Australia has the fourth largest pool of managed funds in the world. I think the investors behind that pool, you and I, have a right to expect that the managers of those funds not only act ethically and responsibly in their own conduct but hold the companies they invest in to the same standards. Asset Stewardship should be a big deal but I dont get the feeling it is. I thought I would have a look at the state of Asset Stewardship in Australia, in particular focussing on managers of Exchange Traded Funds.
It is possible now (you might even say it’s easy) to invest in funds that have strict ESG filters and policies. There are 7 ETF’s listed in Australia that market themselves as “Socially Responsible” (assets of $1.6b) . And there are others that make more limited claims in that regard.
Let's assume that those funds are trying to do the right thing and focus our attention on what the rest do. Just because you haven't invested in an ESG fund doesn't mean you are not interested in governance and the environment.
In Australia the Financial Services Council and the ASX both have guidance/standards that address ethical conduct. The FSC Standard 23, Principles of Internal Governance and Asset Stewardship, says this:
“Asset Managers should encourage the companies in which they are invested to meet the highest standards of governance, as well as ethical and professional practices. They should provide a description of their approach to monitoring and engaging with investee companies and the connection between monitoring, engagement, proxy voting and investment decision making. Asset Managers should endeavour to hold boards and management accountable where they fail to maintain acceptable standards.”
So Asset managers should encourage ethical practices and tell us how they do that. That sounds good. But what actually are “ethical practices”?
The ASX gives us some guidance in their Corporate Governance Principles and Recommendations. Principle 3 is;
" Instil a culture of acting lawfully, ethically and responsibly. "
And they go on to tell us how you might do that, here are their suggestions for a code of conduct;
• Express or cross-reference the organisation’s values.
• State the organisation’s expectation that all directors, senior executives and employees will:
– act in accordance with the entity’s stated values and in the best interests of the entity;
– act honestly and with high standards of personal integrity;
– comply with all laws and regulations that apply to the entity and its operations;
– act ethically and responsibly;
– treat fellow staff members with respect and not engage in bullying, harassment or discrimination;
– deal with customers and suppliers fairly;
– disclose and deal appropriately with any conflicts between their personal interests and their duties as a director, senior executive or employee;
– not take advantage of the property or information of the entity or its customers for personal gain or to cause detriment to the entity or its customers;
– not take advantage of their position or the opportunities arising therefrom for personal gain; and
– report breaches of the code to the appropriate person or body within the organisation.
• State that the code will be periodically reviewed to check that it is operating effectively and whether any changes are required to the code
That’s all good stuff but I am still left wondering what it means to act ethically and responsibly in the corporate context. The company has to make money, doesn’t that always come first?
In a footnote to the ASX code of conduct suggestions there is a very interesting quote from Kenneth Hayne, you remember him? He was the Commissioner on the Royal Commission into Misconduct in the Banking Sector. He said this:
“As [a commercial enterprise], [a listed] entity… rightly pursues profit. Directors and other officers of the entities owe duties to shareholders to do that. But the duty to pursue profit is one that has a significant temporal dimension. The duty is to pursue the long term advantage of the enterprise. Pursuit of long term advantage (as distinct from short term gain) entails preserving and enhancing the reputation of the enterprise… And, lest there be any doubt, it also entails obeying the law. But to preserve and enhance a reputation… the enterprise must do more than not break the law. It must seek to do ‘the right thing’.”
So companies should act ethically and responsibly and “do the right thing” which means looking after the long term interests of the firm rather than the short term profits. Not exactly prescriptive but we are getting somewhere I think. The key perhaps is that the asset managers to whom we have given our trust in managing our assets must make a judgement about what acting ethically and responsibly means and then hold the companies to account to the extent they are able to do so. Mainly through the exercise of proxy votes, our votes.
So then we go back to the FSC and what they have said is that the asset managers need to outline how they intend to make these judgements and make that available publicly on their websites. Specifically they should; “provide a description of their approach to monitoring and engaging with investee companies and the connection between monitoring, engagement, proxy voting and investment decision making.”
So i went to have a look. Not at everyone, I focussed on asset managers, managing Exchange Traded Funds, ETF’s. There are 20 “Issuers” of ETF’s listed in Australia. Of those, 9 provided reasonable disclosure on ESG matters and asset stewardship. Some even made available their history of proxy voting on matters that in their judgement involved ESG issues.
The managers with good disclosure on asset stewardship were, Magellan, Blackrock, Fidelity, Perennial, Schroders, Russell, State Street, Vanguard.
These are some of the biggest investment firms on the planet so I guess it is no surprise that they have the resources to provide great disclosure to investors. Others need to do better.
Links to policies and reports of asset stewardship for all managers are available at Accument.com.au in the Issuer Rating section of the Analysis area.
Accument provides ratings on ETF Issuers based on factors such as experience, FUM, costs and now we have added an ESG score to the issuers rating.
I think the ultimate owners of these assets, us, need to, and will increasingly want to know more about how their investments are being managed in this key respect.
Accument provides information, ratings and content on Australian ETF’s. If you invest in or advise on ETF’s and you want to make informed choices including about asset stewardship, then you need to subscribe to Accument.