little bits of atomic bombs.
And through our pooled funds we have interests in lots of other things about which we as individuals might have moral qualms, such as tobacco companies, coal companies, alcohol and gambling interests.
The overwhelming majority of us, when we hand over our savings, in effect outsource our ethical considerations as well. We offload our consciences to people who, while they might have their own personal ethical standards, might not share ours. And who are in any case constrained by long-established notions of fiduciary responsibility that stress they must get us the best possible financial return.
Collectively through our super savings we have immense financial power – now more than $2 trillion in total, which is rather more than Australia’s annual GDP. Yet we have no moral influence over our money.
Or do we?
About three weeks ago, one of Australia’s largest super funds, the $32 billion health industry fund Hesta, informed the stock exchange that it was divesting some $23 million worth of stock it held in Transfield, the major contractor running Australia’s controversial offshore detention centres.
It wasn’t big money by market standards. Much bigger divestments happen all the time. Analysts will determine a particular company is not looking like a good financial bet and advise the money managers who will then sell out.
Yet the decision prompted a reaction in the big end of town, in politics and in the financial media out of all proportion to its dollar value.
The reason Hesta’s dumping of Transfield was such a big deal is that it was widely believed it was motivated by conscience. And that concerned a lot of people.
Hesta’s chief executive, Debby Blakey, insisted the decision was ultimately based on financial rather than ethical considerations. But she also cited a “substantial body of evidence” pointing to human rights abuses in the detention centres on Nauru and Manus Island. She said this exposed Transfield to the risk of costly legal action that could impact on its longer-term financial performance and share price. She also noted that the government-imposed secrecy about details of the contracts with Transfield meant Hesta could not get important information.
Boiled down, what Blakey was saying was that Hesta was not acting on its own conscience, but out of an expectation that other people would act on their consciences, and that could damage Transfield as an investment.
That might seem like a subtle distinction, but it’s an important one. Blakey was suggesting the fund had been hard-headed about financial risk, rather than soft-hearted about human rights.
Nonetheless, numerous people, including assistant treasurer Josh Frydenberg, suggested Hesta was not doing its fiduciary duty.
“You would hope that Hesta was making decisions based on the best economic interests of its members,” he said.
He went on to link the Hesta’s decision to the government’s push to change the structure of the boards of trustees of industry super funds, so as to dilute the influence of unions. Currently, industry super boards are typically divided 50-50 between employer and employee representatives. The government’s plan is to force union-aligned industry super fund boards to appoint one-third independent directors, so as to “help protect people’s hard-earned retirement savings”.
That argument overlooks one significant fact, however: Hesta members apparently believed the decision was in their best interests. It was the soft hearts of Hesta members, led by the Victorian branch of the Australian Nursing and Midwifery Federation, that campaigned for the divestment for two years.
The Australian Financial Review’s national affairs columnist, Jennifer Hewett, opined that the Hesta example “strengthened” the case for the government’s proposed action. She fretted about investor activism that “often trades on the conveniently emotive term of ‘ethical investing’ ” and insisted the union influence in industry funds made them “particularly vulnerable”.
“What’s next?” she asked. “Sugar producers? The car industry? All mining?”
Her choice of specific examples perhaps waxed a little hyperbolic, but her central point was one on which all sides of the issue seem to agree.
The decision by Hesta to dump Transfield does indeed mark “a new front in an increasingly aggressive war of environmental and social activism”.
And those who support the idea that superannuation fund members should just contribute their money and leave everything after that to the managers have cause to be concerned.
“Hesta is a mainstream fund. It would not describe itself as an ethical fund,” says Simon O’Connor, chief executive of the Responsible Investment Association Australasia (RIAA), the peak body for some 150 “ethical and responsible” investors, with a collective $500 billion in assets under management.
“And this [is] really one of the first times a major fund has taken a decision based on ethics and the wishes of their members. That’s the reason we’re seeing massive push-back. That’s the reason for the indignation and thinly-veiled threats in The Fin Review and elsewhere that these funds might be breaching their fiduciary duty.”
The massive growth in superannuation, says O’Connor, is bringing about a big power shift.
