Build your wealth by investing in companies that are developing products and services that contribute to a better world. Ethical Investments have been proven to generate competitive returns with the added value of bringing about positive change for society

Ethical Spotlight


A report from the Foodprint Melbourne Project – a collaboration between Melbourne University and local councils – estimates that an average Melburnian wastes about 200kg of food per year. This means collectively, as a state, we waste close to 1 million tonnes of edible food, enough to feed two million people a year.

Growing this wasted food uses 180 gigalitres of water each year (or 113 litres per person per day) and uses around 3.6 million hectares of land, which is more than 20 times the area of the Melbourne Cricket Ground! This uneaten food represents a waste of natural resources, given Australia is a water scarce region with only 6% of suitable land for growing crops. It is also responsible for around 2.5 million tonnes of greenhouse gas emissions, 60% of which is generated by food waste rotting in landfill, with the rest generated by producing the wasted food.

In one of Melbourne’s iconic food precincts, the Melbourne City Council has situated a recycling machine where businesses can dispose their organic waste to be converted into fertiliser. These machines, supplied by Eco Guardians, were first developed in South Korea, where food waste was banned from going into landfill 20 years ago. Eco Guardians have to-date supplied over 30 machines to hospitals, prisons and markets, with their next big target being inner-city households and high-density apartments where composting or worm farms are trickier to adopt.

Supermarkets and restaurants have also been taking initiatives in combating food waste by donating unsold surplus fresh food to charitable organisations such as SecondBite and FareShare. According to the report, more than 60% of food waste is generated simply because it does not pass the aesthetic criteria. Last year, Woolworth launched the ‘Odd Bunch’ campaign, aimed at educating consumers that ‘knobbly’ looking fruit and vegetables are perfectly consumable. In April this year, OzHarvest, a renowned food rescue organisation, opened Australia’s first rescued food supermarket in Kensington, Sydney.

There are numerous websites and articles offering ideas on how we, as consumers, can do our bit to reduce food waste, such as shopping smarter and better meal planning. We can also accept the ‘knobbly’ looking produce, while learning to be creative with leftovers, storing food better, composting or even joining a local co-op where neighbours can swap excess fruit and vegetables.

Some food for thought given the festive season is just around the corner.


This past quarter saw the Finkel Review, billed as the blueprint for the National Electricity Market, make a range of recommendations on how to deliver reliable, secure and affordable electricity in a lower emission environment.  

The review, commissioned by the Federal and State energy ministers, was prompted in part by soaring electricity prices, as well as the recent South Australian blackout which has raised concerns about the stability of the system and reliability of renewable energy sources such as wind and solar. To address this, the review recommends that all new wind and solar plants be equipped with back-up batteries and storage to increase dependability. 

Another highlight of the review is the new ‘Clean Energy Target’, recommended to replace the existing ‘Renewable Energy Target’ in 2020. The new policy, unlike its predecessor, would be technology-neutral where any generator producing power below a baseline of emissions set by the government would be regarded as ‘clean’ regardless of whether it be from wind, sun, hydro, gas or even coal. Retailers would be required to buy a certain proportion of their electricity from these ‘clean’ generators. This reignited the debate surrounding the definition of ‘clean energy’ to include new coal, as it is expected to have a slightly lower emissions profile than generators built decades ago. Under this proposal, coal-fired generation is expected to provide up to one quarter of Australia’s electricity generation by 2050.

Meanwhile, the report also lists concerns over the nation’s fleet of ageing coal-fired generators. Over the past three months, two of the biggest coal-fired power stations – Hazelwood and Loy Yang A -  closed down, with a further seven due to close in the next 20 years.

Given few replacements are being built to offset these closures, due to low investor confidence arising from uncertainties around ever-changing policies and emissions reduction targets, the electricity market is turning to gas-fired power stations to fill the gap.

However, this comes amidst the execution of three new enormous gas export contracts, leaving scarce resources and consequently pushing up gas prices. To better manage future closures, the review recommends that generators provide three years’ notice instead of five months, as was the case at Hazelwood.

Overall, the policy has left climate change groups unhappy that the new Clean Energy Target is not ambitious enough for a once-in-a-generation opportunity to reform the electricity sector. Despite Dr Finkel acknowledging that the cost of wind and solar is cheaper than both coal and gas-fired generation (even without taking into account carbon emissions and the environmental impacts of fossil fuels), it is unfortunate the recommendations have not featured renewables more strongly.

March 2017 - The Need To Act On Climate Change

There is no denying the world has moved forward on tackling climate change, with as many as 200 world leaders signing a collective agreement to cut greenhouse gas pollution at the last Paris Climate Convention. However, despite the momentous occasion, climate change policies remain vulnerable in the hands of governing parties. The newly elected US President Trump is already threatening to withdraw from the Paris agreement and rescind the Clean Power Plan, which was a key component of the Obama Administration’s Paris climate agreement, while in Australia, Treasurer Scott Morrison recently attempted a case for the central role that ‘clean coal’ should play in Australia’s energy future.

Although the Federal Government may be climate laggards, state and regional governments, along with many businesses, are moving ahead and making their own commitments to address climate change. South Australia and the ACT have already begun transitioning to low carbon economies by establishing renewable electricity sources and investing in transport systems and waste systems. At the same time, multi-national companies such as Nike, Starbucks and Coca-Cola are also taking steps to protect their brand image, as more and more consumers and investors shift their support toward companies with a stronger environmental performance.

Meanwhile, an increasing number of not-for-profit groups believe the force behind pushing climate change forward starts with the people. One such example is Climate for Change; whose mission is to help create environments for people to have conversations with their peers on climate change – something that is now being recognised by experts as key to building public support for the action needed. The key is to reframe the topic to issues that people can more readily relate to, such as threats to food, water, health and the economy rather than provoke the debate of whether climate change is real.

