News from the front desk: Lendlease has attracted some heat over the last few months for a new residential development near Campbelltown in NSW that could threaten the area’s vulnerable koala population.
The Figtree Hill estate project would see farmland converted to housing, which will involve a degree of land and subsequently habitat clearing. Although the company has promised to develop the area sensitively and provide corridors for the animals to move around that might make the land even more koala-friendly than when it was used for grazing, not everybody is convinced the company is going far enough.
This includes the likes of ethical investment manager Australian Ethical, a Lendlease investor. While it doesn’t invest directly in the Figtree Hill or Mt Gilead projects, and has committed not to, it remains an investor in the property giant due to its commitments to sustainable property and infrastructure, such as Barangaroo.
The Figtree Hill incident has triggered a well-honed escalation response from the investment manager, according to its head of ethics research Stuart Palmer, starting with open engagement. From there, the investor has drawn some lines in the sand for Lendlease based on the findings of AE’s own ethics team and the best available biodiversity research it can get its hands on.
If the company fails to meet its criteria, it will divest.
Palmer has long been of the opinion that it’s not a matter of choosing between engagement or divestment. “They go together”. It’s a matter of using all tools at hand strategically.
These are tricky engagement tactics that the responsible super fund, which has $5.05 billion in funds under management, has been grappling with for the 35 years it has existed.
Today, it’s not just smaller boutique investors navigating these complex waters in a bid to derisk their portfolios and affect real world action on climate and a host of other sustainability issues. It’s a complicated dynamic that’s now playing out in the mainstream.
A report released earlier this month by the Australasian Centre for Corporate Responsibility pointed out the dangers of failing to use both engagement and divestment tactics.
Dan Gocher, director of climate and environment at ACCR, says the report has received some “pretty good feedback” from investors who “welcome the nuanced discussion around these issues.”
He says the interest is coming from investors that are trying to reduce their carbon exposure but also want to have real world influence. “The challenge is marrying the two together.”
While Gocher recognises there’s value in divestment – especially for companies that cannot, or will not, do better, such as thermal coal mining companies – while investors remain inside the tent, they should be using all the tools at their disposal to drive change.
This includes voting against directors, which Gocher says is becoming more common in Australia but usually for “acute” risk management issues, such as the debacles at Crown and Amp Capital. Longer term “chronic” risks, such as climate change, haven’t elicited quite the same response, however, he notes that ExxonMobil has been subjected to this kind of pressure.
Something else investors can do is back shareholder resolutions that propose decarbonisation strategies. Gocher says Australia is still fairly immature in this sense, especially compared to somewhere like the US.
The worry, as noted in the report, is that an overreliance on divestment has limited real-world decarbonisation effects. The intention of divestment is to stigmatise climate and ESG bandits, lowering the share price and hopefully leaving the company with no other option but to decarbonise their operations.
Gocher says the reality is it’s a bit of a “mixed bag” in terms of impact. Whitehaven Coal, for example, wants to double its production over the next 10 years despite several super funds divesting from it.
Part of the problem is that potentially less ethically conscious investors swoop in on the “climate reputation fire sales”, as one AFR commentator put it, leaving these companies free to go about their carbon intensive business unhindered.
The other issue is if investors exclude fossil fuels but don’t replace these investments with clean energy sources, such as renewables and batteries.
“If you just divest and exclude all the difficult parts of the economy and invest in digital publishing, you might have a low carbon portfolio but you’re not helping the transition of society,” AE’s Stuart Palmer says.
It’s all in the motivation
It seems that pulling capital out of carbon-intensive industries is a great way to de-risk a portfolio but not always necessarily an effective way to create change.
Responsible investment decisions are not necessarily driven by institutional investors suddenly “growing a conscious”, says Tim Buckley, director of Energy Finance Studies, Australasia at the Institute for Energy Economics & Financial Analysis (Australia).
Investors have woken up the very real risk of climate to their returns: the physical risks to assets, as well as the threat of stranded fossil fuel assets when government policy (finally) comes into force to make these businesses unprofitable.
BlackRock’s Larry Fink has woken up to the threat of climate risk, Buckley says, with the CEO of the investment management giant paying lip service to the notion a few years ago. Fast forward a bit and his last CEO letter was solely about the climate “tsunami” about to hit the global financial system.
“So why is he shifting? Did he grow a moral spine? No, he realised capital flows are shifting profoundly.”
A balance between public and private
Palmer stresses the importance of an open and transparent dialogue, and recognising the complexity of the issues at hand.
“These issues aren’t as simple as we’d like them to be.”
And while transparency is central to the super fund’s strategy for influencing investee decisions, he also says it’s important to pick the right moment to go public.
Palmer says there’s well-founded cynicism about the “private cosy discussions” that he agrees sometimes change nothing.
“Equally, privacy can be important at different stages – or confidentiality. If there’s a sense everything that is said will end up in the media, that naturally tends to inhibit open conversation.”
The other major challenge is that lot of the data that investors are using to make responsible investment decisions is not particularly robust. “A lot of these metrics aren’t settled.”
Although there are companies that are genuinely grappling with the complexity to provide clear and comparable data for investors, the muddy waters also leave room for greenwashing. Cherry picking data, for example, where a company reports on just one dimension rather than their operation as a whole.
As decarbonisation and sustainability speed up and the stakes get higher, expect those waters to only get more turbid.