“It’s a fascinating flip,” he says. “Labour is now getting to the point of owning capital. Superannuation is getting so large and influential that the thought of it flexing its muscle worries them. They don’t like the idea of labour and consumers making decisions about how capital should be deployed.”
O’Connor describes it as “the democratisation of capital”.
He points to polling showing most people are not content just to be passive investors of their super money.
In April, work done by Essential Research found just 18 per cent of respondents thought their super funds should consider only profit when investing members’ money, although there was considerable difference of views by political party. Twenty-nine per cent of Liberal/National voters thought profit should be the only consideration, compared with 15 per cent of Labor voters and just 8 per cent of Greens.
People invested in retail funds (23 per cent) were somewhat more likely than those in industry funds (18 per cent) to think profit should be the only consideration, which is ironic considering retail fund returns are consistently lower than those of industry funds. Even so, a clear majority across all parties and all fund types favoured the inclusion of ethical considerations.
Another bit of market research carried out for the RIAA in 2013 found majorities of people did not want their funds invested in tobacco (86 per cent), weapons manufacture (81), gambling (78) or old-growth forest logging (73). A smaller, but still significant, 42 per cent did not want their funds invested in fossil fuel extraction.
This week will see the public coming out of a group dedicated to pushing for investors to dump their holdings in Transfield and all the other companies profiting from Australia’s offshore detention regime. It is called No Business in Abuse.
Although the group has had no public profile to date, its work has been well known to fund managers for months. It started with one woman on maternity leave, Shen Narayanasamy, who was disturbed to see that a number of offshore “ethical” investors had holdings in Transfield.
With a group consisting of other like-minded people, including several others on maternity leave, who also happened to have applicable skills in activism and human rights law, she set about documenting the allegations of human rights abuses on Nauru and Manus, and setting them in the context of corporate obligations to act on agreed international principles of environmental, social and governance principles.
The result was 100,000-word brief to be sent to investors. It has not been sent yet, although other bits of their work have. The interesting thing is that even as they worked on it, back in April and May, big corporates such as Citi and Macquarie got wind of it and began seeking meetings.
So they have done the rounds of the financial sector, informing banks and others of their corporate obligations around human rights, under principles set by the United Nations and the OECD, to which they have signed up.
Apart from Hesta, a number of others have committed to either divesting from Transfield or blacklisting the company as a potential investment.
Clearly Transfield is worried. It has prepared its own counter-brief to investors and has also begun offering concerned investors and their advisers trips to visit the detention centres in an effort to convince them abuses are not taking place.
Narayanasamy declined to be quoted ahead of the group’s public launch, but another recent mother who worked with her – Rachel Ball, director of Advocacy and Campaigns at the Human Rights Law Centre in Melbourne – said:
“Companies that participate in Australia’s offshore detention regime cannot claim to be meeting their responsibility to respect human rights. These companies are complicit in serious abuses, including arbitrary detention, the detention of children, and cruel and inhumane treatment. Investors and financiers are right to be concerned.”
So, potentially, does government. If other investors decide to act on their consciences or even on the investment risk posed by other people agitating according to their consciences, it could become increasingly hard to find contractors to run their offshore processing centres.
One only has to look at what has already happened as a result of activist campaigns against the fossil fuel industry, particularly coalmining. It provides the textbook example of how moral and ethical concerns can translate into fiduciary risk.
All over the world, super funds and pension funds and other investment vehicles have begun offering fossil-fuel free options to clients. To some extent, this allows for conscience, but increasingly these things are demanded because people believe fossil fuels are a poor long-term investment.
Charlie Wood, campaigns director for 350.org Australia, which has agitated for divestment of coal shares, can tick off the impacts.
“There are now 38 or 39 institutions in Australia committed to divesting,” she says. “Internationally, 350.org has commissioned a fund manager to compile a total figure for the value of divested stocks. We think that will come close to $1 trillion.”
Among the big ones are Norway’s Government Pension Fund, the world’s largest sovereign wealth fund. Wood’s organisation is campaigning, so far unsuccessfully, for Australia’s Future Fund to do likewise.
But the writing is on the wall. Last week, the California legislature passed a bill requiring the state’s two largest pension plans to divest their holdings in thermal coal.
The two funds, which between them hold assets of close to $US500 billion, will have to dump some $200 million worth of coal stocks.
