26 October 2010 – Four of the biggest companies in Australia are seeking Queen’s Counsel advice on how to deal with a new fund that plans to challenge their climate and ethical practices in the current round of annual general meetings.
According to the Climate Advocacy Fund, which has been launched by the Australian Ethical Investment and Superannuation and supported by the Climate Institute, its aim is buy shares in all the companies listed on the S&P/ASX accumulation index – no cherry picking of stocks. It will then analyse the performance of each stock based on disclosure of environmental, social and ethical performance and risk assessment, in particular, according to a fact sheet on the Climate Institute website key concerns will be:
- Policy and governance – climate change awareness and commitment, incorporation of anticipated future carbon prices in business decision making.
- Management and strategy – strategies and plans to reduce emissions.
- Disclosure – track record of emissions disclosure.
- Performance and innovation – emissions, emissions intensity and strategies to reduce emissions beyond involvement in the Carbon Disclosure Project.
The first four companies to be targeted are Aquila Resources Ltd, Paladin Energy Ltd, Oil Search Ltd and Woodside Petroleum Ltd.
The fund plans to increase its clout by using shareholder nominees. A nominee shareholder is an individual who is formally registered as the bearer of shares despite not being the beneficiary owner of the stock holding. These individuals are the stock “owners of record” and the fund can have up to 100 nominees for each company in which it has holdings. These nominees – who are not the same as proxies – can then attend and vote at AGMs on behalf of the beneficial owner, in this case the fund. The use of the nominees legally circumvents the requirement to hold 5 per cent of company shares, a legislative prerequisite for putting forward resolutions.
Executive director of Australian Ethical Investment, James Thier, has ensured investors that the new fund would not be a sell-out to the big end of town.
Quite the opposite, Mr Thier told The Fifth Estate.
“This fund aims to address the worst of the worst. We are investing in all the companies we eschewed in the past. The BHPs are in there, the Rio Tintos and the Gunns are going to be in there. Our aim is to put resolutions to the companies with the aim of changing their behaviour.
“Our aim is not to try and destroy or undermine the companies. We want to improve their social and environmental practices. In Australia, there have been no social or environmental or social resolutions put to these companies in the last five years.”
Key tools that the fund will encourage include reporting frameworks such as the Carbon Disclosure Project (CDP) and the UN Global Reporting Initiatives Sustainability Reporting Guidelines (GRI) .
“We formally launched the fund in July and we put our first four resolutions in two weeks ago and we are now waiting to see what the outcome will be,” Mr Their said.
“We honestly don’t know what it will be. We don’t even know if they are going to be put on the notice of meeting. We do know that a number of these companies are now getting Queen’s Counsel advice. These companies may or may not put these resolutions in their meeting papers. Either way, there are a number of journalists interested in how they will respond.”
But it’s not all about the climate change activism, according to Mr Thier.
“At the end of the day, we are looking for a financial return to our investors equal to or better than the market rate of return from the ASX 200.”
“Our fund is an index fund but not the standard index. We value the companies using an economic footprint method as opposed to the standard valuation method, the share price.”
An assessment of economic footprint uses the objective measures of sales, cash-flow, book value and dividends.
“This form of indexing has only been in use in Australia for about a year,” Mr. Their said.
“But if we back test it for the 25 years we see that the fundamental index – that is, the valuation method we are using – performs at between one and two percent better than the S&P ASX/200 index.”
He adds that there are times when the index under-performs.
“It under-performs during bubbles. The biotech bubble, the dot com bubble and the recent property bubble in the US. Which is precisely when you want it to underperform because what is happening in those bubbles is that people are buying more and more irrationally.”