The CSIRO and Bureau of Meteorology have previously prepared a report for the Victorian Government highlighting the fact that not only will climate change affect farmers and food crop production, it will also impact other industries such as tourism, with shorter snow seasons and harsher fire conditions, and the state’s transport network, as it becomes increasingly exposed to periodic flooding and heat loading. Hot days and heatwaves would also exacerbate health risks adding pressure on hospitals and emergency services. On an even greater scale, one of the key reason the Chinese Government has recently taken an aggressive approach to expanding renewable energy is the debilitating air pollution that coal-fired power plants generate, regularly causing air quality levels in many Chinese cities to exceed hazardous levels.   

Climate change is the largest collective-action problem we face. To effectively deal with this problem, more people are needed to voice their support, raising awareness within the community to keep the pressure on the government. The science is in, and policy makers need to put in place the right legislation to deliver climate change action.

On Earth Day, 22 April, the March for Science will see people across the globe march for evidence-based policies. For more information, visit

December 2016 - The rise of ESG reporting

With some of the biggest share price falls of 2016 being related to scandals at seemingly strong companies, it is becoming increasingly clear that financial data alone are no longer sufficient to measure the health and strength of a company.

An example is the German car manufacturer, Volkswagen, which admitted to installing defective devices on its vehicles to cheat on emissions tests. This resulted in the potential recall costs related to 482,000 vehicles, with up to 11 million vehicles possibly affected. Beyond its attempt to deceive customers and regulators, the scandal highlighted the failure of traditional valuation models in capturing cost implications of a wider range of risks that can shape a company’s outlook. These include environmental (E) issues such as pollution, global warming and energy conservation; social (S) issues such as work practice considerations; and governance (G) issues such as corporate management, culture and conduct.

An increasing awareness of these risks by investors at both retail and institutional levels has seen a rise in demand for the incorporation of ESG reporting by companies. According to a survey conducted by the Australian Council of Superannuation Investors (ACSI), 90% of ASX200 companies now provide some level of reporting on sustainability factors. The most improved of these companies being in the utilities, gas, and energy distribution sectors, which may be correlated with increasing pressure from investors in these sectors to be transparent about economic and environmental risks.

We appreciate that financial markets are skewed to the short-term, however, reporting on ESG issues provides both internal and external stakeholders with the transparency and insight needed to make better investment decisions. Although tremendous progress has been made in raising the profile of ESG considerations in the decision-making process, its integration remains sparse and inconsistent. Some of the challenges preventing a more widespread integration of ESG reporting include the quantification of risks, along with the lack of a standardised framework, given different companies can face different risks.

Global fund managers like the Stewart Investors Worldwide Sustainability Fund and the Generation Global Share Fund highlight the importance of ESG when selecting companies for inclusion in portfolios on the premise of sustainable growth and earnings. At the same time, it’s important to note that while larger companies are increasingly adapting ESG in their reporting, smaller companies can often remain left behind due to a lack of resources. We take the view that the incorporation of ESG reflects a company’s ability to consider the long-term risks and opportunities relevant to a business, linking those material risks to the sustainability of financial performance.

October 2016 - Transparency in political party donations

With the recent publicity surrounding political donations in both the State and Federal arena, the issue of corporate donations to political parties is in the spotlight. A clear understanding of how a corporation uses investor funds is an important element in investing ethically.

In Australia, the majority of political donations come in the form of donations from corporations that go towards funding the parties' election campaigns. The Australian Electoral Commission (AEC) monitors donations to political parties and publishes a yearly list of political donors. However, this does not provide a complete picture. Donors are only required to declare donations above AUD$12,800 and can sometimes hide their identities behind associated entities. In addition, payments not classified as donations by the recipient parties will not appear on the AEC’s database. This effectively hides millions of dollars in payments each election cycle.

Recent research commissioned by the Australian Greens under the ‘Democracy for Sale’ project revealed that over the past five years, major companies declared between AUD$7 million and AUD$8 million in donations that were not formally recorded as such by the recipient parties. The report also examined donations by industry sector and found that over AUD$2.9 million was from the Financial/Insurance sector, followed by AUD$1.28 million from Energy and Resource companies, and over AUD$580,000 from the Property sector.

As for how this relates to direct shareholding, investors may be interested in knowing to whom the companies they invest in are donating, and how much is being donated. The Australasian Centre for Corporate Responsibility (ACCR) is advocating for accountability and transparency by putting forward resolutions on corporate political expenditure at company annual general meetings. According to the ACCR, “Corporate political expenditure has the ready potential to corrupt Australian democracy to the detriment of both Australian citizens and shareholders in Australian companies”.

ACCR’s first target in its campaign was the National Australia Bank (NAB), which in the past three years has given over AUD$500,000 to Australian political parties. The campaign saw ACCR commence the process of putting together a resolution for consideration at the December 2016 NAB AGM, seeking to improve Board responsibility to shareholders on this issue. On 20 September 2016, a new policy was announced by the NAB board, which apparently took effect in May 2016, ending political donations. The move was followed by ANZ Bank’s announcement that it too was reviewing its policy on political donations.

ANZ and NAB aren’t the only companies that spend money on Australian politics. In June 2016, ACCR published research on 23 of the top Australian listed companies and their attitudes, transparency and oversight in regards to corporate political expenditure. ACCR’s research found that compared to the USA and UK there is less oversight of political donations by shareholders or the public in Australia, and the issue remains an important ethical consideration.

July 2016 - Gold Mining

Many nations have built their wealth on gold. It is believed to have been one of the first metals to be mined and was instrumental in the rise of many ancient civilizations. International agencies such as the World Bank and Asian Development Bank continue to favourably view gold mining as a key driver of economic growth for developing countries. However, if miners and governments do not take steps to implement responsible mining practices, the environmental and social costs can quickly erode the financial gains made.

