On March 3, Australian Treasurer Josh Frydenberg wrote a letter to the national prudential authority about the Australian Council of Trade Unions’ request that superannuation funds engage mining giant BHP on a pressing labour issue.
“In disregard for the law, militant unions are acting like big brother”, he wrote, “brazenly pushing their industrial relations agenda to pressure superannuation funds to use their influence over company management and boards.”
The superannuation funds to which Mr. Frydenberg is referring are comprised of workers’ deferred wages. The funds are governed by boards of directors whose trustee members are appointed, separately, by the unions and employers who back the superannuation fund. The trustees’ responsibilities to their beneficiaries are enshrined in trust law, which obliges them to act in the best interests of fund members.
This, according to Frydenberg, is the issue: union-appointed superannuation trustees’ requests that their funds engage with BHP is, according to the treasurer, a contravention of their fiduciary duty to make investment decisions in the best interest of beneficiaries.
The assumption behind Frydenberg’s argument is that incorporating environmental, social and governance (ESG) considerations into investment decision-making is not in the best interest of beneficiaries. This viewpoint of fiduciary duty, however is inconsistent with the most recent academic research, which demonstrates that ESG issues are in fact material and therefore relevant considerations for investors.
Among these is a review of 2,000 academic studies from the University of Hamburg and Deutsche Asset Management indicating a positive correlation between ESG strategies and strong financial performance and an Arabesque Asset Management and Oxford University study that revealed that 88% of research indicates that strong ESG practices result in better operational performances for companies.
Frydenberg’s argument is also at odds with the latest legal opinions on fiduciary duty and ESG considerations that have emerged from leading international law firms. For example, Freshfields Bruckhaus Deringer was commissioned by the United Nations Environment Programme Finance Initiative to write a report on the legal framework surrounding institutional investment and environmental, social and governance considerations. The Freshfields report concluded that these issues can be material to a company’s performance and their consideration is therefore “clearly permissible and is arguably required.”
In the wake of Freshfields, the UN established the Principles for Responsible Investment (PRI), a global network of investors committed to implementing six principles related to the incorporation of ESG into investments. It now has 2,300 signatories, which include essentially every large asset manager and pension fund in the world, with around $80 trillion in assets under management in total. The 141 Australian signatories include AustralianSuper, HESTA Super Fund and UniSuper. Meanwhile, a growing number of jurisdictions across the world have developed regulations and codes requiring institutional investors to embed ESG considerations into their decision-making processes.
In other words, responsible investment is no longer on the periphery.
There are, however, challenges. Though the growth in responsible investment globally along with emerging academic evidence demonstrates that the conceptions of materiality and fiduciary duty are shifting, national regulations in many jurisdictions have not kept pace sufficiently. Investors are now seeking clarity from national regulators on the consideration of ESG issues as part of their fiduciary duty obligations. For example, a report produced by the PRI on Australia recommended that the Australian Prudential Regulation Authority (APRA) clarify to superannuation funds that ESG issues are material to risk and return analysis and that stewardship expectations be formalized in a stewardship code.
Let’s return to Frydenberg’s argument that superannuation funds engaging a company on a labour issue is a contravention of its legal obligations to beneficiaries. Specifically, in Australia, Section 62 of the Superannuation Industry (Supervision) Act requires the fund to be maintained solely for the provision of benefits for each member of the fund on retirement (known as the ‘sole purpose test’).
The request put to superannuation funds by ACTU was that they assess BHP’s ESG performance and investment risk profile against the funds’ investment policies – many of which include ESG or sustainability standards and engage the company accordingly.
The issue of concern was BHP’s decision to remove two locally-crewed ships, where 70 workers and their families benefited from decent work conditions protected by collective agreements, with Flight-of-Convenience ships where crews receive wages as low as $2 per hour, as documented in a 2016 Parliament of Australia report.
Poor labour practices and the high levels of precarious work associated with low wages can generate risk for investors and costs for communities. A US National Commission investigation into BP Deepwater Horizon oil spill, for example, which cost the company $65 billion in legal and clean-up costs, found that cost-saving measures related to employees contributed to BP’s inability to manage risk and safety. These included inadequate attention to employee qualifications and training, as well as insufficient communications between personnel in the supply chain.
In the fallout of the BP disaster, the Rotman International Journal of Pension Management published an article on the role that long-term institutional investors can play in preventing “surprises.” Among them is their role in encouraging boards to ensure that ESG standards are at the core of company operations in areas such as supply chain management and relations with workers.
Given the losses BP shareholders faced in the wake of the disaster, it could easily be argued that investor engagement on ESG practices related to labour in the supply change would have been in the interests of the members of pension funds invested in the company. And – in the case of BHP in Australia – it is perfectly reasonable to expect investors to engage on social issues, as part of their fiduciary duty, based on sound assumptions and within a rigorous process.
Tamara Herman is Senior Program Officer at the Global Unions’ Committee on Workers’ Capital.
Photo by md jehan| Unsplash
