On the heels of its recent conversations with Boral, Australian Ethical has warned companies that while divestment can be a “blunt instrument”, it won’t shy away from using it if engagement efforts fail.
The investment firm – which operates both an APRA-regulated super fund and a range of managed funds – was one of the high-profile institutions that publicly criticised ASX-listed construction giant Boral last week, after it stepped back from its 2025 carbon emission target. Alongside HESTA and AMP, Australian Ethical expressed concerns about the lack of climate transition commitment from its current management team.
Amanda Richman, the investor’s ethical stewardship lead, says it is planning to spend more time engaging with Boral, especially on the lobbying front.
“If companies are lobbying in a way that’s in their own short-term interests – which of course is what they’re going to do – how should diversified investors investing for the longer term respond?” Richman tells Investment Magazine.
“There’s been some claims by Boral that our advocacy is essentially pushing emissions offshore to other industries, I think it’s a bit cynical to suggest that that’s the only credible pathway if Australia and Boral seek to implement strong carbon policies and targets.”
However, the investor will always keep divestment in its back pocket. “It is not a tool we use lightly – it can be a bit of a blunt instrument,” Richman admits. “But if done well, it can help bring about real-world change.”
‘Prospect for influencing’
Australian Ethical divested from five companies following over 250 engagements in the 2023 financial year. Four were made post-engagement, and one was made without because there wasn’t “any prospect for influencing”, per Richman.
The stance came amid recent local calls from Investor Group on Climate Change (IGCC) for asset owners to help truly decarbonise the economy and not just their portfolios through means such as supporting a managed phaseout approach.
Internationally, the European Corporate Governance Institute’s Socially Responsible Divestment working paper last year suggested another perspective.
It proposed a “tilting” strategy where investors tilt away from a brown industry, but can hold stocks that are genuinely taking corrective action – an approach deemed more effective than blanket exclusion because it provides incentives for “brown” companies if they feel their ESG efforts are awarded.
Richman recognises that the debate around divestment and engagement doesn’t always have a black-and-white answer in the industry. “There’s scope for reasonable minds to differ,” she says. But even with a category Australian Ethical doesn’t invest in, such as fossil fuels, she says there are always ways to influence around the periphery.
Looking back at an example from earlier this year, when all big four banks refused to renew a billion-dollar loan to Whitehaven Coal, she says it’s the result of significant engagement efforts from institutional investors of the banks and sends a strong signal in terms of public policy settings.
“Sometimes people can say: if this doesn’t result in absolutely guaranteed no future emissions, there’s no point engaged in doing this stewardship approach.
“But I think that ignores that the potential for positive feedback loops between the private sector consumers, the public, and government and regulators, and the signals that we can send to each other by taking these steps.”
Members’ opinions second order
Servicing one of the most ESG-conscious groups of all super funds, Richman says Australia Ethical’s members often have strong opinions of their own when it comes to engagement and divestment debate.
Prior to its ultimate divestment of Lendlease earlier this year over the Mt Gilead housing development in NSW (which is believed to have an adverse impact on the local koala colony), Australian Ethical went through a period of engagement.
She says the fund received correspondence from some concerned members during this period, who just want Australian Ethical to divest straight out of the gate. While these sentiments are important to the decision-making process, Richman says they don’t determine the outcome.
“It [Lendlease] is one of those areas that’s quite nuanced and complicated, and there can be some knee jerk reactions. We try to avoid having them,” she explains.
“When we develop a framework, we’re looking at research from academic papers, from organisations like WHO… and applying the principles of our ethical charter.
“We do take into consideration the feedback that we’re getting, but it’s just not going to be determinative, because we’re trying to make decisions as objectively as possible.”