The most common method of extracting gold from ore is cyanide leaching. It only takes a rice-grain of cyanide to be fatal to humans and one-millionth of a gram per litre of water to be fatal to fish. Given the large scale and often decades-long duration of many gold mining operations, contamination of the surrounding environment with cyanide is seen as inevitable, posing serious health risks to the labour force andsurrounding communities. Following the opening of the Ok Tedi Mine in Papua New Guinea in 1982, the dumping of waste into the OK Tedi River saw its fish population poisoned, 176 sq km of forest damaged and staple crop plantations destroyed, disrupting close to 50,000 livelihoods. One anthropologist described it as “ecocide”.

Gold mining operations have longbeen associated with funding unlawful armed conflicts, which is why the World Gold Council, an industry body representing the world’s large-scale industrial mines, has developed a Conflict-Free Standard. This standard provides a framework for major gold producers to assess and provide assurance that their gold has been extracted in a way that does not support unlawful armed conflict.

In 2004, Earthworks and Oxfam launched a ‘No Dirty Gold’ campaign to raise the human rights and environmental standards of gold mining practices. Over 100 of the world’s leading jewellers and retailers have embraced the campaign’s Golden Rules, putting pressure on suppliers and manufacturers to do the same. Tiffany & Co, for example, now only sources gold from responsible mines that do not use cyanide, while Brilliant Earth, another retailer, actively promotes the use of recycled gold to reduce the demand for newly mined gold.

Given that an estimated 100 million people worldwide rely on gold mining for their livelihoods, benefitting both developed and developing countries, it is vital that gold be mined responsibly. Small-scale miners, in particular, typically live in high levels of poverty in remote areas and are too often exploited by middle-men without any protection for basic human rights. Fairtrade Gold aims to tackle this issue by encouraging small-scale gold miners to adopt the Fairtrade standard of responsible mining standards. There is a small but growing movement in Australia to use Fairtrade gold in jewellery design such as Sydney-based Zoë Pook Jewellery, who is leading the way as the first Fairtrade Gold Jeweller in Australia.

March 2016 - Social Impact Bonds

Social impact investments seek to deliver both financial and social returns. Social impact bonds are a form of social impact investment which use a debt or loan structure to provide finance for social investment. Since the launch of the first social impact bond in the UK in 2010, more than 50 bonds have been issued across Europe and North America targeting various social outcomes such as youth unemployment, homelessness, disability, education and renewable technology. Here in Australia, the first two social impact bonds were launched only two years ago by the New South Wales Government.

As one example, the NSW Newpin Social Benefit Bond has delivered positive social and financial returns. The program supported by the bond has to date restored 66 children to their families and prevented a further 35 children from entering foster care. This successful outcome translated into an estimated AUD$66,000 annual cost savings per child to the State Government (the cost of supporting a child in foster care), with qualified investors to receive a 7.5% coupon in the first year and 8.9% in the second year. Positive social and financial returns from the trial bonds have inspired the South Australian and Victorian government to follow the NSW lead.

Major investors for social impact bonds have predominantly been philanthropic organisations, private syndicates and specialized institutional investors. Interest is now growing amongst corporate and financial institutions, including super funds.

Research conducted by Impact Investing Australia has identified that at least AUD$18 billion is expected to pour into local social impact investments over the next five years, although there is still a lack of supply to satisfy investor demand. One of the reasons for this is ‘scalability’, with the majority of deals being typically small and relatively resource intensive.

Reflecting on the NSW Newpin Social Benefit Bond, the Government spent the better part of 18 months finalising an AUD$10 million bond – a lot of work for a relatively small pool of capital, given a project needs to grow big enough to absorb the high transaction costs. Additionally, large institutional investors require frequent performance data, resulting in additional administrative costs. Whilst intermediaries such as social enterprises have been willing to step in and devote time and resources to help project manage the deals, they still need the government and/or large institutional investors to back the deals to lend market credibility.

The impact investment space is still evolving. So far the evolution has focused on institutional investors such as super funds and charitable foundations, with retail investors being notably absent despite popular support. A particular challenge for retail investors is illiquidity in impact investing, which, due to the absence of an established secondary market, means investments are generally locked up for a period of time with limited or no ability for investors to prematurely sell their units.

EIS continues to monitor opportunities for social impact investment for our clients. Eligible EIS clients who wished to participate were able to invest in the NSW Newpin Social Benefit Bond which has delivered positive financial and social returns.

December 2015 – Paris Climate Change

The recent UN Climate Change Conference in Paris (COP21) saw 195 countries pledge to keep temperature increase “well below” 2 degrees Celsius and pursue efforts to limit the increase to 1.5 degrees. Representatives and leaders from around the globe discussed the framework for how to achieve this and for providing regular reporting on how each country is progressing. The agreement has been described as “the single most important collective action for addressing climate change” and is expected to take effect in 2020. The 195 countries that participated in the agreement represent over 90% of global greenhouse gas emissions.

One of the positives to come from COP21 is that America and China appear to be working together with a far greater commitment to reaching an outcome. India (the 3rd largest emitter after China and US) was also on board with the agenda. This helped soothe the contentious debate that the world’s largest emitting countries should shoulder the lion’s share of responsibility for climate change and support poorer nations in making the necessary changes to reduce emissions and quit coal.

There is no doubt climate change hits the poorest nations very hard and the World Bank estimates that extreme weather and rising seas could drive over 100 million more people into poverty by 2030. The threshold of 1.5 degrees was locked into the treaty at the COP21 after a concerted push by small island nations who said their very existence would still be threatened if the agreement only limited global warming to 2 degrees. Rising sea levels, coupled with intense storm cycles exacerbated by global warming, are contaminating the water table and polluting agricultural land, destroying assets and livelihood. Crop yields are continuously reducing, and are struggling keep up with the population growth on the small islands. These harsh conditions combined with rising sea level are making the islands uninhabitable and pushing some islanders to seek asylum as climate change refugees. However, climate change refugee status is still not widely recognised. A recent test case in New Zealand turned a family from the Pacific Islands away on the grounds that asylum is only granted to those being persecuted, primarily as a result of political and internal unrest. Australian Foreign Minister, Julie Bishop says the government recognises that Pacific neighbours are vulnerable and intends to help these island countries access funding through Australia’s new role in the Global Green Climate Fund. The fund was set up to help islanders rebuild and develop sustainable ways to cope with climate change.

