ESG, short for environmental, social, and governance, is proving difficult for companies to implement in practice, and some have been accused of greenwashing. What exactly is ESG and has it come to the end of its useful life, as the Financial Times has suggested may be the case?
Joining show host Gene Tunny in episode 145 to discuss ESG are some highly experienced corporate governance experts: Dr Rachel Baird and Stephen Howell, part of HopgoodGanim Lawyers. Both Stephen and Rachel advise boards on ESG matters and Rachel is currently facilitating the Law & Sustainability short course delivered in partnership between Pearson and Oxford University.
In this episode you’ll learn how good corporate governance is the critical foundation for everything, and how company leaders should ensure their company’s policies are not dictated by inexperienced people posing as ESG experts pushing their own agendas.
You can listen to the conversation using the embedded player below or via Google Podcasts, Apple Podcasts, Spotify, and Stitcher, among other podcast apps.
Links relevant to the conversation
Dr Rachel Baird, GAICD, FGIA – Director – IcebergSRC | LinkedIn
Stephen Howell – Director – Effective Governance – Part of the HopgoodGanim Advisory Group | LinkedIn
Origins and Consequences of the ESG Moniker (paper mentioned by Rachel in the episode)
Who Cares Wins 2005 Conference Report: Investing for Long-Term Value
Tim Paine scandal a mess of Cricket Australia’s making — and it will get worse – ABC News
How ESG investing came to a reckoning | Financial Times
Transcript of EP145 – ESG: Useful concept or greenwashing w/ Rachel Baird and Stephen Howell, Effective Governance
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 00:01
Coming up on Economics Explored…
Rachel Baird 00:04
We don’t even know what the implications are of lithium, like, is that actually going to be environmentally friendly? We don’t even know; you know, there’s movements about green steel. We don’t know what the impacts are of all the cloud-based servers in the American desert. So, there’s so much more potential to understand what we’re doing.
Gene Tunny 00:22
Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional Economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is episode 145 on ESG, short for Environmental, Social, and Governance.
According to Investopedia, ESG criteria are used to screen investments based on corporate policies and to encourage companies to act responsibly. But ESG is proving difficult for companies to implement in practice, and some have been accused of greenwashing.
What exactly is ESG? And has it come to the end of its useful life, as the Financial Times has suggested may be the case? Joining me to discuss ESG this episode, are some highly experienced corporate governance experts, Dr. Rachel Baird and Steven Howe, of effective governance, part of HopgoodGanim lawyers. Both Stephen and Rachel advise boards on ESG matters. And Rachel is currently facilitating the law and sustainability short course delivered in partnership between Pearson and Oxford University.
In this episode, you’ll learn about how good corporate governance is the critical foundation for everything, and how company leaders should ensure their company’s policies are not dictated by inexperienced people posing as ESG experts, pushing their own agendas. In the show notes, you can find relevant links, corrections and clarifications. You’ll also find details of how you can get in touch with any questions, comments, or suggestions.
Please let me know what you think about this episode. And if there are any topics you’d like me to cover on the show. I’d love to hear from you. Right now, for my conversation with Rachel Baird and Steven Hale from effective governance on ESG. Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode. I hope you enjoy it.
Rachel Baird and Steven Howell from effective governance part of Hobgood Ghanem Lawyers, welcome to the program.
Rachel Baird 02:26
Thanks. Great to be here.
Yeah. Great to be here, Gene.
Gene Tunny 02:29
Yes, it’s good to have you back on again, Steven. We chatted about corporate governance a while back and I reached out to you because I’m interested in this issue of ESG. And you mentioned that Rachel is an expert on ESG. So, I thought, that’s great. Let’s bring her into the conversation. So, Rachel, it’s good to have you.
Stephen Howell 02:51
It’s good, Gene, because, in our practice, we recognize the importance of the Australian; ESG is not just Rachel’s area of practice, she does right across the governance advisory work, but she does have an interest in ESG. So, that was one of the main reasons that we brought Rachel into the business to assist us with that. Because of the increased activity, particularly from boards.
Gene Tunny 03:21
Right. Okay. I’ll be interested to hear about that. Rachel, could you just tell us a bit about your background? When I spoke with Stephen last time, I learned a bit about Stephens background at ASIC and, and before that, in the Police force. I’d be interested in your background; you’ve been in the law, haven’t you?
Rachel Baird 03:43
I have, but I actually started my legal career in the defense force. So, Stephen and I share that; we come from, I guess, regulatory backgrounds, which is good for governance. And I was a lawyer in the Airforce and decided that I needed to have more challenges and got out into the masters of environmental law. And that led to practice at Clayton Newts, which was great; big law firm, lots of exciting work. And then, children came along and I ended up doing academic work and did my PhD in International Environmental law with Gillian Triggs, who was a great supervisor. And I’ve always had this very strong interest in ESG. And even in the late 1990s, that corporate social responsibility concept was starting to take seed. In a way, I feel like I’ve written this wave where environment wasn’t accounted for on the financial pledges, and now it’s very firmly on the board table conversation. And I’m really excited about that. And obviously, of course, social as well, and we’ll unpack that acronym soon. But yeah, I have a strong sort of academic and practical background in environmental social issues. I’ve worked on big oil and gas projects, I’ve been exposed to the social impact, I have done large projects as well.
Gene Tunny 05:02
Right, okay; very good. Let’s get started.
Rachel, would you be able to tell us what ESG is exactly? You mentioned corporate social responsibility; is this a successor to that concept? What is it exactly?
