Welcome to the Environmental, Social and Governance (ESG) Wrap, where our team share the latest ESG issues in the media and their implications on investment. 
This month the key ESG issues making headlines are:
  • Eliminating Tobacco Companies from Investment Portfolios – Ted Talk 
  • Melbourne café suggests 18pc ‘gender pay gap’ surcharge for male customers
  • Shareholders take action over 'inadequate' disclosure of climate change risks
  • Electric Vehicle Outlook 2017
  • Do you trust your bank?

Eliminating Tobacco Companies from Investment Portfolios – Ted Talk

  • When radiation oncologist, Bronwyn King learned she owned several tobacco companies by default, via her superannuation fund she made it her mission to change the system. In this powerful and persuasive talk, she speaks out against investment in the tobacco industry, an industry that kills 6 million people every year and outlines her global campaign to eliminate tobacco companies from investment portfolios.
  • Bronwyn also talks about AMP Capital’s commitment earlier this year to divest from $450m worth of tobacco stocks. This was the largest ethically driven divestment of stocks in Australian corporate history.
  • Currently the tobacco industry externalises all the health costs associated with its product and it is instead borne by the community, society and the government. Whereas, the Tobacco company internalises the profits.
  • 35 large Australian Super Funds with total assets of >$650 Billion are now tobacco-free. To date, they have divested around $2.5 billion in tobacco stocks.
  • So what?  AMP Capital is of the belief that active engagement and voting is a crucial mechanism for change. Increasingly, however, asset managers are realising that this isn’t possible with tobacco companies. Perhaps we will see asset managers and owners taking a similarly strong stance on other issues in the future.
  • Is it time for every one of us as individuals to ask the question of our superannuation funds, is my money invested in tobacco companies?

Melbourne café suggests 18pc ‘gender pay gap’ surcharge for male customers

  • Handsome Her in Melbourne’s inner suburb of Brunswick introduced house rules stipulating that women have priority seating and men will be charged an 18% premium “to reflect the gender pay gap” (2016).
  • The money raised is donated to Elizabeth Morgan House, Victoria’s peak body for Aboriginal women’s services.
  • This figure comes from Australia’s Workplace Gender Equality Agency which also found that the more women there were in executive leadership roles, the lower the gender pay gap was in the organisation.
So what?  Despite major advances for women in both educational attainment and workforce participation, the gender pay gap remains a permanent fixture of the Australian labour market. This translates into fewer women in more senior positions such as ASX company boards and executive positions. Research continues to show that greater diversity, whether it is gender, ethnicity, age or experience, contributes positively to performance.
We talk more about these issues in our Gender Diversity Insight Paper. Click here to view. 

Shareholders take action over 'inadequate' disclosure of climate change risks

  • Shareholders are increasingly interested in climate change. One example of shareholders taking action involves that Commonwealth Bank, which is being sued by shareholders for what they say is a failure to properly disclose the risks to the business posed by climate change.
  • The claim, brought by lawyers at Environmental Justice Australia on behalf of Commonwealth Bank shareholders Guy and Kim Abrahams, says the bank’s 2016 directors’ report did not adequately inform investors of climate change risks.
  • It also seeks an injunction to stop the bank making the same omissions in future annual reports.
  • The move comes six months after the Australian Prudential Regulation Authority warned climate change poses a material risk to the entire financial system, and called for companies to report on climate change-related risks as financial risks.
  • Reputational risks for the bank as the economy moves away from fossil fuels could also be significant
  • So what? If you are investing your money in something, you deserve to know all of the risks involved and exactly where your money is being spent. This case will be a warning to all businesses investing in fossil fuels

Electric Vehicle Outlook 2017

  • Bloomberg New Energy Finance (BNEF) expects that by 2040, 54% of new car sales and 33% of the global car fleet will be electric. This will be due primarily to battery costs falling faster than expected and rising commitments from automakers. 
  • China, the U.S. and Europe will make up over 60% of the global EV market in 2040.
  • Electric vehicles become price competitive on an unsubsidized basis beginning in 2025. Some segments will take longer, but by 2029 most will have reached parity with comparable internal combustion engine (ICE) vehicles. 
  • Fossil fuel demand will be displaced by the growing fleet of EVs. Bloomberg projects 34% of cars on the road will be EVs by 2040, which will displace up to 8m barrels of transportation fuel per day.
  • So What?   We are increasingly seeing policy that supports the introduction of EV, not only driven by climate change policies but also a focus on improving urban air quality, where vehicle emissions are the main source of pollutants that cause photochemical smog.  Policies in New Delhi and Chinese cities for EV are primarily driven by urban air quality concerns.
  • These sorts of policy will significantly impact longer-term oil and gas demand, with decrease demand putting downward pressure on longer term oil prices assumptions.  It will also raise questions about the return on capital expectations of some large scale infrastructure and LNG facilities that may be associated with projects that are higher up the oil & gas cost curve.

Source:   https://data.bloomberglp.com/bnef/sites/14/2017/07/BNEF_EVO_2017_ExecutiveSummary.pdf

Do you trust your bank?

  • The Sedgwick report released in April this year made 21 recommendations urging banks to overhaul the way they reward staff and managers for selling products to customers.
  • The recommendations aim to address a “trust deficit” in the banking industry and assist banks in revamping their image.
  • So what? T hese recommendations will force the banks to drop incentives based directly or solely on sales for anyone on the front-line: teller, mortgage broker, phone sales etc. They will force the introduction of balanced scorecards where financial measures are not the dominant component. Cross-selling incentives will also need to be phased out. 
  • Most of the banks have already said that they will comply with the outcome of the report and the remainder will be grilled by politicians in parliamentary hearings if they do not. We will certainly be asking the bank CEOs and chairs for their commitment to comply as part of our engagement agenda this year.