The other highlight from COP21 was the broader support received from the private sector. Major corporations and financial institutions made commitments to decrease their carbon footprints, engage in sustainable resource management and finance climate change action. In fact, the private sector is one of the largest sources of climate finance. In 2014, the private sector funded USD$243 billion in climate-related investments such as renewable energy investment in emerging markets. However, in return the private sector seeks strong policy signals from respective governments to create a stable environment for their climate related investment to thrive. In Australia, we witnessed how the uncertainty over the Renewable Energy Target (RET) stalled the renewable energy industry between 2011 and 2014. It wasn’t until the Government confirmed it’s RET position in May 2015 (along with the election of Turnbull) that the sector’s confidence and investment activity resumed. It remains to be seen following from the COP21 what policy changes will be implemented in Australia and if any pressure will be applied to closing down coal-fired power station

September 2015 – Recycling – Where are we today?

The practice of industrial recycling can be traced back to 1815 when an Australian paper mill first started recycling rags to make paper. Australia’s first kerbside collection programme however was only introduced around the late 1980s following calls from the environmental movement.

Australia’s recycling rates have been steadily rising from 33% in 2007 to currently around 50%. This puts Australia ahead of the US (34%) though still a long way off the Australian Council of Recycling’s recommended target of 75%. In Europe, countries such as Austria and Netherlands currently recycle 60% or more of their municipal waste. According to the Australian Department of Environment, our greenhouse gas emissions from waste alone have fallen from 16 million tonnes of carbon dioxide equivalent gas in 1990 to 10 million in March 2015. This is despite our population growth from 17.1 million to around 23.7 million over the same period – evidence that recycling has a role to play in reducing emissions.

For many materials, the process of recycling into useful raw materials is straightforward: metals are shredded into pieces, paper is reduced to pulp and glass is crushed into cullet. Metals and glass can be remelted almost indefinitely without any loss in quality. An aluminium can has potential to be recycled indefinitely and only takes 60 days before it goes back on the grocery shelf as another aluminium can.

However the nature of waste is changing, with more complex goods that contain multiple types of plastic, metals (some of them toxic). In 2010, the Australian Environment Minister endorsed the Australian Packaging Covenant which aims at encouraging businesses to design products with recycling in mind as well as more sustainable packaging to increase recycling rates and reduce packaging litter. The ultimate aim being the design of ‘closing the loop’ technology where the objective is for no waste to be left behind as landfill. More mature recycling facilities are also struggling to cope with the newer complex waste stream as their machineries are often ill-equipped to handle the newer materials. Remedying this problem requires not only capital investment to upgrade the recycling infrastructure but also more sophisticated technology to better identify the various materials in the sorting process.

In Australia, the recycling industry is a rapidly growing business, creating 8 times more jobs than the landfill industry. Environment Victoria estimates that 2,310 new jobs can be created in resource recovery in Victoria alone. This is part of the ongoing evolution of recycling that shows the potential opportunity for job creation, innovation and land fill reduction. Whilst progress in our recycling efforts should be applauded, we need to be careful about anecdotes such as “making cans from recycled aluminium requires 95% less energy than virgin stock” or that “recycling 30% of Australia’s waste is equivalent to removing 25 million cars from the road”. These sorts of statements, whilst deservedly boastful of what can be achieved, can be counterproductive if they end up changing our perception of waste as a problem and thus propelling society’s excessive overconsumption.

Given the majority of our seabirds are now known to have ingested some sort of plastic, and with carbon in the atmosphere set to reach dangerous levels, we would all be better off to refuse the can or bottle in the first place, turn off the TV and use the car less. The recent resurgence of the minimalist movement provides a timely reminder that recycling should still be viewed as second in line to the preferred environmental approach of reducing our consumption.

June 2015 – Disruptive Business

Elon Musk created a lot of excitement recently with the announcement that his company ‘Tesla’ will go into production of the new Tesla battery which will have the potential to transform the take up of renewable energy.

Many of us would ideally like to take up solar panels on our homes, but the inability to store the energy produced during the day to use in it in the evening creates a barrier against a much larger uptake. The cost equations do not currently stack up especially given the low price paid for this energy by utility companies when households feed it back into the grid. But consider the introduction of an affordable battery to store this energy and this has game changing potential. Technologies with such game changing potential have come to be described by the new buzz word ‘disruptive’ businesses.

Disruptive technologies are defined as advances that will transform life, and the global economy. This flips the coin on our understanding of the word ‘disruptive’, normally associated with negative connotations, to one that reflects opportunity, progress and solutions. A business is deemed disruptive when it shakes up an industry and changes the way things are done, not only creating competition but often to the extent of making traditional methods obsolete. Cheaper and simpler disruptive businesses can open up doors to new markets and categories of users that were either previously locked out or never considered. Think about how the internet has changed banking transactions, how PayPal (also founded by Musk) and online shopping has impacted retail stores, what email has done to postal service providers and what online reporting has done to the newspaper industry.
A report from the McKinsey Global Institute has identified 12 technologies that could drive enormous transformations over the next decade. Standouts from the list include:
Renewable Energy – Sources such as solar, wind, hydro-electric, and ocean wave hold the promise of an endless source of power without stripping resources, contributing to climate change, or worrying about competition for fossil fuels.
Energy-storage devices or physical systems that store energy for later use. Technologies such as lithium-ion batteries and fuel cells already power electric and hybrid vehicles.
Advanced robotics— increasingly capable robots with enhanced “senses,” dexterity, and intelligence used to automate tasks or augment humans offer huge scope.
Next-generation genomics – fast, low cost gene sequencing, advanced big data analytics and synthetic biology (‘writing’ DNA) leading to improved health treatments.
3D printing – with applications in manufacturing and medical technologies such as ‘bioprinted’ organs or bone parts.
The full list can be found here: – Disruptive Technologies

The potential benefits to the world are yet to be quantified but the disruptors of today will deliver solutions and improvements for tomorrow. Whilst it is hard to predict which technologies will have the greatest impact an early investment into these types of business can bring financial reward. Predicting industries that might be ‘disrupted’ is equally important.

