ANZ’s financing of ruling party senator Ly Yong Phat’s controversial sugar plantation, at the centre of longstanding land grabbing disputes, was singled out in the damning report released last week by NGO Oxfam. Australia’s largest four all banks came under fire when Oxfam revealed financing links to rights abuses.
With a membership base managing some $500 million in investments, including holdings in Australia’s big banks, the Responsible Investment Association Australasia (RIAA), are looking for answers.
The Post’s Daniel de Carteret spoke to Simon O’Connor’, CEO of RIAA from his office in Melbourne this week to discuss the fall out of Oxfam’s report and the response from some of Australia and New Zealand’s largest institutional investors.
What has the response been from investors in Australia to the Oxfam report?
Looking at the Oxfam report through an investor lens, what it really highlights to our membership is that there are a great many risks and a very different risk landscape that companies are operating within when they expand beyond the borders of Australia. We see a lot of the Australian companies expanding in to Asia and certainly a lot of them are pinning their future growth success on expansion through Asia and beyond.
The Oxfam report is a timely reminder that there are a number of different risks for companies when they get beyond the borders of Australia and these are all things of greatest concern to our members. Companies, as they expand in to Asia have strategies and processes and policies in place to manage this very different risk landscape, certainly there has been a lot of attention on the Oxfam report from the investment community here in Australia. The allegations highlight concerns that there is a risk that some of the big four banks could put their own value at risk, through their expansion into Asia if it is not properly managed. Our investors are most acutely interested in knowing that the banks are actually managing these factors and that when they expand in to Asia that their subsidiary operations are operating under the high standards that we expect their operations undertake in Australia. Our members are very interested in hearing in detail about this report and the allegations raised. We will be helping to brief our members on these issues but at the same time, spending some time speaking to the banks and hearing their response to these allegations too.
How has ANZ responded to the Phnom Penh Sugar case in Cambodia?
The challenge with all the banks is that they are restricted by client confidentiality. I guess what they have tried to do is reassure us. All of the banks have indicated that they are fairly comfortable with how their risk management processes are operating. Most of the banks have been fairly welcoming of this report by Oxfam as it really does help them to prioritise this type of risk management in their foreign operations. I think they do feel like they are doing a reasonable job of this. But it has been difficult to get down to more detail in terms of specific examples.
ANZ stuck by Phnom Penh Sugar despite the fact that the company failed to address 60 per cent of the banks own auditor’s recommendations. Do they stay or do they go? How do banks manage this dilemma?
All of the banks have pretty much said consistently that their priorities are to work with their clients to try and manage this risk to try to improve the performance of their clients and I think there is potential here for these banks to play a really good and productive role in terms of strengthening the performance of how these companies manage environmental and social factors. So most will try to work with their clients in the first instance and I guess what investors want to know is at what point do they exit from a relationship? And how long will they give their clients to improve their performance in these areas? It gets to a point where it risks damaging the reputation of these Australian banks if they don’t know when to exit from such a relationship.
One of the banks CEO’s was quoted as saying “These expansions in to Asia they come with all of the risk but only a portion of the profit” – and I guess that is something that really needs to be front of mind when Australian banks are planning great lucrative sounding expansions in to Asian markets, these are companies that in Australia do rely very heavily on their reputation and I think that is an asset that needs to be protected.
How damaging was the report from an investor perspective? We did not see any share price movements for example.
It is very rare that you can attribute a movement in share price to one specific event. There certainly are in recent months examples of companies have failed in their management of environmental or social or businesses ethical issues and the share price has moved substantially. A recent example is the Australian company Leighton Holdings. When allegations were revealed through newspapers in Australia of large scale business dealings in their emerging markets operations the share price dropped 10 per cent in a day. What we have here with the banks is a slightly different story were we are talking about relatively small transactions in subsidiary operations that are only contributing a minor part of total revenue to the banks at this point at of time. So as a result to be very hard nosed on this, the immediate materiality of that impact has the potential to be small.
We are now getting a lot of interest in our membership to be briefed in more detail on this issue. For example we will be undertaking a more detailed briefing later this week.
I think what it also really does from our perspective is it really underlines how responsible business practices are not a luxury but a necessity and a report such as this highlights that there is a very good reason for these companies to be prioritizing in becoming more responsible businesses in managing these non-financial issues. So it is just another example about how this is a necessity for Australian businesses.
And I guess that is why we have seen continual growth and consumer uptake of a more responsible investing approach in Australia and indeed globally. It is largely not driven by ethical consumers demanding this, its actually driven by large institutional investors becoming increasingly aware that these companies can really destroy shareholder value by not managing these factors. That’s why we have seen very large mainstream investment organizations in this country and globally undertaking more responsible investment practices.
The Oxfam report highlights that average Australian’s are likely to hold investments via their savings and pensions in Australia’s banks. It attempts to bridge that gap between their money and rights abuses occurring overseas. Do you think the average Australian investor responds to news that their money may be linked to rights abuse’s issues overseas?
That is a tough one to gauge. Our observation remains in Australia at least that there tends to be a pretty big disconnect with the average Australian from there own beliefs and values and that plays out in their actual choices of investment options. We still see relatively soft demand for ethical and responsible investment products in Australia. So in terms of changing the Australian consumer and the retail investor’s response to these issues I think that is a tougher ask. I think more likely it is going to play out in the average Australians’ perceptions of banks and I think that is a much more sensitive topic in Australia. There is a fair bit of cynicism from the average Australian to the big four banks, so I think that the Oxfam report probably plays to that a little bit more.
I think what Oxfam has done really well here. It is playing a really important role of civil society groups, it is taking issues that are occurring a long way from where investment decisions are being made and making them real to investors on the other side of the world. I think that is a really important role for civil society and I think they have done that really effectively. That kind of information is really valuable for investors and our members certainly welcome reports like this.
What’s next for ANZ in Cambodia from your perspective? What do you think will occur?
We are having an ongoing conversation with ANZ so I wouldn’t want to preempt the next steps because I think that is something that their processes will ascertain and from what they have indicated to us they are going through a process and a lot of attention is on this particular client at the moment, so we are really keen to continue to engage with ANZ to hear from them what they think the steps are. They are the experts at this and we trust and we hope and certainly expect them to have a process in place to deal with these types of issues.
In a more general way what we hope that a report like this catalyses is the continual focus of Australian businesses on ethical and responsible business practices on emerging markets and all the markets that they operate. It is certainly expected by my members, it is expected by the large proportion of investors in Australia that call themselves responsible but equally it is expected by the average mum and dads in Australia that their savings are not going to support human rights abuses or communities being moved off their land without their consent or illegal logging practices.
Do you think people could ever trust that banks would put ethics above profits?
The incentive structures are pulling in the opposite direction, but what we are trying to demonstrate here that actually ethics are quite closely aligned with corporate performance and there are a number of examples to show that is absolutely critical. If you go back to look at News Limited and their breach of internal ethics or you look at Leighton Holdings and their breach of internal ethics and corrupt business practices it is actually totally consistent for a company to operate ethically and responsibly and to maximize and grow profit and value for shareholders. So I guess that is the biggest take out for us.