Funds giant IFM sin-bins Westpac over Austrac scandal

Money manager IFM has restricted its exposure to Westpac bonds until the prudential regulator completes its probe into the Austrac debacle.

Westpac settled the Austrac litigation last September for $1.3bn. Picture: AAP Image

IFM Investors, the $158bn money manager owned by the industry superannuation sector, sin-binned Westpac over the Austrac money-laundering scandal and is continuing to restrict its exposure to the bank’s bonds.

IFM said its treasury services team, which manages the fund’s debt portfolio, employed an “inform, restrict and engage” strategy due to the seriousness of the allegations.

“The team clearly communicated to investors and Westpac its commitment to restricting exposure to Westpac below a determined level until a resolution with Austrac was reached and the subsequent APRA investigation was completed,” IFM said in its 2020 responsible business ­report. “Restriction was employed given the severity of the allegations.”

Westpac settled the Austrac litigation in September last year for $1.3bn.

However, the Australian Prudential Regulation Authority is yet to rule a line under its investigation, and agreed to an enforceable undertaking with Westpac in December in which the bank promised to significantly improve its risk governance.

IFM owns and operates critical community infrastructure, with exposure to four asset classes — debt ($60.5bn), listed equities ($32.5bn), infrastructure ($25.5bn) and private equity ($1.1bn).

Environmental, social and governance considerations are given equal billing to financial data, with the fund taking an active approach to asset management, engagement and voting.

IFM participated in 252 company meetings in the 2020 financial year and voted against management in 10 per cent of the 1521 resolutions considered.

Of that figure, 31 per cent were remuneration reports, 30 per cent related to executive remuneration, and 28 per cent covered director elections.

Debt investment was different because there were no ownership rights, so the ability to influence management was constrained.

IFM’s approach to ESG was therefore focused on the screening and due diligence phases prior to investment, although in cases like Westpac it engaged with the borrower after making the investment.

The fund said it discussed the Austrac issue directly with Westpac, informing the bank of its stance, expectations and what it considered to be an appropriate resolution.

“Notably this engagement is ongoing,” IFM said.

The fund, chaired by former federal Labor minister Greg Combet, also took an active ­approach to managing its equities portfolio, including Rio Tinto’s destruction of two 46,000-year-old rock shelters in the Juukan Gorge.

Investor and community outrage triggered by the blasts led to the departure of Rio chief executive Jean-Sebastien Jacques.

IFM said the decision to proceed with the blasts might have been legal but it was the wrong thing to do.

“[We] questioned whether the principles of ‘free, prior and informed consent” were applied, and we remain concerned about the limitations of current legislation that’s supposed to protect Indigenous cultural heritage,” it said.

“IFM participated in several meetings with Rio, raising significant concerns relating to leadership, governance and oversight processes for the protection of significant Aboriginal heritage sites.

“We are satisfied with the resignations and executive changes ­announced in September 2020, which followed significant investor pressure.

“However, we believe the company still has much work ahead of it in order to rebuild trust with its stakeholders, most significantly the traditional landowners — the Puutu Kunti Kurrama and Pinikura Peoples.”

IFM also took credit for the role it played, along with the Australian Council of Superannuation Investors and other shareholders, in the AMP board spill triggered by the controversial promotion of Boe Pahari to head of AMP ­Capital.

Chairman David Murray and non-executive director John Fraser both resigned.

The fund, it said, had engaged with AMP for more than two years due to significant concerns over the suitability of management and the board to rebuild the group’s ­integrity and culture.

“[We have] expressed dissatisfaction in the past by voting against the appointment of David Murray in 2019 and against the remuneration report in May 2020,” IFM said.

“In both instances it was our ­belief that the board failed to ­appropriately consider the negative impact of their actions on shareholders.”

On Mr Pahari’s appointment, IFM engaged with the company alongside ACSI and directly, saying the company’s initial response to internal and external concerns was unacceptable.

“We believed that the company’s initial response could ­destroy value at a company undergoing a significant restructure and transformational change,” the fund said.

“We also raised concerns regarding the impact of these events on the attraction and retention of talent.

“We came away with limited confidence in the ability of the incumbent leadership to recognise the cultural issues that exist at the firm, effectively deal with them, and re-establish or build the value of the company.”

On climate change, IFM indicated it would publish its first stand­alone report on the issue early this year, which would follow the recommendations of the taskforce on climate-related financial disclosures.

The fund would continue to drive reductions in carbon emissions and identify investment opportunities to contribute to the goals of the Paris Agreement.