March 2015 – Corruption and Bribery

As a result of host countries introducing stricter regulation and penalties on corporate corruption, incidents and allegations of corrupt practices in corporate behaviour have increased as more companies have been caught out under stricter rules. Corruption or bribery incidents have generally been accompanied with international criticism, sharp declines in company share price and considerable litigation expenses – costs that are ultimately borne by shareholders. Importantly, companies embroiled in such events are often characterised by poor corporate governance processes, the failure of internal processes to protect the integrity of stakeholder relationships and an inability to successfully implement and monitor company codes of conduct.

The United Nations notes that ‘Corruption is a complex social, political and economic phenomenon that affects all countries. Corruption undermines democratic institutions, slows economic development and contributes to governmental instability. Corruption attacks the foundation of democratic institutions by distorting electoral processes, perverting the rule of law and creating bureaucratic quagmires whose only reason for existing is the soliciting of bribes. Economic development is stunted because foreign direct investment is discouraged and small businesses within the country often find it impossible to overcome the “start-up costs” required because of corruption.’

Research provider CAER (the Centre for Australian Ethical Research) was commissioned by ACSI (the Australian Council of Superannuation Investors) to examine the current state of anti-corruption and bribery practices in Australia, with a focus on the ASX 200. The ASX 200 contains 164 companies with subsidiaries operating internationally (“ASX 200 Internationals”). Of those 164, 77%, representing 126 companies, are involved in either an at-risk sector, an at-risk country or both, indicating significant risks for Australian corporations.

The inclusion of bribery and corruption prevention in a company’s Code of Conduct represents the first step along the road to adequate anti-corruption practices. Transparency International Australia (TIA), part of a global coalition in over 80 countries, recommends that directors and management demonstrate visible and active commitment to the implementation of an anti-bribery program.

EIS endeavours to monitor and identify good corporate governance practices by means of our own research, research conducted by CAER and the exchange of information with other members of the Ethical Advisers Co-Op. At times clients have even provided valuable information and insights. In an increasingly globalised business environment and subsequent increased chance of exposure to bribery and corruption, EIS believes that companies must demonstrate a strong commitment to good governance with clear policies banning bribery and corruption.

December 2014 – Shareholder Engagement & Corporate Responsibility

In the most part Australian companies are no longer evaluated just on their financial performance. If corporate responsibility is also about minimising negative and maximising positive environmental and social impacts then shareholder engagement is a key avenue to making this happen. Shareholders (including large institutional investors as well as individuals) and prospective investors are increasingly interested in how companies are conducting their businesses and the impact their dealings have on the environment and community. Although there are currently no legislated requirements in Australia for companies to prepare and publish sustainability reports, we are starting to see some companies incorporating corporate social responsibility reporting in their annual reports. However there is still room for improvement in the quality and rigour of the information reported and we would like to see companies being more explicit about which social and environmental issues they see as being most relevant and material to their business. Such issues might include corporate governance and executive pay, carbon emissions, human rights, use of corporate funds for lobbying or political purposes or disclosure of environmental and social impacts.

Whilst there are numerous stakeholders such as non-government organisations and community groups advocating for various issues, shareholders hold the power to push the issues. Whilst individual shareholders are entitled to vote, a collective shareholder vote is even stronger. In the last year we have been pleased to see formalisation of organisations that help bring together like-minded shareholders to share ideas and expectations on how corporations should act and behave. One such organisation with whom we have organised shareholder action is the Australasian Centre for Corporate Responsibility (ACCR). When armed with collective shareholder votes, the ACCR are better able to command attention and influence corporate practices. In instances when dialogue alone is not effective, alternative measures may include requesting the company circulate a statement to all its shareholders about the issue or alternatively requesting a resolution be put forward at its Annual General Meeting. These measures also inadvertently draw media attention to the issue, raising further public awareness, which can be material to outcomes especially where companies show resistance.

Some of ACCR’s recent proposed resolutions include Santos withdrawing from the Narrabri Gas Project and amendment of Woolworth’s constitution to limit the extent of involvement in electronic gaming machines. They are currently in the middle of a campaign advocating that banks disclose their carbon emissions as a result of their lending practices. A notable break through has been achieved with the Chair of the CBA acknowledging for the first time that climate change was one of the big issues that the bank faced. As founding members of the Ethical Advisers Co-op (EAC), we have welcomed a partnership in the last year between the EAC and the ACCR which facilitates our clients’ involvement in shareholder engagement by signing over of shareholder proxy votes to ACCR for individual campaigns.

September 2014 – Renewable Energy Targets

Australia’s Renewable Energy Target (RET) came in to the spotlight in August following the Warburton review commissioned by the government. The RET was initially established with the aim of sourcing 20% of the nation’s electricity from renewable sources by 2020.

The way the RET works is through the creation of tradable certificates issued through a central registry and managed by the Clean Energy Regulator. Through the scheme, large renewable power stations and small-scale system owners (such as solar panels, wind and hydro) are eligible to create certificates, which then get purchased by electricity retailers who on-sell electricity to households and businesses. These electricity retailers have a legal obligation to ensure that a proportion of the electricity they supply is sourced from renewable sources.

