Human rights considerations part of trustee board obligations
When industry superannuation fund HESTA announced that it had divested from its holdings in Transfield Services, it cited social governance concerns that, in their view, represented an unacceptable risk to members' future retirement savings for the potential return. The decision signalled that human rights concerns are linked to financial returns of this stock in the fund's estimation.
The consideration of social issues like human rights issues is on the agenda for superannuation funds, and flags the use of normative standards and international treaties and conventions as means to assess companies' risks as subjects for engagement and further action such as divestment. Legal experts told The Sustainability Report that human rights risks must be considered by superannuation fund trustees as part of directors' duties defined under Australian law. HESTA's concerns relate to Transfield's contracts with the Australian government to provide garrison and welfare services at asylum seeker detention centres in Nauru and Manus Island.
"In line with HESTA's long-standing ESG policy, if a company is identified as not complying, directly or indirectly, with international laws, standards or guidelines, HESTA may consider divestment of any such companies," HESTA said in a statement explaining its decision to divest." A number of independent non-government organisations, including the United Nations High Commissioner on Refugees (UNHCR) and the Australian Human Rights Commission, have found that the mandatory, prolonged, indefinite, and nonreviewable nature of detention at asylum seeker processing centres breaches the fundamental principles of international human rights law."
"In line with HESTA's long-standing ESG policy, if a company is identified as not complying, directly or indirectly, with international laws, standards or guidelines, HESTA may consider divestment of any such companies," HESTA said in a statement explaining its decision to divest."
The AU$32 billion HESTA super fund had an AU$23 million investment in Transfield, representing a 3.5% stake in the company. In an interview with the Australian Financial Review, HESTA CEO Debby Blakey emphasised the link between social governance issues associated with Transfield's detention centre contracts having a negative impact on Transfield's business and share price, and also pointed out a heightened risk of future legal actions against the company.
"After careful consideration of the ESG risks associated with this investment, and following an extensive period of consultation with relevant stakeholders and engagement with the company, the HESTA Board determined that HESTA would divest from Transfield," Blakey said in a statement provided to The Sustainability Report. "Our review of this investment was in line with our long-standing ESG policy and commitment to be a responsible owner of the companies we invest in. "Our ESG policy dictates that we follow a rigorous process, informed by advice from our internal investment team and external engagement service providers. In divesting from the company, our priority was the safeguarding of our members' investment."
HESTA had exercised its process over a number of months, with consideration and in conjunction with the Australian Council of Superannuation Investors (ACSI), noted Duncan Paterson, chief executive officer and founder of CAER.
"HESTA have been looking at this issue for quite a long time," Paterson said. "They engaged with the company itself quite extensively. I don't think we're seeing a sudden shift in attitudes. Having said that, there is no doubt that entering into the sort of S space in the environmental social and governance front does lead to conversations that can be more challenging, and trustees can be understandably more sensitive about analysing those issues to date, but as they become more comfortable with their role in terms of being able to be the arbiters of ESG issues, I think they can expect some more confidence in communications."
Superannuation fund trustee boards must have processes in place to consider environmental, social and governance (ESG) risks in investments and investment strategies. Evaluating the risks of ESG risks such as violations of human rights conventions, climate change and implementing decisions based on those risks is consistent with the statutory covenants imposed on trustees and their directors by the Superannuation Industry (Supervision) Act (SIS Act). The recent Stronger Super reforms place greater importance on the risk management and due diligence processes undertaken by superannuation trustees in Australia as well.
HESTA is not the only superannuation fund to divest from Transfield - media reports say NGS Super has also divested from its holding in the company recently. Last year, Christian Super also divested from Transfield, while UCA Funds Management added Transfield to its exclusion list. Divestment from companies over concerns over compliance with international conventions and treaties is not unheard of, noted Louise Davidson, ACSI chief executive officer.
"You can't shy away from the fact that these are complicated issues," said Sarah Barker (pictured), special counsel at Minter Ellison Lawyers. "They are complicated and they require extended assessment perhaps, but that doesn't mean that it shouldn't be done. Investment in and of itself is all about managing future risk and return, and nothing is certain in that context."
