The controversial state of financial regulation around the globe, the difficulties of green investing and watching asset consultants go head-to-head in front of a room full of potential clients were some of the highlights of the Australian Council of Super Investors (ACSI) annual conference.
Held in Melbourne last month, the conference had a strong focus on environmental, social and corporate governance (ESG) risks in investment, with ACSI chief executive officer Ann Bryne saying the association was stepping up its environmental and social monitoring activities. This includes releasing research into sustainability-reporting practices, and labour and human-rights policies and disclosure at S&P/ASX200 companies, Byrne says.
The day kicked off with a keynote address from University of New South Wales professor Justin O’Brien discussing the current state of financial-regulation reform in the United Kingdom, United States, Australia and Ireland.
O’Brien says the volume of derivative transactions has returned to 2007 levels. Meanwhile, governments’ focus on technical financial-regulation reform, rather than ensuring market players acted with integrity, had failed to mitigate systemic risk.
Other sessions included a rundown on carbon policy and investment from Gerry Hueston, a commissioner at The Australian Climate Change Commission, and David Paradice, the founding principle of Paradice Investment Management, which oversees $6.6 billion for institutional and high-net-worth investors.
To us, sustainable investing is ESG plus long-term investment horizons,” Hugh Doherty says.
Paradice, who recently helped review green-energy proposals put to the Australian Government’s Clean Energy Finance Corporation, provided case studies of failed green investments, and highlighted some of the challenges and opportunities for institutional investors.
The governance spotlight was also shone on asset consultants. Executives from JANA Investment Advisers, Towers Watson, Frontier Investment Consulting and Mercer Investment Consulting addressed the major challenges in integrating ESG and active ownership policies.
Hugh Doherty, Towers Watson’s head of manager research, told delegates that ESG was just one component of sustainable investing.
“To us, sustainable investing is ESG plus long-term investment horizons,” Doherty says.
Simon Eagleton, head of investment consulting in the Asia-Pacific region for Mercer, says that part of a consultant’s job is to simplify ESG. However, he challenged funds to tackle ESG risks before waiting for consultants to provide coaching.
He pointed out loyalty dividends on stocks and the abandonment of quarterly earnings as the types of reform that funds could push for to help change the prevailing short-termism affecting markets.
“We are operating under the false assumption that ESG integration is hard to do,” he says. “There are a whole lot of things that we could do, and a whole lot of things you could all take back to your boards and management teams and do in the next quarter around ESG and its integration. “These are simple things with clear objectives, it can be done and it should be done.”
It’s tough being green
The allure of green investing fast becomes hard work as questionable business models and shifting regulations undermine the certainty of long-term investors.
David Paradice has seen the ups and downs of green investing. He recently spent time on the panel of the Clean Energy Finance Corporation and says that small companies have been a disappointment to investors.
“Investors need specialist skills and lots of luck” to succeed at green investing, according to Paradice.
Despite government support, fossil fuel-intensive-energy producers have a cost advantage over renewable- energy companies. The uncertainty about a future carbon price three years from now also gives investors cause for concern, Paradice says.
Gerry Hueston also says regulatory uncertainty creates a hostile environment for clean-energy entrepreneurs and investors. A 34- year veteran of BP, Hueston says green start-up enterprises must navigate a “valley of death” before succeeding. Later entrants are typically the companies that eventually profit.
The commission, led by prominent scientist Tim Flannery, aims to provide independent advice and scientific information about climate change to interested parties.
Hueston thinks Australia’s attempt to price carbon is unlikely to outpace those being undertaken by other countries. Concerns around a winding back of the carbon tax by a potential conservative government under Tony Abbott are overblown, Hueston says, because legislation is likely to be crafted in such a way as to make it difficult for the federal government to extricate itself from any potential future commitments.
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