Australia risks backlash as ESG concerns become politicised
Australia may be in danger of facing a US-style backlash against environmental, social and governance activism, particularly around climate change.
Australia may be in danger of facing a US-style backlash against environmental, social and governance activism, particularly around climate change, the chief executive of the Responsible Investment Association has warned.
Simon O’Connor said there was increasing politicisation of ESG activism in the US, with President Joe Biden last month forced to use his first ever presidential veto to reject a Republican proposal to prevent pension fund managers basing investment decisions on factors like climate change.
He said Republican politicians were complaining that ESG issues were being used by investors to put pressure on companies to pursue their own political agendas.
“We see there is a risk of some contagion or spill-over into this market,” he said in an interview with The Australian.
“Whether intentionally or otherwise, there seems to be an attempt to drive a political or an ideological agenda.”
He said this was increasingly the case with climate change where there were “some examples of polarisation” in Australia around how companies responded to climate change.
He said moves against proxy advisers by the Morrison government and Senate inquiries into whether the financial service sector should be able to exclude fossil fuels in their lending practices were some other examples of this.
He said the performance test for superannuation funds could discourage them from investing in the transition towards green energy.
Mr O’Connor said concern about the backlash in the US, where Republican politicians are introducing legislation in federal and state legislatures to ban perceived ESG-driven decisions by companies, had prompted the association to make it a key item for discussion at its conference in May.
“We have concerns that (the debate in the US) could spill over into Australia and be taken out of context, which is why we will focus on it at our conference,” he said.
Mr O’Connor said he was “very disturbed” at the discussion in the US, which involved a “misclassification of what ESG is about”.
“ESG is about managing risks which are beyond the traditional financial risks. These are environmental, social and corporate governance-type risks,” he said.
He said the Australian Prudential Regulation Authority and the Australian Securities & Investments Commission were putting pressure on companies to spell out what they were doing to manage climate change and other risks.
“ESG is about managing risks and strengthening investment results, and not about politics,” he said. “It gets conflated with some confusion that it is trying to invest for a social outcome, which is a very different approach.”
The chief executive of the Australian Shareholders’ Association, Rachel Waterhouse, said there had been criticism of some activist groups raising issues at annual meetings in Australia.
“We have not yet seen a backlash against ESG issues here yet, but like most areas the investment world often follows US trends,” she said.
“We have been seeing criticism of activist investors, with some arguing that they are not seeking to speak on behalf of retail investors but are distracting investor meetings with their preferred topics.”
Chair of the UN Global Compact Fiona Reynolds, who will speak at the Association’s conference next month, said ESG issues were “now getting caught up in the culture wars in the United States and have been labelled ‘woke capitalism’.”
“The forces are growing,” she said. “President Biden in March this year had to use the first veto of his presidency to reject a Republican bill when the US Senate sought to overturn a US
Department of Labor bill that made it clear that US investors could consider ESG issues when making investment decisions.
“It is also caught up in the big business of lobbying in the United States. This is a very difficult issue for many large fund managers, particularly those who are headquartered in the United States.
“On the one hand fund managers there are being told by their European clients that they will only give mandates to those managers who have an understanding and ability to consider ESG factors in their investment decisions and on the other hand, they have Republican law makers telling them, you can’t manage money for our state or our state pension fund if you do consider ESG issues.”
She said there had been attempts by conservative governments to stop ESG investments in Australia over the past 10 years.
The Professor of Political Science at the University of Melbourne, Timothy Lynch, who will speak at the conference, said resistance to ESG, particularly in the US, was being “driven by conservative concerns that the project is woke, green, virtue signalling etc.”
He said proponents of ESG should not pitch their proposed measures as being about changing the world but about returning profit to shareholders.
“ESG in Australia cannot survive if it does not deliver investor returns – measured in bank balances rather than woke feel-goodism,” he said.
EY’s Oceania Partner, Climate Change and Sustainability Services, Emma Herd, said investors had been “watching events unfolding in the US with concern”.
But she said there was “no desire to import the politicisation of investment mandates into Australia.”
She said ESG was being seen in Australia as a means of managing risk and return, and not seen as pushing political agendas.
“There are really significant trends like decarbonisation and housing affordability which are clearly having a market impact with significant implications for company profitability,” she said.
She said superannuation funds were “hearing from their members that they want more information on where their retirement savings are going and the impact it is having.”
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