In March 2017, AMP Capital adopted an ethical decision-making framework across its entire portfolio and became one of the largest fund managers in Australia to divest from companies that manufacture tobacco and controversial weapons.
Devising and implementing the framework was a long and complex exercise. Speaking recently at the Responsible Investment Association of Australasia’s annual conference, held in Sydney, November 15-16, 2017, AMP Capital head of environmental, social and governance (ESG), Adam Kirkman, outlined how the fund got there.
The process began in 2014, when the company recognised that ethical dilemmas were increasingly arising and funds were being held to account.
The framework was devised in accordance with section 601FC(1)(c) of the Corporations Act, which states that funds must act in the best interests of members.
“In carrying out [its] duties, the responsible entity must exercise a degree of care and diligence that a reasonable person would typically exercise if they were in that position,” Kirkman said.
A broader notion of ‘best interests’
Australian Ethical managing director Phil Vernon said funds are often discouraged from adopting ethical frameworks due to the mistaken idea that operating in members’ best interests refers only to financial interest.
“It’s that myth that prevents a lot of funds from taking action,” he said.
As AMP Capital started to challenge the thinking around best interests fiduciary duties, it began to ask itself what actions were acceptable in the pursuit of returns. It decided that funds are not just neutral ciphers through which capital flows, and that there are circumstances where it’s not defensible to invest in an activity, even if it’s legal and commercially viable.
“We came to realise that as a commercial organisation that works in a competitive business environment, we have a right to determine the terms and conditions under which we offer loans,” Kirkman said.
The company wanted a framework that would help it resolve ethical issues on an ongoing basis. “This is quite tactical and strategic because it means that we’re not just responding to things on an ad-hoc basis anytime we get flooded with a social media campaign,” Kirkman said.
The work was led by the ESG team and developed in consultation with the board, the investment community, key institutional clients and a panel of experts in business ethics. Anchored in AMP Capital’s existing ESG philosophy, the team introduced key principles that it would uphold as an organisation and apply as key determining factors in its decision-making.
The first principle is the right of individuals to respect, which affirms the intrinsic dignity of all people and ensures that human beings are not treated merely as a means to an end. The second principle considers whether a company provides a product or service that has a benefit to society or can be used without causing harm to others.
Putting it into place
Once AMP Capital decided on the framework, implementation took time.
“For a business that runs over 400 funds, and has a stable of over 50 external fund managers, it’s been a massive exercise,” Kirkman said.
The first step was to construct an equities and fixed-income exclusion list. The next involved a massive forensic accounting exercise to account for every dollar invested across the organisation. Then came the outreach to external fund managers to ensure they had experience running this type of mandate. The fund also spoke to institutional clients and surveyed an AMP customer panel of more than 2000 retail super members.
“That gave us confidence that we were heading in the right direction,” Kirkman said.
Recognising that attitudes often change well in advance of the law, AMP Capital now continually scans the horizon, takes societal changes into account and passes them through the its decision-making framework.
“In exceptional circumstances, we as an organisation may make the decision to exclude a company purely, on an ongoing basis,” purely for ethical reasons, Kirkman said. That’s what it did with manufacturers of tobacco and controversial weapons.
On the whole, the process was an overwhelmingly positive journey for the AMP Group, said Kirkman, who emphasised that a desire to act in the best interests of members was central to the process.