Originally published in Investment Magazine (May 2017)

 

Every year in May, the leading experts in ESG investing gather for ACSI’s annual conference, and each year the audience coming to hear from them seems to grow bigger.  It’s been said before, and sometimes prematurely, but ESG investing really is in the mainstream now.

Long term investors know the measurable impact environmental, social and governance issues have on the sustainability and profitability of listed companies. 

And Australians more broadly - those whose retirement savings are at stake here - are on board too.

Because, the reality is that the issues we deal with every day at ACSI aren’t just good for profit, they’re good for people. 

Let’s consider just two of those issues.

It’s hard to believe that, in the second decade of the 21st century, Britain would have to enact a law addressing modern slavery, and that the Australian Parliament would start an inquiry to see if we need to do the same here.

Yet, according to the UN’s International Labour Organization, there are 21 million people around the world estimated to be victims of forced labour, and their labour ‘in the private economy generates US$150 billion in illegal profits every year.’

 ‘Modern slavery’ is real and it exists in domestic and global supply chains of companies operating in Australia.  This is something ACSI has been working on for years, and we’re certainly making a submission to the inquiry urging the introduction of a tighter legal framework.

In business terms, a company with slavery in its supply chains faces huge reputational risks that have the potential for significant impact on its share price.  In human terms, slavery and forced labour are clearly abhorrent and should have long been relegated to the history books.

Then there’s that perennial hot topic, CEO pay. In the USA, the average, S&P500 CEO earns around 350 times the amount an average worker does.  Under rules meant to go into effect this year as part of the Dodd-Frank reforms, US companies will have to disclose the ratio of their median pay of their employees to the pay of the CEO. 

Simply disclosing the ratios won’t necessarily bring those salaries more in line with community expectations, but it will certainly give investors an idea as to which companies are putting their profits back into shareholder hands, and we hope also give the remuneration committees of listed companies pause for thought. ACSI is supporting these changes.

Modern slavery and CEO pay are miles apart on the spectrum, but have two things in common.  First, the average person would consider both to be unfair and unreasonable.  Second, in investment terms, both can be seen to be linked to short-term profit taking at the expense of long-term sustainability, and both carry reputational risk which may put the company’s social licence to operate in jeopardy. 

The World Economic Forum’s Global Risks Report 2017 found ‘rising income and wealth disparity and increasing polarization of societies were ranked first and third, respectively, among the underlying trends that will determine global developments in the next ten years.’  Rounding out the top three: climate change.  

All of these issues have the potential to cause massive disruption around the world – and rising inequality certainly influenced the political upheavals in the UK and USA in 2016.

Governments around the world have committed to a zero-carbon future under the Paris Agreement, and to reducing poverty to zero under the UN’s Sustainable Development Goals.  The PRI, which is the global hub for responsible investment, is focussing on these two themes as it helps investors come to grips with the enormous challenges ahead.

It is in everybody’s best interests to rise to those challenges.

 

Louise Davidson, CEO, Australian Council of Superannuation Investors