The Warburton review states that the RET will impose significant costs on the economy in the form of subsidies amounting to AUD$22 billion. The review argues that there is no need to spend this money to develop additional renewable investments given the abundance of power supply in the market already. This includes incentives handed out to homeowners who have installed solar panels, which while successful, are seen as an expensive way to cut greenhouse emissions. We note that it is because of oversupply and competition that wholesale electricity prices have been pushed down.

The review also raised a concern about the back up of power in the event of no sun or no wind. In response to this the Clean Energy Council cited that South Australia currently sources over 40 per cent of its power from wind energy. Its power supply has been reported as reliable and stable and the state has not had to rely on alternative sources to support it.

At this time, the Government has not finalised its position on the Warburton review.
In the same week the Warburton review was aired, China announced they were looking to do exactly the opposite. The government of China confirmed its plans to phase out the use of coal and close coal-fired power plants by 2020 and intends to boost the development of renewable energy capacity where the goal is to have 15 percent renewable generation by 2020 (echoing the European 20/20 renewables goals).

If the recommendations of the Warburton review are implemented by the government, the changes could mean closing off the scheme to new large-scale wind and solar farms, while also ending incentives for households to install solar panels and other domestic-scale technology. Whilst Australian RET hangs in the air, we stay tuned to Australian clean technology development companies which in the meantime, are able to market their intellectual property to offshore markets that are working towards meeting their renewable energy targets.

June 2014 – Jump on board the Fossil Fuel Free Campaign

The recent traction helping this issue gain ground warrants a further update on the theme of Fossil Fuel Divestment for this Ethical Spotlight.

Today we can trace a thread back along the ethical investment web to the anti apartheid boycotts in the seventies, sweat shop labour action in the eighties and environmental campaigns of the nineties. These campaigns reflect a time when concern about these issues reached a tipping point into a revised world view. When it was no longer excusable to maintain a blinkered approach to the world in which we live, an imperative was born to strive for effective positive change in these areas. Is it possible then that in 30 years time, when we have managed our transition into a cleaner, greener world, that those threads will be traced back to the current decade as another game changing era? And will 2014 be the year when the seeds finally germinated against proponents of a fossil fuel led economy?

Fossil Fuels are not the cheap option they are claimed to be. They cost money to clean up in terms of human health impacts and the environment. If these externalities were properly accounted for the renewable industry would be way ahead from a cost comparison as well as creating jobs and reducing carbon.

Any fundamental shifts in society require leaders and subsequent followers. The leadership has been demonstrated by many. Too many to mention here but think visionary individuals like Al Gore, Bill McKibben, Bob Brown and environmental groups like and Beyond Zero Emissions. It’s when the followers start jumping on board that the swell of change creates a true possibility that the vision can become a reality.

As investors in fossil fuel assets – eg banks, individual shareholders and superfunds – start to question the true viability of the value of this investment asset, many large institutions are now making that call and announcing a divestment from fossil fuels. Having been presented with evidence, financial institutions and superfunds around the world are divesting from fossil fuels based on new risk assessment analysis.

We are in refreshing times where environmentalism and finance are coming together to create a perfect storm against fossil fuel expansion –perhaps a game changing mechanism to start its demise. This is in contrast to a back drop where citizens concerned about the future of the planet fight against government policies which put the economy before the environment. Whilst a visionary outcome of a fossil free world may at times seem unattainable, this recent traction is gathering momentum and anyone sitting on the side lines can step up for maximum impact.

Coal proponents continue to spruik their product by trying to instil fear in us that we cannot be comfortable, well lit or keep warm without them (you only need to pick up a copy of the latest Renew magazine to see that this is not the case). Those in this camp will probably never be willing followers but climate science will have the final say and they are likely to find themselves being dragged kicking and screaming out of their coal fired dens.

March 2014 – Fossil Fuel Free Investment Portfolios

Ethical Investment Services offers fossil fuel free portfolio options, and has done for many years. This is consistent with the widely agreed goal that we need to hold the increase in the global average temperature to a maximum of 2 degrees above pre-industrial levels. Scientists have calculated that to meet this target we can only burn 20% of the current known reserves of fossil fuels that sit on company balance sheets. The remaining 80% is becoming seen as ‘unburnable carbon’, which when realised will be a loss to investors who hold these assets.

This data presents a capital and moral risk for investors in fossil fuel companies. In March 2014 The Australia Institute, along with leading advocates for fossil free investments, Market Forces and, released a fossil fuel risk assessment of the top 200 Australian companies. They ranked each company into tiers with a suggested shareholder response for each.

• Tier 1 is companies substantially involved in fossil fuel extraction. The report recommended shareholders divest of these companies. Well known companies in this tier include Woodside Petroleum, Origin Energy, Santos, Caltex and Whitehaven Coal.
• Tier 2 is companies who have large downstream exposure to fossil fuels and again the recommended action is divestment. Companies in this tier include AGL Energy and gas pipeline companies APA Group and Envestra.
• Tier 3 is companies that have significant absolute exposure to fossil fuels but where fossil fuels do not dominate the business in relative terms. Interestingly the suggested action for tier 3 companies is engagement or divestment. Companies included are BHP Billiton, Rio Tinto and Wesfarmers.
• Tier 4 companies have indirect fossil fuel exposure and the recommended action is engagement. Companies in this tier are the big four banks (but not Bendigo Bank or Bank of Queensland) and Macquarie, insurance companies, waste services, rail and port companies, engineering and explosives companies.
• Tier 5 (not listed in the report) is the remaining companies that have no exposure to fossil fuels, direct or indirect.

Very predictable and short sighted criticism arises arguing that by excluding certain fossil fuel companies investors give up the high returns generated by the natural competitive advantage Australian miners have. To address this issue in a quantitative way, the report removed tier 1 and 2 companies from the ASX 200 index to form a fossil free portfolio, and then retrospectively calculated how it would have performed over the 10 years to 31st December 2013. The ASX 200 returned 13.36% and the fossil fuel free portfolio returned 13.22%, with a performance correlation of 0.99. This shows a fossil free portfolio would not have harmed portfolio performance for Australian investors over this time frame. If the unburnable carbon science is correct, going forward it is reasonable to expect that a fossil fuel free portfolio will eliminate a material risk and potentially lead to out-performance, but time will tell.

