21/10/2014 - 05:57

Fund managers’ ethical dilemma

21/10/2014 - 05:57

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Bringing personal views to managing other people’s money is tricky.

Fund managers’ ethical dilemma
The Anglican Diocese of Perth moved to sell-off fossil fuel investments.

It has been a fascinating week or two for ethical investment strategies being pursued by some high-profile institutions, all of which took a stance against individual businesses or industries that have a fundamental link to Western Australia's economy.

Just in case readers missed the cases I am talking about here are the three that come to mind.

• The 90,000-member Local Government Super industry fund moved to screen out companies with high carbon-sensitive activities.

• Australian National University blacklisted several WA resources companies for reportedly failing to meet environmental and social conditions set by a specialist adviser.

• The Anglican Diocese of Perth moved to sell-off fossil fuel investments.

Just how you view these decisions will depend, in part, on your own stance towards these issues.

While all are broadly linked, they sit at varying points in the spectrum when it comes to extreme views.

Formalised ethical investment has been around for donkey's years, and many fund managers have used some simple tests to rule in or out certain companies or industries, usually based on what has become unfashionable (such as arms manufacturers or tobacco companies), for want of a better term.

Fund managers have mainly applied such advice, grading or blacklists, in two ways. One is to offer specialist funds for investors acutely troubled by the attitude of the mainstream investment world. The second is to exercise some form of filter across all their investment platforms.

Generally speaking, the former has been the leader and the latter much more cautious, as offering individual choice is a relatively easier path to negotiate – in this regard at least.

That is because mixing investment strategy with politics and emotion is fraught, especially when acting on behalf of others who may not share your views.

In the cases cited above, the LGS decision is clearly the most cautious. It has taken an industry-wide approach against two particular sectors, coal mining and coal-fired energy generation. However, the fund manager reportedly remains in favour of investment in nuclear power, suggesting its stance on opposing carbon emissions is not quite as extreme as the broader green-left agenda.

The Perth Anglicans have taken a similar, but much broader, approach to the same issue, reportedly seeking to cut out coal, oil and gas extraction in favour of alternatives such as renewables. That is a pretty strong stance for a group – religious or not – based in a resources state like WA.

I understand the diocese has asked its investment manager, Perth Diocesan Trustees, to report back on a divestment program. Given the business calibre of the PDT board, including corporate leaders Richard Court and Deidre Willmott, it will be interesting to see what the trust's decision makers think of this decision.

ANU seems the real outlier in this argument. Instead of, rightly or wrongly, targeting an industry or group of commodities, it has attempted a more scientific approach and blacklisted certain companies.

The examples reported included WA companies Sandfire Resources, Sirius Resources and Iluka Resources, as well as several others with interests here. From what I can see, and knowing a fair bit about these companies and the people who run them, the ANU seems to have acted on some fairly flimsy advice, at best.

While this issue is to be resolved, you would hope the university's researchers would do a better job in their fields of expertise.

Generally, I think what troubles me with all of this is just how much each of these institutions appears to have acted in some feel-good way to deal with an issue that clearly troubles some of its decision makers, though probably not all of them.

But does it represent the members or people who they represent as custodians? Are they showing leadership or acting on personal beliefs?

Notably, in all these cases it is about others people's money, so you presume they have taken that into account when considering their responsibilities.

I also wonder if their leadership extends to their own investment portfolios or lifestyle.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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