Trustees now under the gun over environment, social and governance issues

No longer safe for trustees to assume ESG issues are inherently “non-financial”.

A leading responsible investment advocate believes Maori and community trusts in New Zealand should lead the way in matching a trust's social purpose with its investments.

Responsible Investment Association Australasia chairman Pablo Berrutti says there has been a big shift in thinking in the past two years over trustees’ fiduciary duties and the country’s community trusts could easily be leaders in considering environmental, social, and governance (ESG) issues when investing money under their care.

Mr Berrutti says from 2005 onwards it became legitimate for trustees to consider ESG factors but in the past couple of years that thinking has shifted to them having a duty to do so.

A UK Law Commission report in 2014 found that trustees should take into account ESG factors if they are financially material.

Similarly, the US Department of Labor released guidance in October last year acknowledging for the first time ESG factors may have a direct relationship to the economic and financial value of an investment and should be considered by fiduciaries overseeing retirement plans that come under the Employee Retirement Income Security Act.

"When they do, these factors are more than just tiebreakers, but rather are proper components of the fiduciary's analysis of the economic and financial merits of competing investment choices," the report says.

The department governs funds worth many trillions of dollars and "reinforced the UK Law Commission's view", Mr Berrutti says.

Law firm Minter Ellison warned last year that it is no longer safe for trustees to assume ESG issues are inherently “non-financial.”

That followed a breach of duty claim in the US which highlighted the importance of fund trustees and their directors in remaining "informed, proactive and engaged" on material financial risks, regardless of whether they arise out of financial factors such as market change or non-financial factors such as ESG drivers.

Pension holders took a claim against the trustees of the Arch Coal's company pension plan for continuing to invest in the company's stock, which had plummeted in value by 96%.

In another example, the international investor network, Principles for Responsible Investment (PRI), in a submission to the Fraser Review in Australia on a best practice governance code for not-for-profit super funds, said any code has to include a section on incorporating ESG factors into the investment process.

PRI says the code, which may eventually expand to all super funds in Australia, should state funds have to disclose to members relevant ESG governance policies at trustee level, the fund's proxy voting policies and material voting behaviour, and that trustee directors should consider independent third party assurance of ESG reports.

Mr Berrutti there is already a move away from funds just excluding negative impacts such as tobacco companies or fossil fuel companies from investment portfolios to actively seeking to make a positive impact, he says.

"A cancer charity putting money into a tobacco company doesn't make sense and we're seeing that flow through with the growth in impact investing where they can make investments that make money and have a positive impact on their community."

Mr Berrutti says the growing use of social media by those pushing specific ESG issues, such as the fossil fuel divestment campaign, was also having an effect on fund managers and trustees.

One example was the campaign last September by No Business in Abuse waged against corporate Transfield Services, now called Broadspectrum, which also operates in New Zealand, as it was about to sign a multi-billion dollar, five-year deal to continue operating the Manus Island and Nauru detention camps on behalf of the Australian federal government

The group targeted the company's investor base highlighting instances of alleged rape, violence and other incidents against camp detainees. It led to big super fund HESTA divesting $A23 million of Transfield stock and several other investors reviewing their holdings, forcing the company's share price down although it has since recovered.

The NZX is currently considering whether and how listed companies should have to report on ESG issues as part of its corporate governance reporting review, for which submissions recently closed.

About 4% of total assets under management – some $3.2 billion – in New Zealand are invested in core socially responsible investment funds, compared to 2.5% or $A31.6 billion in Australia.


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