This also points out that investors can confidently rule out fossil fuel options on ethical / environmental grounds (as distinct from the financial risk) without being concerned about performance. Ethical Investment Services has been providing advice that rules out tiers 1 to 3 for many years. In addition, several of the investment options that we offer also selectively rule out companies in tier 4 that we deem are not taking their environmental responsibilities seriously.

December 2013 – Unburnable Carbon & Fossil Fuel Divestment

The Intergovernmental Panel for Climate Change (IPCC) released their fifth assessment report in November 2013. With a high degree of confidence the report summarises the following:

• The global average combined land and ocean surface temperature has risen by 0.85 degree over the period 1880 to 2012.
• Almost the entire globe has experienced some form of surface warming.
• The largest contribution to the rise in temperature is caused by the increase in atmospheric concentration of carbon.
• That ‘it is extremely likely that human influence has been the dominant cause of the observed warming since the mid 20th century. Continued emissions of greenhouse gases will cause further warming and changes in all components of the climate system. Limiting climate change will require substantial and sustained reductions of greenhouse gas emissions.’

It is estimated that human activity uses 31 gigatons of carbon per year, and rising (a gigaton is 1 billion metric tons). Scientists also estimate that humans can burn no more than 565 more gigatons before a global temperature rise of 2 degrees becomes unavoidable. At the current rate of emissions that is 18 years before we exceed our carbon budget! Most governments agreed in the Cancun Agreement of 2010 that we need to avoid a temperature rise of 2 degrees, and there is a possibility this will be revised down to 1.5 degrees.

A carbon budget of 565 gigatons represents just 20% of the total known carbon reserves reported by fossil fuel companies and countries (estimated to be 2,795 gigatons by the Carbon Tracker Initiative in the UK). This implies that if humans are to avoid the consequences of global temperatures rising to 2 degrees and beyond then much of the value of fossil fuel reserves currently listed on company balance sheets is worthless. This ‘unburnable carbon’ is roughly worth $USD20 trillion. The cost of climate change for future generations will be far more than this if the excess carbon is burned. In this context it seems absurd that last year the top 200 global fossil fuel companies allocated $674bn toward finding and developing more fossil fuel reserves. This is either materially negligent in relation to the climate for future generations, or it is a complete waste of investors capital given the bulk of it was funded from retained earnings.

These inconsistencies beg involvement far beyond capital markets. Yet it is important to note that almost every adult in the western world has financial exposure to these unburnable fossil fuel assets – mostly through superannuation investments managed with a very short term focus. This points to the duty of shareholders to exercise stewardship over their investment capital so it is employed with financial diligence and climate security. With this in mind a growing and legitimate fossil fuel divestment campaign is emerging. It is asking investors to take steps to divest of fossil fuel companies in order to avoid contributing to the primary cause of climate change.

Investment funds directly managed by Ethical Investment Services do not invest in fossil fuel companies. We continuously lobby the investment managers we use to avoid fossil fuels, with varying levels of success. The recent divestment campaign is helping with our advocacy and we are anticipating more fossil fuel free managed investment funds to emerge through 2014.

September 2013 – The Higher Purpose of Business

Free-enterprise capitalism is unquestionably a great system for innovation and entrepreneurship. It has harnessed and multiplied human ingenuity from which extraordinary innovations continually spring, to the benefit of billions of people. 200 years ago 85% of the world lived in poverty. Improvements delivered through free-enterprise and economic development means this figure is now significantly reduced. Since 1960 the South Korean economy has grown to be 260 times larger today, transforming it from one of the poorest countries to one of the most advanced. This is in stark contrast to North Korea.

There are elements of free-enterprise capitalism that rightly remain under attack. It is seen by some as a system that exploits workers, manipulates consumers, causes inequality and anxiety, fragments communities and destroys the environment. Good examples are the perception of the pharmaceutical and financial industries – which have fallen from grace in the public mind despite the crucial roles they have played in our evolution. Capitalism is a dividing subject, and as an intermediary between profitable business and conscious investors, Ethical Investment Services confronts this on a daily basis.

Many businesses still operate with a low level of awareness about their impact and role in society. They think in short-term trade-offs by focusing narrowly on profit maximisation. Profit is crucial as it attracts finance, stabilises operations, provides for innovation and creates incentive. Yet when it becomes the sole purpose it robs a business of being able to engage and connect with its deeper place in society, which often leads to material negative externalities. Profit maximisation as a primary purpose of business has done enormous damage to the legitimacy of business and capitalism. It comes from a narrow view of human nature and an inadequate view of the meaning of successful business.

Entrepreneurs are the heroes of free-enterprise capitalism. With few exceptions entrepreneurs who start successful businesses don’t do so to maximise profits. Yes they want to make money, but their motivation comes from deeper personal values and an inspiration to do something they believe needs doing. An evolved, conscious business is one that holds onto a deeper inspiration and views itself as an agent for creating multiple kinds of value for all the stakeholders they touch – the employees, customers, suppliers, investors, the community, their industry, and the environment. Instead of looking for short-term trade-offs, a good business will have the intent to look for synergies amongst these stakeholders.

Business has a much broader positive impact when a higher purpose than profit alone is at the forefront of decision making. An articulated purpose beyond profit maximisation creates an extraordinary deeper level of engagement amongst stakeholders. Many forms of value are created through such an integration of purpose – financial, ecological, social, cultural, emotional and intellectual. A multi pronged win win approach based on deeper purpose energises all stakeholders. Therefore a good business will constantly ask the question – what is our purpose beyond profit – and then continually seek to operate according to that. It is no surprise that not for profit organisations with clear purpose are experiencing huge rises in the number of volunteers. They fill a void left by business on several fronts.

