Regnan analyses sustainability of Australian stocksFebruary 2008
Governance scandals and climate change are pushing social and environmental issues up the agenda for companies and investing institutions in Australia. Erik Mather talks to Mike Scott
The assessment of sustainability issues is in its infancy in Australia but a joint venture between a number of institutional investors is aiming to bring it into the mainstream.
Growing interest in environmental, social and governance issues in Australia has been driven by the introduction of the UN’s Principles for Responsible Investment in 2006, a number of corporate governance scandals and the impacts of climate change on the country, according to Erik Mather, managing director of Regnan, a consultancy providing research and governance on ESG issues.
Regnan’s roots lie in the Governance Advisory Service of BT Financial Group, a subsidiary of Westpac, but it is now owned by eight major institutional investors and Australia’s largest university. ‘We were always independent, but the appearance has been bolstered by the change in ownership’, says Mather. Just as it promotes the benefits of diversifying company boards, Regnan’s own diversity of ownership strengthens its credentials, he adds. With a A$50billion ($44bn, £22bn) engagement mandate, representing approximately one in eight institutional dollars invested in Australian listed companies, Regnan has the scale to make engagement effective. ‘Our size and independence significantly increases our level of influence beyond the previous, successful BT GAS model’, says Mather.
About 20 Australian institutions have signed up to the PRI to date. Climate change has become a key topic, explains Mather. ‘In Perth, the day you can water your garden depends on your house number – in the last two decades, rainfall has declined by 25 per cent in Western Australia. Nearly every city is building a desalination plant, and climate change was one of the defining issues in the recent election victory of Kevin Rudd.’
Australian companies have also been in the news in recent years over questions of ethical conduct. James Hardie, the construction company, had to pay out A$4bn in compensation over underestimating asbestos liabilities and lost its chairman and two other directors after Australia’s securities regulator sued the company. The regulator also took action against six former executives of the Australian Wheat Board over illegal payments to the regime of Saddam Hussein.
Such cases ‘expose the extent to which conduct has lost money for shareholders’, Mather says. ‘ESG research can illuminate a company’s risk and opportunity profile and consequently its valuation.’
The company recently launched research on human capital management at all ASX 200 companies, rating them on health and safety, the effects of skills shortages and measures to retain staff. It has also looked at the impact of climate change on the index, concluding that a carbon price of A$30/tonne could cut annual profits at over 40 companies by more than five per cent. Conversely, climate change presents significant opportunities for more than 50 index companies. In 2008 it plans a report on ethical conduct.
‘With impending emissions trading and more severe weather forecasted, the time to thoroughly understand the financial impacts of climate change is now’, Mather says. ‘Institutional investors, especially UNPRI signatories, want fund managers to properly assess climate change impacts on listed companies and invest their funds accordingly.’
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