And there are other interesting developments afoot. In recent days, the law firm MinterEllison released a briefing note to Australian clients regarding a legal case in the United States, where the employees of a coal company are suing the trustees of an associated pension fund.
Over three-and-a-half years, the company’s share price plummeted 96 per cent, as the US coal industry tanked. The fund members want compensation for their lost savings. They claim the fund trustees breached their fiduciary duty by failing to sell out of the company – for which they worked.
John Hewson, the former Liberal party leader who is now chairman of the Asset Owners Disclosure Project, a global organisation whose objective is to protect retirement savings and other long-term investments from the risks posed by climate change, notes that law firms say a similar case could yet be mounted in Australia.
“The principle is that the directors of a pension fund have a fiduciary responsibility to manage the value of those investments so as to maximise the return to the worker in terms of superannuation benefits.
“But what they mostly do is put that out to short-term-focused asset managers, consultants, who are also remunerated on their short-term performance. So they are missing long-term issues like the possibility that climate change or government response to climate change or technological advancement in renewables or alternative technologies come together to reduce the value of those investments.
“If they focus short term and ignore the longer-term exposure, they are breaching their fiduciary responsibilities.”
Moral and ethical considerations inevitably come into play.
It’s clear in the case of fossil fuels. Fund managers are having to look a couple of decades into the future and consider the risk that people, and their governments, will take to limit global warming. It’s a sensible moral position, with huge financial consequences, not only for fossil fuel miners but also for all companies that will have to adjust to a decarbonising world.
It’s less clear in the case of a company such as Transfield. In all likelihood, there will be ever greater flows of refugees in the decades to come, so the business of bunging them up in detention might seem attractive.
But they are dependent on the patronage of government, which is in turn dependent on the mood of the public.
The great problem with ethical investing, says David Deverall, chief executive of the ethical fund manager Hunter Hall, “is that my moral principles may be different from yours”.
This is not a concern for funds such as his, which inform potential investors up front that their money will not be placed in certain investments. It’s much more problematic for mainstream funds if they try to retrofit ethical principles.
Says Deverall: “The approach to investing – which is called negative screening, screening out certain things – gained a lot of popularity among individual retail investors. But big investors like [superannuation funds] felt uncomfortable as trustees applying that negative approach. So they emphasised attempts to be as good and clean and moral as possible while not excluding any industry sector from their investment universe.”
They argued instead that they could effect change from within, through the application of environmental, social and corporate governance principles, and through greater transparency.
“But what’s happened recently, what we saw in the Hesta case, is an entirely new approach to ethical investing by some large institutions,” Deverall says.
“They now are more prepared to exclude companies or industries almost on a case-by-case basis. You can imagine how unsettling that would be for a number of companies and for the sharemarket. It’s becoming a very complex political and legal environment.”
But one thing that is now abundantly clear is that applying ethical considerations to investment need not result in diminished returns, he says. “You can do well and do good at the same time.”
Duncan Paterson, chief executive of the Canberra-based firm CAER, which advises ethical funds, points to the annual benchmark reports produced by the RIAA.
“Core ethical investments outperform their industry benchmarks over a one-, three- and 10-year period,” Paterson says. “That’s one in the eye for people who say you are in breach of your fiduciary duties if you worry about these things.”
Still, it’s very complicated being good. Let’s go back to the personal example that began this piece. Probably most investors would be unhappy to know their money funded nuclear weapons. But they would not be unhappy about being invested in the big four banks.
It’s a bit like opening a matryoshka doll. There is one ethical consideration within another, within another.
Simon Sheikh’s fund, Future Super, is not only entirely fossil fuel free, but also has no holdings in the big four banks because of their downstream investments.
His fund is a year old and still a relative minnow, although it is growing fast. But it’s fair to say, as Deverall does, that for most investors returns will always come first and ethics second, if they are considered at all.
Consequently most of us will stay with our big funds. But that doesn’t mean the activists do not speak for us. And it does not prevent us becoming informed and making our moral positions known if, for example, we don’t want to own bits of tobacco companies, or coal companies, or detention centre operators. Or atomic weapons.
This article was first published in the print edition of The Saturday Paper on Sep 12, 2015 as "An ethical Transfield". Subscribe here.