There is much research that shows companies with high levels of engagement in their social, environmental and governance issues generate longer lasting financial performance.
The investment filtering process used at EIS identifies these companies and recommends them for your portfolios aiming for a genuine WIN on a range of levels.

June 2013 – Where are all the Renewable Energy Investments?

A common theme for most ethical investors is the desire to support and participate in the growth of renewable energy companies. This is substantiated by the powerful trends occurring in our changing climate and our collective need to adopt cleaner energy sources. On the surface this should provide a wealth of exciting investment options offering strong growth profiles. Unfortunately this is far from the reality when considering the renewable energy options available to Australian investors.

The nature of renewable energy investments is still going through a classic hype cycle. Hype cycle theory explains how the uptake of new technologies moves through five phases. The first phase is the ‘technology trigger’, or the event that is a catalyst for significant interest (climate change). The second phase is the ‘peak of inflated expectations’, where the frenzy generates over-enthusiasm and unrealistic expectations. The third phase is the ‘trough of disillusionment’, where many expectations are not met, business model forecasts are not met and the media pays less attention. The fourth phase is the ‘slope of enlightenment’, where industry rationalisation takes place. Finally the fifth phase is the ‘plateau of productivity’, where the technology becomes widely accepted and stable business plans emerge.

Whilst hydropower reached the fifth phase (plateau of productivity) years ago, most other renewable energy investment options are still somewhere close to the third phase (trough of disillusionment). This ‘trough’ is demonstrated in the negative investment returns. The S&P Global Clean Energy Index returned -28.35% over the five years to June 30, whilst the broader MSCI World Index was +1.25%. The Australian CleanTech Index returned -14.84% over the same five years and the broader ASX All Ordinaries returned +2.19%.

These returns are backed up by data that shows a significant over capacity of wind and solar, being at roughly double the global demand. The over capacity is a result of renewable technology moving through the second phase of the hype cycle (inflated expectations), and has mostly come from vastly ramped up Chinese production. Whilst this is supportive of the uptake of renewable energy in general, it is not healthy for renewable energy investments. These characteristics place tremendous downward pressure on prices and business margins, and explain the vast underperformance of renewable energy investments.

Zooming in further, solar energy investment options in Australia again demonstrate the hype cycle. The majority of global solar panel production is now done in China (virtually all Australian solar manufacturers are now out of business), and companies still involved are import, sales and distribution companies. The industry has become saturated – the number of accredited installers has risen from 338 at the end of 2007 to 4,821 at the end of 2012. The heavy downward pressure on prices as well as unstable federal and state government policy has resulted in many players under serious financial stress, if not out of business already. This puts the industry somewhere near the ‘trough of disillusionment’.

The fundamental drivers supporting the growth of renewable energy are certainly still in place. The instability of policy and downward price pressure are signs of immaturity. This will change as technology moves through the hype cycle, but in the mean time many companies will go through significant restructuring and some rationalisation is still to occur. Thus far our reluctance to expose a material amount of our client investment capital to the risks of renewable energy investments has proven correct. Naturally we remain acutely tuned to the opportunities as renewable energy moves through the hype cycle.

March 2013 – Social Impact Investing

It estimated that around three million Australians are either fully or severely excluded from mainstream financial services, such as the ability to obtain a loan. Whilst this statistic alone is material, financial exclusion extends beyond individuals. Non-profit organisations, social enterprises and small to medium sized enterprises also experience higher rates of financial exclusion. This exclusion leads to fewer opportunities for growth and development, and therefore fewer avenues out of marginality, dependence and poverty. It is increasingly recognised that to address poverty and marginalisation any financial response needs to not only focus on welfare and donations, but also on wealth creation and asset development.

The primary explanation for this exclusion is that commercial financial operations (eg banks) cannot justify the higher costs and risks associated with these underserved segments of society. This stems from their focus on financial returns alone, and their mandate to ‘maximise shareholder wealth’. This narrow focus fails to take into account that the provision of services to these segments generates significant positive social impacts.

To compound the exclusion there are often negative perceptions from these marginalised segments about accessing finance. Non-profit organisations frequently insist that only an increase in donations or government funding will increase their viability, whilst debt finance or equity capital is often overlooked. However, it is clear that a continual reliance on donations increases short term reactive actions and leads to longer term instability. An increasing willingness by marginalised segments to operate to commercial standards will assist in changing this perception. We have spoken to several non-profit organisations and social enterprises that have successfully accessed financial capital and each insisted that the extra responsibility that accompanies the finance has focused their operations in a positive way.

Analysis for providing capital to social investments requires a broader vision that incorporates both financial and social returns. Financially, transaction costs, risk assessment and expected returns are tangible and are relatively straight forward to calculate. On the other hand, social risks and returns are more difficult to measure, yet they can also be just as material. There is a higher moral obligation with social investing to see the outcome through, as a failed investment not only results in the loss of capital, but could also result in a teenager becoming homeless again and losing an opportunity to escape exclusion. This typically means social investments will have an initial period of low liquidity as projects get off the ground. In addition the market for social investments in Australia is relatively small, and there is not a long list of ready buyers as there is for normal shares traded on the Australian Stock Exchange.

The social investment space in Australia is under-developed compared to other countries such as England and the USA. Interestingly there is presently a greater supply of capital than there are investment ready enterprises able to accept the capital. It is therefore important that the suppliers of capital for social investments (such as Ethical Investment Services and our clients) work with aspiring enterprises to build their capacity to hold and manage capital.

We are currently engaging with social investments with the aim to match client funds with worthwhile projects. The placing of capital into social investments requires the capacity of an investor to meet the characteristics explained above, such as higher financial risks and lower liquidity, and high minimum investment amounts. However, these ‘financial concessions’ will be balanced with higher social returns, for example, though supporting homeless teenagers gaining hospitality training or by providing funding for specialised disability housing.