Australian super funds are heading into the corporate annual general meeting season with ESG as the dominant theme as well as focusing on executive pay, retention incentives and the economy.

ESG continues to be at the front and centre of super funds’ considerations. The head of HESTA’s Responsible Investment team Kim Tarrant said three key issues would dominate questions to investee companies namely climate change, social and gender inequality and the future of work.

“Our member base tends to be health and community services based, often earnings less than the national average which makes it more important for us to get good returns and that means a strong and stable economy and investee companies meeting their ESG benchmarks,” she told Investment Magazine.

Tarrant’s team, HESTA chief Debby Blakey and chief investment officer Sonya Sawtell-Rickson are about to meet directly with many of the top 300 companies ahead of their annual general meetings.

One company chair told Investment Magazine “three years ago investors used to ask me a bit about governance issues and climate change but now my chief executive is swamped with more questions on the same topic”.

More companies are taking the ESG issue a step further by outing their climate reports up for non-binding votes. These include AGL, Origin, South32, Sims, Westpac and APA.

Vanguard noted it voted against the climate reports presented earlier this year by Santos and Woodside. It said in a recent report “oversight and risk arising from climate change and the rapidly evolving energy transition” were the key engagement this year.

From the corporate side, Wesfarmers is a classic case in point with a simple statement of objective being to “deliver a satisfactory return for shareholders”.

It added “it is only possible to achieve this over the long term by among other issues taking care of the environment, looking after staff, suppliers and communities in which it operates, sourcing ethically and acting ethically and honestly”.

The list covers ESG concerns but rightly puts them in the context of satisfactory returns. UniSuper chief investment officer John Pearce agreed with the Wesfarmers model but said “social media has given a much larger voice to ESG. Shareholders also want to see evidence of action from companies”.

Focus on pay

Pay is always a focus at AGM season and this year is expected to see a continuation of the increase in the average realised pay according to data from Australian Council of Superannuation Investors (ACSI) from $5.6 million to $9.2 million last financial year.

Realised pay includes cash payments plus equity grants actually received in the year. Fixed pay on ACSI figures has actually fallen in the last decade by 0.6 per cent a year but this is made up by bigger equity grants.

The increased focus on incentives to keep executives may also change this trend as it tends to increase pay which in turn pushes up inflation.

Several companies face a second strike against the pay reports which means consecutive votes of 25 per cent or more and once hit then 50 per cent of shareholders voting to spill the board.

Those in the firing line include Dexus, IAG, Platinum Asset Management, Link, Westpac, Kogan, Whitehaven Coal and IDP Education.

Retention payments has also come to the fore as part of the skills and inflation debates and with shortages economy wide, more companies are paying more to keep the right people. One consultant said he had not heard directors talk about the need for retention payments as much since the early days of the GFC in 2008.

However ACSI’s Ed John noted fund managers are a little sceptical when it comes to retention payments thinking they maybe a ruse to sneak through higher executive remuneration.

Deteriorating environment

Funds will be cautious going into this AGM season as the macro-economic trends have worsened. While the earnings season was not as bad as feared, the percentage of companies which beat expectations was relatively low at 28 per cent against 42 per cent which missed expectations.

Goldman Sachs strategist Matt Ross said corporate earnings for the year ended June increased by seven per cent on an earnings per share basis driven by a 7.5 per cent increase in revenues. Costs rose by 14 per cent and companies reported difficulty in passing these on.

But in his report on the profit season, Ross said “it is clear that profitability is now under more pressure than it was through the earlier phase of the pandemic recovery, there was little evidence of any material weakening in broad-based demand and very few firms are reporting a significant crunch on margins”.

However “consumer demand appears more resilient than many feared in the face of higher inflation and rising interest rates.”

UniSuper’s Pearce thought “maybe next year’s meetings will be a better guide because it seems the second shoe is yet to drop, people are still spending but retail stocks are getting hammered”.

He wondered just what impact rate hikes will have on the economy and corporate earnings but figures maybe it is still too early to tell. “The profit season back in August was better than expected but that was based on last year’s earnings and at least now we have now had three months of trading with inflation fears, higher interest rates, a plunging Australian dollar and profit margins under pressure.”

Care Super’s chief investment officer Suzanne Branton said the season “will be interesting to gauge how companies are coping with high inflation and stifling wages pressure”.

“This will also provide as read on the changing macro-economic landscape,” she added.


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