The practice of shareholder activism – where fund managers with minority stakes in companies agitate for the company to make positive changes in its environment, social and governance performance to boost its social licence – is well entrenched in Australian corporate life.
But it’s far less common for financial investors to agitate in the government sector.
As holders of sovereign bonds, fund managers have an (albeit miniscule) stake in the governments in whose bonds they invest. Yet they rarely, if ever, exercise this influence.
Enter the Principles for Responsible Investment (PRI)’s “Australia Sovereign Engagement on Climate” working group.
Composed of seven Australian and overseas-based investment managers, the group was formed with a mission to agitate for better policy disclosure from the Australian federal and state governments, with the overall aim of encouraging policies that better align the country with the goals of the Paris Agreement on climate change, namely to limit global temperature rises to within 1.5°C of pre-industrial averages.
Peter van der Werf, head of engagement at Dutch asset manager Robeco, flew over from Rotterdam to attend a week-long whistlestop tour of meetings with government agencies, including the federal and state Treasuries, the Department of Energy, the Environment, Climate Change and Water (DEECCW) and the industry groups that are intimately involved in policymaking.
Robeco’s fellow working group members are Nordea Asset Management, Schroders, BNP Paribas Asset Management, Aviva Investors, Brandywine Global Investment Management and HESTA, the sole Australian participant.
Government gets a grilling
The group grilled the government agencies on delicate topics including how Australia plans to deliver on its commitment to reduce emissions by 43 per cent below 1990 levels, how various government departments assess climate risk, how the state governments interact on climate change policy.
For the lobby groups, they were curious to know how these organisations could influence policy positions on climate change.
Robeco has had what it refers to as “sovereign engagement” with the governments of Brazil and Indonesia over deforestation and its associated impacts, but the Australian government campaign is the first time the asset manager has targeted a sovereign over climate change.
The group chose to target Australia because it has highly advanced social and government policies but (unsurprisingly) lags on the environmental sphere
Van der Werf said the approach could serve as a template for future engagement with other sovereigns. He said the group chose to target Australia because it has highly advanced social and government policies but (and no surprises here) lags on the environmental sphere.
Robeco has $25 billion of its $275 billion in assets under management invested in Australia.
Most of this is in blue chip public companies such as Rio Tinto and BHP, rather than government bonds. Robeco’s position as a shareholder in Australian companies gives it additional motivation to try and influence government policy, because Australian companies depend on good policy to be able to adequately transition their businesses to a net zero future, Van der Werf reasons.
Robeco, which has been operating in Australia since 2012, has a slightly different approach to engagement to some of the more high-profile activist shareholders such as Elliott Management and Atlassian’s Mike Cannon-Brookes, who bought an influential minority position at AGL Energy in a bid to focus its board on decarbonisation.
Van der Werf said it’s a myth that shareholders can only agitate for change if they hold sizeable minority positions in companies. He said boards are willing to engage with Robeco even if the asset manager only holds 0.1 per cent of the shares.
Robeco undertakes thematic top-down sustainability research by firstly identifying a prescient ESG theme, such as climate change, modern slavery or biodiversity, then screening the universe of companies to assess how they are performing on the relevant metric, such as progress towards net zero emissionAfter using gap analysis to identify companies that they believe they have the capacity to influence and add value, the investment team defines SMART objectives and engages with the company, often over a time frame of up to two years. They then monitor the company to see if it has improved its performance on the specific theme.
In Australia, Robeco has engaged with BHP, Rio Tinto, Fortescue Metals, Bluescope Steel and ANZ on topics as diverse as climate targets, lifecycle management, water use and community relations.
The firm’s top four focus areas for 2023 are biodiversity, a just transition for industries affected by the energy transition, tax transparency and modern slavery.
In 2022, the asset manager launched a Biodiversity Equities Fund and a corresponding investment framework.
Van der Werf said this investment theme is difficult to undertake due to a lack of data available to analysts on how companies’ activities are halting and reversing the drivers of biodiversity loss. “We have been working on getting data to create our own biodiversity rating,” he said.
The Fifth Estate is holding a summit on the theme of Urban Greening on 27 April at UTS, Sydney. See details here