Scandal Responses Highlight Power of Australian ESG Advocacy

(Bloomberg) --

A rise in socially responsible investors is prompting a shift in Australia’s corporate behavior.

Rio Tinto Ltd.’s Chief Executive Officer Jean-Sebastien Jacques last month stepped down amid investor backlash over the destruction of ancient Aboriginal heritage sites, while leaders at AMP Ltd. and QBE Insurance Group Ltd. resigned this year over workplace conduct issues. More recently, the Australian Council of Superannuation Investors last week said Crown Resorts Ltd.’s directors should quit over governance failures exposed by a government inquiry.

Australian companies have been in the spotlight over the past year for corporate scandals ranging from breaching anti-money laundering laws to sexual harassment. Still, thanks to the quality of environmental, social and governance-related disclosures, analysts rate the nation highly among its Asia-Pacific peers in a year when the style of investing is becoming more popular.

“I perhaps wouldn’t have expected some of these things to be confronted quite so head on,” said Phineas Glover, head of ESG research for Asia Pacific at Credit Suisse Group AG. “That is just an example of the increasing shareholder engagement that we are seeing.”

Australian pension funds, the world’s fourth-largest pool of retirement savings, are using their influence to prompt changes in corporate behavior. The nation’s pension pot rose to A$2.9 trillion ($2 trillion) as of June 30, according to the Australian Prudential Regulation Authority.

About 21% of that is allocated to Australian equities, according to Bank of America Corp. research, and this capital is investing more in green and social assets and calling out corporate wrongdoings. “Investors are now far less tolerant of boards who ignore their concerns,” said Sheela Veerappan, head of Australia and New Zealand at Principles for Responsible Investment.

Furthermore, Australia’s unique two-strikes rule allows shareholders to express displeasure with a firm by voting against the remuneration report at the annual meeting. If this occurs for two consecutive years, it triggers a vote to change the board and is being used as a “lightning rod for broader governance concerns,” Glover said.

Automotive parts provider Bapcor Ltd. on Tuesday got its first strike after a majority of shareholders failed to back its pay report. Holder Calvert Research and Management voted against the proposal amid concerns about “excessive” CEO remuneration compared with market value and industry peers. The S&P/ASX 200 index is up more than 6% in October, set for the biggest monthly gain since April.

The pandemic has made ESG investing more popular as governments channel coronavirus-related recovery funds into health and environmental projects. Asset managers including BlackRock Inc. have touted the performance of their ESG investments as a shield against volatility and price declines.

Society has “changed its expectations around what is acceptable of companies,” said Sameer Chopra, head of Asia ESG research at Bank of America. “Call that stakeholder capitalism.”

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