Com­pa­nies fac­ing pol­icy risk wake up to a world of changes

The Weekend Australian - Review - - Investments - Claire Galea

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.’’

Newspapers in English

Newspapers from Australia

© PressReader. All rights reserved.