Responsible investors are able to wield influence in portfolio companies through engagement and proxy voting programs. Australian super funds particularly have outsized influence in these matters given their significant stakes in publicly listed companies in Australia.
The $70 billion Cbus’s approach to stewardship is aligned with member expectations. Speaking at Investment Magazine’s recent Equities Summit in Sydney, Rosalind McKay, Cbus’ head of responsible investment said “as a large super fund with sizable shareholdings, we do believe that we have a role in encouraging improvements in company’s governance, policies, ESG practices and disclosures”.
Cbus actively votes at company meetings, guided by the Australian Council of Superannuation Investors’ (ACSI) corporate governance guidelines across both its domestic and global equities portfolios, though they are able to better influence outcomes in its domestic holdings. “We are more active in Australia because of our size of holdings and also proximity,” she said.
Cbus also partners with others to share resources and learnings and to achieve more impactful stewardship.
“You can be more effective in terms of what you’re trying to achieve and often you’re dealing with systemic issues that you can’t address on your own,” McKay said.
UniSuper’s approach to stewardship can be described as “active as opposed to activist”, said the fund’s head of equities, Penny Heard. The super fund has a very engaged membership base, traditionally drawn from universities.
“Our guiding principles are first and foremost that we always respect our fiduciary duty to members, and we take a long term view on investment decisions,” Heard said.
Key issues of stewardship
Governance is a key issue of engagement with senior company executives over issues such as labour practices, safety, culture and climate change.
“We think about how well a board and management are looking at those sorts of issues when we’re considering how to vote on executive pay and director elections and re-elections. As you can imagine, voting is inextricably linked to engagement,” said Cbus’ McKay.
There is also growing investor recognition that climate risk represents a major systemic risk in the financial system with widespread financial impact on the value of assets.
“It incumbent upon us to really understand what the risks and opportunities are around decarbonisation as it is an enduring trend that is not going to be ignored,” said UniSuper’s Heard.
Investors have a duty to assess the viability of carbonisation plans in their investee companies and demand they live up to sustainability plans and carbon emission targets she said.
Investors also need to have a standardised ESG valuation process and not differentiate between different asset classes and markets.
“ESG awareness is a bigger deal for the investor community who wants to make sure that global capital is being allocated to more efficient companies that serve all stakeholders,” said Josh Rubin, portfolio manager and managing director at Thornburg Investment Management, which manages US$40 billion ($62.3 billion) of assets.
There needs to be “a consistent ESG process across the investment organisation, not just one for emerging markets and one for fixed income,” Rubin said.
However, he acknowledged reliable data is not easily available, making assessment difficult so the firm is developing its own database.
“Data is not reported in a consistent fashion by all companies, which makes it essential to assess ESG disclosures in the appropriate context,” he said.
“While we do look at third party ESG scoring, particularly in emerging markets it can comes up short and we’re trying to build our own internal data sets.”
Rubin also noted the importance of recognising that improving ESG behaviours within EM companies could unlock shareholder value, pointing to Walmex as a good example.
“The company was caught paying bribes pre-2012, they undertook anti-corruption measures, including Whistleblower protection and training programs for suppliers. Since 2014, Walmex has significantly outperformed the MSCI Mexico index,” he said.
The importance of indigenous and community relations in Australia came to the fore when mining giant Rio Tinto destroyed the Juukan Gorge caves in 2020. Dated over 46,000 years old, the caves were of significant cultural value to the traditional owners.
Following the destruction, ACSI set up a cultural heritage risk management working group that developed a research paper and a policy that set out company expectations, how they interact with First Nations people and the management of those risks based on global standards and regulations.
“The focus continues to be on educating ourselves, educating the working group and educating ACSI’s broad membership base,” said McKay, who chaired the working group.
“Juukan Gorge is not just a Rio issue, it’s not just an extractive issue and nor is it just an Australian issue.”