Political events overseas have ushered in a wave of – mostly negative – opinions about investors and companies focussing on sustainability issues. Some are trying to overlay the US experience here, seeking to make these issues political footballs, but for Australian investors, sustainability is about supporting companies to perform well and consistently over the long-term.
In Australia, super funds need to manage their investments in the best financial interests of their members. This includes managing portfolio risks, such as those related to governance, customer and community expectations, environmental risks and social factors such as safety and supply chain management, as well as the overall management and governance of companies.
These issues were not chosen by whim or fashion. Managing these risks is in line with the fiduciary duty under which superannuation funds must operate.
Sustainability risks can be financial in nature. For example, its well accepted that environmental risks, like those related to the climate transition, threaten economic stability if managed improperly. Social risks, such as supply-chain exposure to modern slavery and failures in workplace safety also have potential financial consequences. 2022 research by Safe Work Australia shows that with the absence of any work-related injuries or illnesses over the period from 2008 to 2018, on average Australia’s economy could have been $28.6 billion larger each year, equating to around 1.6% of GDP. Likewise, governance issues can be financially material, and good governance can also protect against risks like fraud, data security, or product safety which can immediately influence share prices.
Lack of diversity can also be a financially material risk that can have a negative effect on the long-term performance of a company. This, in turn, can impact shareholder returns.
People with different life experiences and views bring diversity of thought, which strengthens decision-making. Diversity also helps support access to the widest possible pool of talent. These are both important contributors to the viability and profitability of companies over the long-term.
This focus on risk management is a vital piece in safeguarding investment value for Australian super fund members, helping their retirement savings grow sustainably over the long term.
Investors focus on material sustainability issues because of the impact they can have on performance. Not every issue will be material to every company, but investors focus on those that are material, because they want to see the companies they invest in succeed, prosper and thrive well into the future.
Australian super funds inevitably have a large exposure to the Australian share market – often via index (or passive) management. It is not realistic to diversify away from this, so it’s critically important to investment returns that the companies listed on the ASX perform as well as they possibly can. Encouraging companies to manage sustainability risks is part of promoting good performance.
Having diverse boards and workforces is all part of maximising company value. For over a decade, Australian investors and companies have worked to promote diverse workforces and boards in turn supporting company performance. Soon, the ASX200 will hit a milestone of 40% female directors reflecting a more gender balanced makeup of listed company boards.
Studies are increasingly showing that gender diverse boards have strengthened decision-making processes, and other research indicates diversity can bring higher returns than companies with boards dominated by one gender.
Investors are not asking companies to act against the profit-making imperative – in fact, it’s precisely the opposite. And most companies recognise the material benefits diversity brings to their operations.
This isn’t just true of diversity, it’s true on a range of financially material issues.
Even before the introduction of mandatory climate reporting, the majority of the ASX200 already disclosed detailed information to the market. A broad range of business and industry groups support mandatory climate reporting, because it is something which will help investors and companies understand how climate risks are being managed and aid investment decision-making. There is clear support for reforms which codify practice and support more comparable disclosures.
And it’s important to note that Australian investors are not alone. All around the world, in Europe, the UK, Canada, Japan and elsewhere, investors and companies recognise that many sustainability issues are financially material and must be managed alongside any other risk. While political shifts in the US have brought to prominence some loud voices, investments, especially for long-term investors, should not be subject to short-term and non-evidential noise.
If an issue could impact a company’s performance or strengthen its value, it will be squarely in the focus of investors. None of this is about politics or following a fad. It’s just good business.
Louise Davdison, ACSI CEO
First published in the Australian Financial Review on 21 January 2025, under the headline Big Super still supports diversity despite Trump.