Divestment backlash shows companies need to improve sustainability reporting

Universities in the US have led the divestment charge - the ANU is leading the Australian movement. Light Brigading/Flickr, CC BY

Tony Abbott’s criticisms of the ANU’s divestment decision will come back to bite him. The tide of change is such that Vice-Chancellor Ian Young and the ANU Council will be seen as leaders. Others will follow.

Abbott has added his voice to a growing chorus condemning the decision by ANU to divest from seven resource companies, including treasurer Joe Hockey, education minister Christopher Pyne, and blacklisted companies Santos, Iluka Resources and Sandfire Resources.

But if these companies are unhappy with the analysis of their environmental and social performance, they should take responsibility for better valuing and reporting their environmental and social impacts.

The risk of fossil fuels

Abbott’s claim that divesting deprives fund members of a good investment could ultimately be proven incorrect. Even the generally conservative accounting profession is making an increasing amount of noise about the impact of climate change on asset valuations (or stranded carbon assets).

This is a particular issue in the fossil fuel sector.

“Fossil fuel companies should start accounting for the risk that their vast reserves may ultimately end up as stranded assets.” That’s the title of an article published by the Association of Chartered Certified Accountants (ACCA) earlier this year.

A report published last year by the ACCA and the Carbon Tracker (with a foreword by the president of the International Federation of Accountants) found that companies typically do not disclose information that is material to investors on carbon risk.

Why isn’t the Prime Minister of Australia outraged about that rather than a university taking action?

The ACCA/Carbon Tracker report argues that to integrate climate risk into their business, companies need to consider potential CO2 emissions of reserves, and risks to valuations of reserves if demand for fossil fuel energy falls.

Moves towards more disclosure

The Australian Government position is in stark contrast to the mood of recent events in Europe looking at the role of corporate reporting in sustainable development and incorporating the sustainable development goals.

The events, attended by a wide range of stakeholders, concluded that reporting by companies and mandatory reporting requirements were not providing sustainability information needed by investors to assess risk and long term performance.

This is where the focus of policy makers should be — not on a report prepared for ANU highlighting gaps in management and governance by companies of social and environmental sustainability issues.

Assessing environmental value

I know of companies which are starting to develop what they refer to as a “social and environmental profit and loss account” or “net impact statement”. Essentially they are evaluating what they are contributing to society and the environment, and setting against that their negative impacts.

This sort of information attracts ethical investors looking for long term returns. Some are starting to calculate how this impacts on financial profit.

KPMG released a report last month outlining what they refer to as a “true value” approach assessing how social and environmental risks and opportunities will impact on future financial profit. The report uses hypothetical case studies to measure the impact of this value created (or lost) by companies on profit.

A report in Australian Mining complaining about “sloppy criteria” for the divestment by ANU misses the point. It is up to companies to provide adequate information on their risks, policies and activities for investors.

And, at the end of the day, if the fundamental nature of a company’s business is unsustainable, other criteria for divestment, however “sloppy” are somewhat irrelevant.

Universities led charge against Nike…

Universities have a history of being a force for good. The complete turnaround by Nike on corporate social responsibility was due to widespread boycott of its sports products by US universities in the 1990s.

Nike had contracted with factories throughout Asia (which became known as Nike sweatshops) that were found out for using child labour, poor working conditions, excessive overtime, sexually harassing female workers and paying below the minimum wage.

This was widely publicised by CorpWatch (a US based research group), Naomi Klein in her book “No Logo”, Michael Moore and the BBC in documentaries and various anti-globalisation and anti-sweatshop groups.

Nike originally denied the claims and expressed a view that what happened in supplier factories weren’t its concern. This only served to increase the campaign against it. Nike now takes transparency, accountability and corporate responsibility seriously and has restored its reputation.

And social and environmental sustainability practises in the supply chain are of increasing interest to large corporate customers concerned about reputation risk.

… and tobacco

The British Universities Superannuation Scheme (USS), at the time the third largest fund in the UK, made a significant response, through a campaign for responsible investment led by academics through “Ethics for USS” and students through “People and Planet” in the 1990s.

They questioned the morality of investing in tobacco which was dropped by the Australian Sovereign Wealth Fund last year. As a result of the academic and student led campaigns, the USS became the first large UK pension fund to adopt a socially responsible investment policy.

The approach included engaging with companies in which they invested to drive change towards more responsible behaviour. The USS sets out its proactive approach and explains its rationale for not divesting in companies on moral and ethical grounds only and legal advice that it is not permitted to make decisions purely on a moral or ethical stance here.

Students taking the lead?

In any case there is a strong and increasing link between some “moral and ethical grounds” and financial returns. In recognition of this Australian superfunds have also called for greater disclosure on Environmental, Social and Governance risk.

This is not to say that universities themselves should not being doing much more to develop future leaders able to respond to climate change and sustainability challenges. But that is another issue.

Of course, we must not forget that in making the decision to divest, Ian Young and the ANU Council were responding to student protests. They are the true leaders in all of this.