Mike Smith

One of the biggest barriers to corporate social responsibility and therefore sustainability is the short-term pressure from the market for ever increasing quarterly profit results. The Business Council of Australia (BCA) [1] published a major report in 2004 arguing that market driven short-termism was threatening the long term competitiveness of Australian firms.

Eco-efficiencies - While the value of investing in eco-efficiencies and eco-innovation to improve long term competitive advantage is increasingly understood by CEOs, boards and managers, the return on investment can vary from six months to four years and the market militates against it. Fund managers compete against each other for rankings based on share price performance, profits and outlook over periods as short as a month, which is ludicrous. Immediate commercial imperatives are often contrary to creating an environment for sustained growth.

Research on CEOs in Australia has found that their most cited reason for lack of progress in implementing more sustainable development/corporate social responsibility practices is the pressure placed on them by investment houses to deliver quarterly returns. There is an inherent conflict between managing for the short term or for the long term. It is possible to destroy organisations by just managing for the short term.

Superannuation funds - Whereas superannuation funds invest people’s money for quite a long period, on average twenty years, their performance is rated by the markets every quarter. Short term management is re-enforced by the fiduciary duty requirements of super fund managers and trustees. The fiduciary duty requires them to maximise returns in the best financial interests of the beneficiaries of the trust. Currently, most definitions of fiduciary duty implicitly exclude making socially and environmentally oriented investments.

However, studies by Innovest [2], amongst others, have shown that companies that pursue corporate social responsibility experience as good or better profits than those which do not. This is allowing changes to the fiduciary duties of super funds, and is beginning to turn what has been a driver of unsustainablity, the pressure for quarterly profit results, into a driver for sustainability.

Fiduciary duty - Lovins and Link [3] have argued that change to fiduciary duty regulations in the USA pertaining to super fund trustees has the potential to help facilitate the next industrial revolution to sustainability. There is now significant data showing that companies that invest in eco-efficiencies and innovation outperform their competitors. Calvert Socially Responsible Investment Funds in the US was able to win in court on the matter of fiduciary duty because it was able to demonstrate that there is no reason for pension funds not to invest in companies with a superior social and environmental performance.

The chair of the California Public Employees’ Retirement System says that what he cares about is whether the whole economy is there, and healthy, in twenty to fifty years time, when he has to pay out the pensions. He thinks that pension and super funds may well be the institutions with the greatest vested interest in seeing that sustainable development is achieved.

Australian funds - The efforts to address the fiduciary duty laws of super fund trustees in the USA have been mirrored globally, including in Australia. A Senate inquiry into Corporate Responsibility in Australia [4] found that super funds should be encouraged to include ESG considerations in their investments. They also recommended that institutional investors in Australia, including the Future Fund, should become signatories to the United Nations Principles for Responsible Investment.

ESG reporting - Forward thinking super funds in Australia are changing, with fund managers grappling with how to become better long term investors. To help them we need better information on the ESG [5] performance of companies. Our reporting on this falls well short of reform efforts around the world. Many countries have comprehensive reporting requirements, covering some or all of the following: disclosure of water, energy and other resource consumption, greenhouse and other emissions, waste management, impact on biodiversity, management policies and compliance.

The Australian Senate Inquiry missed a significant opportunity by deciding against making ESG reporting mandatory for companies above a certain size. If this were done, it would provide more objective information, in a standard framework. It would streamline analyst and community information requests. It would lead to better business performance.

There is a growing body of evidence that public reporting improves financial performance by creating organisational structures to improve resource efficiency and waste minimisation, as well as by suggesting strategic business opportunities and raising environmental awareness overall.

Major companies wanting to ensure ongoing super fund investment will increasingly see it as essential business practice to report annually on ESG criteria. Significant investment houses now recognise sustainability as a useful indicator of corporate performance and as an important indicator of corporate risk.

References
1. The Business Council Sustainable Growth Task Force (2004), Beyond the horizon: Short-termism in Australia

2. Innovest Strategic Value Advisors (2004), Corporate Environmental Governance: a study into the influence of environmental governance and financial performance, p 10

3. Lovins, L.H. and Link, W (2003), Pension funds: Key to capitalizing natural capitalism

4. Parliamentary Joint Committee on corporations and financial services (2006), Corporate responsibility: managing risks and creating value

5. ESG: Environment, Social, Governance - two-thirds of the triple bottom line