Michael Baldwin served as chief executive of Fund Executive Association Limited (FEAL) for 12 years. Now head of corporate affairs at First State Super, he spoke to Investment Magazine about his views on reputation risk against a background of heightened public scrutiny.
IM: Your panel session at the ASI 2018 Super Investment Conference is called “Investment Decisions and Managing Your Fund’s Reputation”. Is the manner in which investments are being made and executed becoming more central to how members and others perceive a super fund?
MB: Central to our reputation is the notion of trust. We want to be worthy of our members’ trust and that idea frames our approach to investing. We want to be proud of the investments we make and we want those investments to deliver sustainable long-term returns and, subject to our fiduciary duties, deliver tangible benefits to the communities in which our members live, work and retire.
We are conscious of the footprint that our investments make in markets, in communities and on the environment. These factors directly impact reputation and they are assessed and weighed carefully through our investment process.
If a fund wants to add a ‘reputation risk’ check to its investment diligence, what should this encompass?
We consider how reputation risk applies to both market-related factors and non-market factors. Market-related, or Tier 1 risk factors include: failure to deliver appropriate risk-adjusted investment returns; liquidity risk; and infrastructure, property and credit risk. Non-market related, or Tier 2, risk factors include: investment governance and investment operations risk, counterparty risk and ESG-related risks.
We also try to consider investment opportunities through the lens our members and stakeholders might apply. A unique example of this is our decision to divest from tobacco. Many of our members work in the healthcare sector and are acutely aware of the negative health impacts of tobacco use in the community. Our members’ expectations were an important consideration in our investment decision.
What are some possible future social risks and economic risks that might affect super funds? Are there any specific to your fund?
Research informs our investment and reputation risk-management process. This includes the consideration and assessment of possible future social and economic risks and their impact on our members and their investment with us. Issues on our radar include:
- Protection of workers’ rights, including safety, fair pay and supply-chain risks
- Ongoing monitoring and reporting of ESG issues
- The impacts of climate change
- Governance and organisational culture, including gender diversity, executive remuneration practices, the payment of taxation and off-shoring practices
- Water scarcity and its impact on global food supply
- The impact of sugar and obesity
- The use and disposal of plastic
These issues also inform our approach and engagement as an active owner.
How can asset managers assist with this process?
We want our asset managers to know our investment philosophy, to understand our responsibility as a universal owner and to partner with us in delivering strong sustainable returns for our members and better outcomes for the community.
Has First State made any changes to its investment portfolio with regards to reputation risk? Why or why not?
Reputation risk considerations have directly influenced and changed our approach to investing. Examples include the introduction of our Climate Change Adaptation Plan, the elimination of tobacco from the portfolio, the ongoing monitoring of the ESG credentials of our investments and our decision to invest in the development of critical infrastructure such as the New Bendigo Hospital and the International Convention Centre Sydney.