There’s a new frontier in the battle to transition companies to more sustainable business models: lobbying.
Shareholders are waking up to the damaging effects that certain lobbying activity can have on the growth potential of their portfolios over the long term.
Take the case against Rio Tinto, for example. The company’s website highlights its commitment on climate change thus: “Rio Tinto supports the intent of governments to maintaining “a safe and stable climate in which temperature rise is limited to under two degrees Celsius”. The company signed the Paris Pledge for Action supporting the agreements made by 195 governments in Paris at COP21.
It seems a little contradictory, therefore, that the company spends an estimated A$2 million on membership fees to the Minerals Council of Australia (MCA). This organisation and others like it have played a significant part in slowing down the progress on climate change legislation in the country by adding to the prolonged deadlock in energy and climate policy, particularly as it relates to coal.
The action against Rio Tinto, which includes resolutions to be heard at the mining firm’s UK and Australian AGMs in April and May, is being led by the Australasian Centre for Corporate Responsibility and has attracted co-signants including AP7 and the UK’s Church of England Pension Board.
Adam Matthews, head of engagement at the Church Comissioners for England and the CofE Pensions Board, says lobbying activities of investee companies is an issue of particular importance to asset owners as “a lot of trade associations impact governments’ ability to regulate on climate change”. He points not just to the ethical considerations, but also the implications for corporate transition risk.
If companies’ failure to transition to low-carbon and sustainable business models undermines the potential to generate risk-adjusted returns over the long term, then companies’ efforts to slow down related legislation should be an area of growing concern. Especially as it is shareholders’ money these companies are spending.
Of course, not all lobbying activity is counterproductive, but lobbying is typically seen as negative when it comes to ESG ratings so it seems intuitive that investors should start to focus to a greater degree on this issue.
But it’s also important to look at the ethical side of the argument. Lobbying is considered an influence of political power by offering contributions that affect political outcomes. In other words, buying influence and, in doing so, subverting the political system.
The purpose of government is, fundamentally, to protect the most vulnerable in our societies, whose share of voice can only be expressed through the democratic process. If companies and wealthy individuals are able to sway the political process in their favour, then democracy is fundamentally undermined. What results is a political and regulatory system that protects the interests of the wealthy.
But political systems that leave the most vulnerable behind are precisely what has fuelled the rise of populism in recent years. And the result? Geopolitical uncertainty in many developed and developing economies over the last decade, the prospect of an escalating trade war between two of the world’s most powerful economies today, and, for portfolios, heightened volatility and the prospect of potentially greater losses.
Greater losses because, if the policy makers are effectively paid to look the other way, companies’ business practices are not monitored as closely as they should be. And then, when the proverbial hits the fan, the damage is all the greater in a world where news travels round the globe at the click of a button.
It’s also interesting to consider the unwritten message lobbying should be sending to the financial community. In spending money on pro-coal lobbies, for example, companies are effectively acknowledging the extent to which climate transition risk affects the future growth potential and profitability of their business models. But how many of those companies are also making their shareholders aware of those risks through appropriate disclosure?
And then there is the obvious question – are companies knowingly or unknowingly supporting anti-progressive or counterproductive lobbying activity? If the first option, their governance practices are in need of serious improvement because they are putting shareholders’ returns under threat over the long term. If the second, then companies are potentially spending vast amounts of money without taking due care of what that money is being spent on. If this is the case, their governance practices are in need of serious improvement because they are putting shareholders’ returns under threat over the long term.
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A quick cuppa with Faith Ward, Chief Responsible Investment and Risk Officer, Environment Agency Pension Fund