Australian super funds now have a chance to show how they will encourage ethical practices within their investments, as the industry has launched a code of practice.

The Australian Asset Owner Stewardship Code was launched at the 2018 Australian Council of Superannuation Investors (ACSI) Conference in Sydney on May 17. The peak industry body has urged all asset owners to sign up.

ACSI chief executive Louise Davidson says the code has been created to cater for the growing desire among beneficiaries and stakeholders for information about how asset owners manage the funds entrusted to them.

“We see this as an opportunity to shine a light on the important work asset owners do to protect and enhance long-term value for their beneficiaries,” Davidson says.

The code promotes the transparency and accountability of asset owners’ stewardship practices and make it easier to understand how asset owners approach their stewardship responsibilities.

“It will provide insight into a wide range of stewardship activities, including exercising voting rights, company engagement, monitoring asset managers and financial system advocacy,” Davidson says. “Reporting and disclosure requirements are embedded into the code.”

Colonial First State Global Asset Management head of responsible investment, Asia-Pacific, Pablo Berrutti, says professional investors are moving to improve ethical standards in response to recent scandals in Australia involving franchise models such as Domino’s Pizza and Caltex, and due to the use of labour hire in agricultural supply chains by Woolworths and Coles.

Labour and human rights risks for investor portfolios were once thought to be the sole realm of supply chains in emerging markets, but have been brought into sharper focus at home, Berrutti says.

Five leading industry bodies support an Australian Modern Slavery Act, to be debated in Parliament this year, aimed at improving information across the market and, consequently, engagement with companies from investors and other stakeholders.

“We need a race to the top on this issue, which [affects more than] 40 million people and 150 million children around the world,” Berrutti says. “The best way to start that race is through greater transparency.”

Asset owners need to commit to engaging with these issues within their portfolios, rather than walking away, he argues.

“It is easier for an investor to respond to a scandal on the front page of a newspaper than it is to develop a long-term conversation on human rights,” Berrutti says. “Ultimately, investors need to set expectations for companies to follow the [special UN special representative John] Ruggie Principles on Business and Human Rights and provide adequate disclosure.”

He says there is a high level of engagement and genuine interest in these issues and is encouraged that 40 investors attended the first meeting of the Responsible Investment Association Australasia human rights working group, which was recently set up.

Universal owners

First State Super responsible investment manager Liza McDonald says the $89 billion fund has placed franchise models in Australia under scrutiny recently, which will inform its engagement with companies.

McDonald says alleged wage fraud and migrant rights abuses related to a variety of franchises in Australia recently have become an emerging risk for big investors.

Large super funds such as First State must embrace the principle of universal ownership, she says, to ensure companies have good workforce relations and manage safety, supply chains, diversity and adherence to international guidelines on human rights.

“Universal owners are defined as pension funds or other institutional investors that are so large they become an integral part of the market microstructure,” McDonald says.

Open dialogue with companies allows First State investment managers to continue to monitor its concerns around franchisee risk and ensure corrective
action is understood and being taken.

She says the biggest labour and human rights risks in the fund’s portfolios are from companies with large workforces or supply chains – and they appear across all asset classes and geographies.

The fund also supports a Modern Slavery Act, based on the UK’s Modern Slavery Act, established in 2015, after the 2013 Rana Plaza collapse in Bangladesh, in which more than 1000 garment workers died as a result of poor construction and safety standards.

“We welcome a Modern Slavery Act to improve transparency about how companies operating in Australia are managing modern slavery risks in
their operations and supply chains,” McDonald says.

In developed markets

New Zealand Super Fund responsible investment chief Anne-Maree O’Connor says she has been passionate about human rights for decades, with issues around bonded labour and child labour always at the heart of responsible investment.

O’Connor was recently voted the world’s eighth most influential asset owner responsible investment specialist in the 2017 survey on Independent Research in Responsible Investment. She says the focus is shifting to developed countries where abuses of migrant workers’ rights are emerging – from horticulture to hospitality and healthcare – in Australasia.

Human rights abuses, she says, are a “pernicious thing” that must be “stamped out at the root” through vigilance from investors and company boards, particularly those of large multinationals that source from many countries.

“There’s real brand and reputational risk on the human rights side and that [affects] both business-to-business and particularly business-to-consumer reputation and relationships and therefore, ultimately, revenue,” she says.

This translates to fiduciary risk for institutional investors and super fund managers must understand those risk factors in their analyses, O’Connor says.

Template to stop abuses

The NZ Super Fund, which has almost $40 billion in assets under management, has made investment exclusions based on human rights, particularly within the resource and security forces sectors in high-risk areas.

O’Connor says the UK’s Modern Slavery Act, introduced in 2015, has provided Australian companies with a template for stamping out and dealing with abuses within the supply chain.

“The UK slavery act has focused on reporting because each situation generally requires its own special solutions to change it. It’s hard in law to prescribe the actions to take,” O’Connor says. “Companies in Australia can look at counterparts in their particular sector and go, ‘That was a useful statement.’ I think they’re almost becoming education tools.”

She says while it is great to have “soft and hard law” guidance on human rights, such as UN principles and industry standards, Australasian companies must also map where there are labour force vulnerabilities.

Ethics ‘breakthrough’

As a positive sign of renewed focus on ethical investment, ethicist Simon Longstaff highlighted AMP Capital’s “breakthrough” decision this year to
divest from exposure to tobacco and munitions in its investments.

AMP announced it would sell $440 million in exposure to tobacco and $130 million in exposure to cluster munitions and landmines, following discussions with Longstaff’s Sydney-based Ethics Centre.

“What was such a breakthrough in AMP’s thinking was that they realised they were entitled to set their own moral boundaries about how they go about earning profits,” Longstaff says. “They decided there were some boundary lines that they clearly did not want to cross.

“Their decision is not different to a doctor who, through religious beliefs, might refuse to perform certain procedures, or a taxi driver who says there are some people I won’t give carriage to because they’re drunk. In one sense, it’s an entirely unremarkable decision to make. In another, it stands out because it is so clear and unusual for a corporation to set its own boundaries in that way. All investors need to ask themselves the same question: Just what is it we’re prepared to do to generate our profits?”

He says AMP’s framework could be applied to any investment decision.

The guidelines include: not investing in entities or activities that undermine fundamental human dignity and violate international human rights law; considering the extent to which investments are in entities or products that cause harm.

AMP will also bear in mind whether engagement with a company might be a better route to achieving a positive ethical outcome.
Longstaff says moves by companies and the funds that invest in them are heading in the right direction.

“Investment advice is starting to be redefined as an ecology of meaning, not just doing,” Longstaff says. “What you can differentiate on is what you stand for and how you apply that across relationships.”

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