ETHICS Investing in Ethics – Future patterns and pathways

Australian businesses are embracing corporate social responsibility (CSR) with gusto. That’s the view of Michael Walsh – editor and publisher of Ethical Investor magazine, executive director of Corporate Monitor and former chairman of the Ethical Investment Association. “While there remains significant minority of companies that do not address environmental or social responsibility in their business model or public disclosure,” says Walsh, “the majority has now taken up the CSR mantle. Those that have established themselves as leaders in the CSR field are forging ahead with new programmes, forcing others to lift their CSR game and still others to enter the fray.”
Meanwhile, for Louise O’Halloran, executive director of the Ethical Investment Association, red-hot issue, with activity and battles on all fronts, is Federal government inquiries into directors’ duties and CSR reporting. These have come about as direct result of the James Hardie claim that it was restricted in its efforts to put aside sufficient payments for outstanding asbestosis liabilities because of the Corporations Law requirement of directors to act only in the interests of shareholders.
O’Halloran, whose association aims to promote the concept, practice and growth of ethically, socially and environmentally responsible investing in Australia and New Zealand, breaks the activities down into three movements: the Corporations and Markets Advisory Committee Inquiry into Directors’ Duties and CSR; the Parliamentary Joint Committee Inquiry into CSR and Stakeholder Interests; and the request by the Federal Minister for the Environment that the ASX broaden the ASX Governance Guidelines to incorporate requirement for CSR reporting.

Award winning practices
Walsh believes that nowhere are environmental challenges potentially more important than the motor vehicle industry. Ethical Investor magazine recently reported that from 2020 cars would start to be quite different from today. Honda (whose New Zealand business was winner of the 2005 Deloitte/Management magazine Top 200 AUT Business Ethics Award) is player in the hybrid battery/fuel car market.
“In coming years,” Walsh notes, “we will probably see other players in this area, more vehicles configured for alternative fuel blends and hopefully the introduction of hydrogen fuel cell powered vehicles. We will also see big engines powered by gas rather than diesel. And more and more biodiesel will be used and blended with its fossil fuel based counterpart. There is lot to happen between now and then but when company like Honda puts this new vehicle technology into the market we call it leadership. It gets noticed and it gets tongues wagging.”
Another example of what Walsh describes as the “great sustainability race” is for big business to demonstrate that it is not only concerned about climate change but that it has adapted its business to manage the risks of global warming. Walsh believes that Insurance Australia Group (whose New Zealand business IAG (NZ) was finalist in the 2005 Deloitte/Management magazine Top 200 AUT Business Ethics Award) is master at this. “From its CEO, Mike Hawker down, the company is convincing the community that world with clean environment, good security and fewer social problems will also have lower insurance premiums. This makes sense.”
Walsh sees competition amongst companies in Australia to be considered the best corporate citizens. Westpac, for example, has been placing advertisements in national newspapers celebrating its bevy of CSR awards. “Recently most of our major banks have developed programmes and research to develop literacy of disadvantaged groups. Doing so usually involves partnerships with community groups who handle people in financial difficulty on day-to-day business. The ANZ Bank is probably the leading bank in this financial literacy challenge, having won community business partnership award for its programme in 2004. It has since partnered with the government to adapt and take the programme to the aboriginal community.”
In New Zealand the ANZ has partnered with the Retirement Commission in national survey to identify areas of low financial knowledge by topic and population breakdown to help educators, government and the financial services sector improve skills in these areas.

Sustainable investment
In its 5th Annual SRI (Sustainable and Responsible Investment) Benchmarking Study, the Ethical Investment Association reported that SRI is growing strongly in Australia and in areas where this is not yet apparent – such as community finance and mainstream acceptance of SRI research techniques – it is poised to grow strongly in the coming year.
SRI Managed Portfolios grew by 70 percent during the 2005 financial year from A$4.5 billion – an increase of A$3.17 billion. New investor inflows into existing SRI funds form smaller, albeit significant, part of this growth. The main factors contributing to this impressive level of growth were: large superannuation funds adopting SRI policies for existing portfolios (A$1.72 billion); strong investment performance (A$785 million); capital raised by new SRI funds (A$153 million) and net flows to established SRI funds (A$512 million).
O’Halloran notes that in Australia, several superannuation funds have taken the lead on sustainable finance initiatives. Over 40 percent of Australia’s top 20 super funds currently have an SRI strategy including VicSuper which has recently launched an Australian investment consortium called “Investors Group on Climate Change”. She regards VicSuper’s policy on sustainability and investment as an excellent example of the logical link between long-term investment horizons and SRI: “Like sustainability, superannuation is about planning for the future. For part of VicSuper’s equity portfolio, we invest in companies in each industry sector that are leaders in corporate governance with sustainability-focused business strategies, including: environmental performance; transparency in business decisions; employee development; occupational health and safety; and long-term financial planning and risk management.”
O’Halloran also observes lot of movement in the renewable energy, clean-tech, waste and water area. It is, she says, more than in previous years with large and small fund managers and investment banks such as Macquarie Bank and Babcock and Brown getting involved.
Walsh believes that New Zealand’s public policy leadership in sustainability is well illustrated in that “the New Zealand Super Fund has an investment mandate that is oriented towards responsible business. Australia’s relatively new equivalent, The Future Fund, shows no sign of adopting anything other than mainstream approach. Except of course that it may end up being repository for some of the government’s ‘privatised’ Telstra shares.”
The Ethical Investment Association’s Benchmarking Survey notes that the governing legislation for the New Zealand Superannuation Fund requires the fund to implement “ethical investment, including policies, standards, or procedures for avoiding prejudice to New Zealand’s reputation as responsible member of the world community”. In line with the legislation, the fund has reported that policy for ethical investing has been developed. The fund is now planning to increase its interactions with similar initiatives undertaken by other institutional investors around the world to ensure the fund’s approach in this area remains contemporary.
An additional area of focus is the manner in which the voting rights attached to the ownership of the equities in the fund’s global portfolio are exercised. The fund notes that there is increasing recognition that alignment between institutions with long investment horizons and the management of organisations in which they invest, is mutually positive. The fund is seeking to increase its involvement in global initiatives aimed at achieving this. The projected size of the fund ($48 billion in 10

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