HESTA is not the only superannuation fund to divest from Transfield - media reports say NGS Super has also divested from its holding in the company recently. Last year, Christian Super also divested from Transfield, while UCA Funds Management added Transfield to its exclusion list. Divestment from companies over concerns over compliance with international conventions and treaties is not unheard of, noted Louise Davidson, ACSI chief executive officer.
"There are other precedents for this," Davidson said. "I think that a number of our members have divested their holdings in controversial weapons, particularly land mines and cluster munitions. There is a concern about investing in those companies manufacturing weapons that might be in contravention of international treaties and conventions."
Norms-based screening is a central part of core responsible investment as defined by the Responsible Investment Association Australasia (RIAA) 2015 benchmark report. It makes up a chunk of responsible investment assets in Australia, but is dwarfed by broader ESG screening techniques. In 2014, screening approaches - negative, positive, best-in-class, and norms-based screens - made up AU$21.36 billion out of a total universe of AU629 billion broad responsible investment assets under management. RIAA defined norms- based screening as screening investments against "minimum standards of business practice based on international norms such as those defined by the United Nations (UN). This can include, for example, excluding companies that would contravene the UN Convention on Cluster Munitions, but also screening primarily based on ESG criteria developed through international bodies such as the UNGC (United Nations Global Compact), ILO (International Labour Organisation), UNICEF (United Nations Children's Fund) and the UNHRC (United Nations Human Rights Council)."
Assessing businesses' risks and opportunities against international norms and conventions is part of superannuation funds' investment strategies, Davidson said.
"I think they're a factor, because we live in a global world, and for example, I think a lot of funds in their ESG policies or ESG practices would make reference to the UN Human Rights Convention, and various other international treaties and conventions, in terms of defining what they see as appropriate practice in the companies they invest in," she said.
However, while there is a burgeoning sophistication and proliferation of means to measure, assess and execute based on carbon emissions and climate change data, there are fewer tools to hand to help trustees assess human rights risks.
"The question will arise as to how well you're able to link back direct costs to these sorts of initiatives," Paterson said. "With something like climate change, one can posit a future where there's a price on carbon, and that will be a direct cost on companies that are carbon intensive. It is, at this point, less easy to identify similar sorts of costs arising for human rights as an issue."
There is work underway internationally to try and fill that gap - Paterson pointed to the Corporate Human Rights Benchmark (CHRB) as one example. CHRB has developed draft indicators that will be used to rank companies on their human rights performance.
The draft indicators are out for public consultation, and CHRB plans to use the indicators in a pilot ranking for June 2016. The draft indicators cover five measurement themes, across nine subtopics, totalling more than 50 indicators. The methodology is being finalised, and in the first pilot in 2016, the top 100 globally listed companies will be benchmarked against those indicators. The companies will cover three industry sectors - food and beverage/agriculture, apparel, and extractives.
The benchmark has been developed by fund managers Aviva Investors and Calvert Investments, the Business and Human Rights Resource Centre, an international NGO, research provider EIRIS, the Institute for Human Rights and Business, a think tank, and the Dutch Association of Investors for Sustainable Development (VBDO).
"At the moment most of the work being done is looking at intangibles like brand," Paterson said. "Whilst you have the Transfield case and in the UK, CERCO also facing issues, there are fairly limited set of companies that are going to face that issue when you look at the S spectrum more broadly."
But because ESG risks and opportunities are correlated with financial risks and opportunities, even though the analytical tools are still at beginning stages, trustee boards are still obligated to consider the issues and act accordingly, Barker said.
"It's usually approached as a very binary way in the press - either ESG or financial returns, and historically that's how it's been viewed, but when you examine the issues through a 21st century lens rather than an Industrial Age lens, it's clear that the two are inseparable," Barker said. "In a modern economy with globalisation, the internet, social media, everything is hyper-transparent - you can't hide like you used to be able to. You have resource scarcity. You've got population pressures, water issues that you didn't have before. Any business that isn't considering the risks and opportunities associated with those issues, you have to ask why and you have to ask if directors are in accordance with their legal duties."
This article has been re-published with the permission of The Sustainability Report.
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