U.S. governmental foot-dragging on climate-change issues continues to delay the implementation of new measures, such as a federal cap-and-trade system in the U.S., it has helped spur another novel idea — using investors’ clout to impose on companies the climate-related regulations that governments have yet to introduce.
In mid-July, Australian Ethical Investment, the A$640 million ($609 million) investment firm that introduced socially responsible investing to Australia more than 20 years ago, launched the Climate Advocacy Fund. Heralded as the first of its kind in the world, the new fund promises to turn the traditional approach to SRI on its head. Rather than simply refusing to invest in companies it considers harmful to health or the environment, the fund will work with these companies through a formalized process to effect the changes it wants to see.
By tracking the S&P/ASX 200 index, the Climate Advocacy Fund pulls into its portfolio many of the companies that Australian Ethical has never touched before. Once the new fund invests in companies with which it finds fault, it will use its shareholder muscle to present formal resolutions at their general annual meetings. For the first few years, the fund will focus primarily on climate-change issues and largely on disclosure — for example, writing resolutions that would require a company to publish a report about its carbon emissions.
James Thier, executive director of Australian Ethical and the brains behind the fund, says that in the absence of governmental implementation of the kinds of climate regulations he believes are needed — such as cap and trade and mandatory emissions reporting — the country’s large investors must take a more active role. “One of the reasons we formed the fund is that we think individuals need to act if government doesn’t,” Thier, 54, tells Institutional Investor.
In Australia, too, a cap-and-trade system recently fell by the wayside, with then Prime Minister Kevin Rudd dropping the plans in April, citing insurmountable political and public opposition to the idea.
But the idea for the Climate Advocacy Fund was in the works long before that. In 2006, Thier received Australia’s Churchill Fellowship, which he used to research ways to make SRI a better change agent. He traveled to the U.S. and Europe in his search for answers and ended up with a hybrid fund that borrows from some of the SRI models but has its own twist.
With the Climate Advocacy Fund, Thier has developed a new type of shareholder advocacy. It’s not an original concept in the world of SRI, but two things set Thier’s fund apart: First, it will be writing and submitting its own resolutions, with the help of a roundtable of about 20 scientific, environmental and social advisers. Although there are a few other funds that formulate their own resolutions, those documents are typically used to spark a private conversation between the fund and the board. After some sort of agreement is reached, the resolution is often withdrawn. “The resolution itself is usually seen as simply a wedge to get in the door to negotiate,” says Thier.
The second difference relates to the formal process adopted by the Climate Advocacy Fund. It doesn’t intend to just submit a resolution with the idea of quickly withdrawing it and moving into a discussion behind closed doors. “This needs to be more than simply sitting around a table and having a discussion,” Thier notes. “This is a more formalized, more rigorous process, set within the legal and regulatory structures.”
Leslie Lowe, who recently left her position as director of the environment program at the New York–based Interfaith Center on Corporate Responsibility, which sponsors shareholder resolution discussions, is encouraged by Thier’s new fund — though she says it’s too early to say whether the structure will catch on as a trend. If it does, investors need to watch carefully to be sure that SRI firms aren’t adopting the structure just to boost returns by getting around the pesky limitations that negative screening can present. “If you really are an advocacy fund, what did you do to change Exxon and Chevron?” she says. “And can you demonstrate that to me?”
