Companies facing policy risk wake up to a world of changes
LAST MONTH’S Budget gave a significant fillip to sustainable investment. The Labor Government’s pledge to commit $ 2.3 billion to reduce greenhouse emissions; $ 500 million each to a National Clean Coal Initiative, a Renewable Energy Fund and a Green Car Innovation Fund; $ 20 billion to invest in roads, rail, ports and broadband; plus $ 11 billion in education; and a further $ 10 billion to establish a health and hospital fund, highlights many of the environmental and social issues that are the mainstay of sustainable investment.
Serious issues affecting the wellbeing of companies in the 21st century include climate change; petrol prices; transport; water and food scarcity; the growing and ageing population; pandemics such as HIV, obesity and diabetes; labour skills shortages; waste management; human rights issues and slave labour.
Companies and investment managers addressing these issues stand to benefit in the longer term.
AMP Capital Investors director of sustainable funds Michael Anderson identifies an increasing link between these environmental and social issues and government policy. He points out that climate change became one of the top polling issues in 2006.
If you look at the budget, it’s hard to find an angle that is not supporting SRI issues. The three biggest policy issues are now climate change, education and health. It is interesting to track the rise in the green vote around the world and all parties now claim to have a climate change policy in order to capture that vote. Politics has been becoming stronger on those issues.’’
More than ever before, increasing government legislation on environmental and social issues is having a positive or negative financial impact on companies’ balance sheets. It can also instigate new investment and company expansion within a particular sector.
One such example is the current expansion of the mandatory renewable energy target ( MRET) which dictates that 20 per cent of electricity generated will have to come from renewable energy by 2020. To help ensure it achieves this, the Government has committed to increasing the MRET from 9500 gigawatthours to 45,000 gigawatt- hours in 2020.
These opportunities which are being presented to renewable energy companies through legislation and regulation have not escaped the attention of the Arkx Carbon Fund, a wholesale investment fund which is unusual in that it only invests in companies which focus on reducing carbon emissions.
For example, the US company Itron which has invented the smart meter. At a flick of a switch it will turn off all your power points as you leave the house — excluding the fridge and hot weater service.
Launched in January this year, the Carbon Fund has already returned 9.71 per cent to the end of May, compared to the MSCI fall of 5.69 per cent .
So far so good,’’ said Arkx Carbon Fund Managing Director Geoff Evison. We want to do good, but first we have to do well.’’
Evison calculates there are about 550 potential companies around the world in this sector which are suitable to invest in. However, of the 18 companies in the portfolio so far, only two are Australian, partly because international government incentives for this sector are much more attractive — particularly in Europe.
If you want a successful renewable energy sector in Australia then we need government incentives to build it. For example, in the UK, by 2016, every new house built has to be carbon neutral, forcing investment into solar insulation and double- glazing,’’ Evison said.
However, while legislation can present investment opportunities it can also bring unexpected risks, and these are the risks which sustainable investment managers attempt to anticipate and avoid.
The Victoria Government’s unexpected ending earlier this year of the poker machine duopoly held by Tabcorp and Tattersall, forced both companies to halt share price trading on the Australian Stock Exchange. Both companies are heavily represented in many superannuation portfolios.
The ban on smoking in bars and restaurants had an unexpected knock- on effect of dampening poker machine revenue by 10 per cent to 20 per cent, while the more recent increased tax on alcopops to discourage binge drinking has had its own ripple effects.
Similarly, indications from Labor Minister for Climate Change and Water Penny Wong that big business won’t necessarily receive preferential treatment when it comes to the introduction of an emissions trading scheme, illustrates the extent to which companies are exposed to the whims of government policy.
Regnan Governance Advisers managing director Erik Mather believes there’s another threat to a company’s financial performance, as illustrated by the effect of collective action taken by future asbestos disease victims against James Hardie in its attempt to evade compensation payments.
There’s not only a legislative and regulatory risk to companies, but a community one as well. The cost that was imposed upon James Hardie was higher than anyone anticipated and the impact was reflected in the share price, which fell from about $ 8 to the low $ 5- mark.
All the time we’re seeing new laws and various protocols promoting a sustainable focus in the community. We live in a democracy and we want our leaders to look after our own self- interests. Sustainability is a wonderfully selfish and greedy phenomenon — people want to reduce the amount of carbon because they want to have a world they can live in and enjoy, and don’t want to face the prospect of no more ski fields in Australia and not being able to swim in an ocean that has become too acidic. We should be proud that it is a greedy and selfish issue.’’