Rachel Baird 05:20
You could say it is. I guess to start with, it obviously means something, because there’re some estimates that, by 2025, around US 53 trillion dollars, will be held in ESG assets, whatever that could be. And it’s a very nebulous term. And I think it’s an acronym with a huge remit. And, I could be cynical and say that it’s like, avocado on toast, or soya balls; it’s the big fad. But I don’t want to be that cynical, because ESG is very, very important. But you can trace its roots back; I think the first time it was mentioned was 1999, the UN came out and they were more forward looking. And they talked about this global compact where they wanted big business and banks and government to be part of a social conscience. And so, there was a report that came out of that global compact, called Who Cares Wins. I guess that was by James Bond,
Gene Tunny 06:23
Yes, yes, very good.
Rachel Baird 06:27
So, Who Cares Wins, and buried in this report was a statement that said, “better inclusion of environment, social and corporate governance factors in investment decisions from there and its use.” Well, that was the statement, sorry; “better inclusion of environment, social and corporate governance factors and investment decisions would lead to better outcomes.” But from there, its use really grew in investment decisions and investment circles. So, for a long time, it was spoken about in investment circles. And I think that’s borne out by a lot of the standards about, climate change related disclosures, financial disclosures, you know; are there climate change related risks or litigations that are going to impact the financial bottom line of a corporation? But gradually, it sorts of crept out of the investment circle.
So, in 2005, there was a UN report that linked ESG factors to financial performance, and that was increasingly being recognized. So, it wasn’t just nice to have that, it was actually proving its worth looking at environmental issues, social issues, and corporate governance, decision governance issues.
Gene Tunny 07:37
So, what was this report, again?
Rachel Baird 07:39
In 2005, the UN report, I’m sorry, I don’t have…
Gene Tunny 07:43
That’s okay. But they were making the case that it does improve financial performance.
Rachel Baird 07:49
And I think that’s been accepted. Well, and truly now, with 17 years later, there’s a definite link between improving your environmental and social and corporate governance factors. I mean, Stephen…
Stephen Howell 08:01
I think it links back to good, or highly effective governance processes and procedures in place. We know from other reports, we know from a lot of research that’s been done, we know from our own businesses, and our own business activity, that, investment decisions often relate to good governance practices within corporations. Investors will look for those good practices; investors will be turned off by those bad practices.
So, good, solid governance frameworks, good processes in place, good controls in place, having the right people with the right skills sitting around board tables, having the right people with the right skills, in the executive teams making those decisions, always attracts investors and investors nowadays will go out of their way to seek out good companies to invest in based on their governance practices. And that’s what Rachel was saying. By having; investors will now look towards those organizations that have good ESG practices in place.
Gene Tunny 09:37
Yeah, they mean to have a closer look at those types of studies because the skeptical economist is going to wonder, to what extent is the correlation rather than causation? or to what extent is it; is it the fact that it’s something else? I mean, it’s the fact that these companies are better run, they’ve got all of these other processes and then they adopt ESG because they like to have that suite of policies and procedures and it may not necessarily be ESG that’s improving their performance. It’s the fact that they’re well run in the first place.
Stephen Howell 10:12
Some really game commentators will talk about percentages of increase in performance levels, based on good governance practice. I think that’s a bit dangerous to do that. Because, it sends the wrong message. And but, I think a lot of it, Gene, is also based around government policy, particularly around particularly the regulators; we’ve got a lot of regulators in this country, we talk about ASIC, our company regulated when we got our pro rail, prudential regulator, we’ve got the ACNC, charities regulator, and all those regulators always talk about the; sorry, not so much, talk about they articulate the level of scrutiny of companies that aren’t abiding by good governance practice. And they will highlight the fact that they need to have the people that are able to make the right decisions. The people that have the background and experience. It’s a big push from regulators at the moment to ensure that directors and executives for that matter, have the right skill, they’re the right people to make decisions that are going to affect shareholders, stakeholders, consumers.
Rachel Baird 11:47
I think economists can be encouraged by the fact that the term ESG started in investment circles, okay? So, it’s earned its chops so to speak, because it’s proven that it relates to a better financial performance. But it’s true that the better organized you are; the better your governance structure is, the better equipped you are to take advantage of opportunities. Some people talk about ESG is a risk, but it’s an opportunity. So, if you’ve got a really well operating organization, then you can go; let’s take advantage of the opportunities that an environmental and social strategy provide us. So, if you just look at environmental, and we’re talking about this before, it’s becoming a requirement of government tenders to show that you’ve got an ESG strategy.
If you don’t, you’re straightaway cutting yourself out of those opportunities to get the government work. We also know with our young workforce, the millennials entering the workforce, they want an organization that’s aligned to their values.
A research shows that employees want to work for companies that have a strong environmental and social moral license, whatever that means. But then you’re going to have more engaged employees, you’re going to have theoretically lower attrition rate, a higher discretionary effort. There’s also benefits to your bottom line where you’re operating more efficient processes; there’s a lot of economic benefits to be gained. And I used to say to my environmental law students years ago, when we get very idealistic, and they go, why does environmental social issues; why do they always lose out to the Big E economy? And I’d say, it’s time will come when it will have a financial value and I think that time has come.
For the ASX 200 companies would not be involved in ESG because it’s voluntary in Australia still. If there wasn’t a financial benefit to doing it, because they still at the end of the day, have shareholders to be responsible.
Gene Tunny 13:46
Okay. I mean, it’d be good to explore that a bit later. And to what extent they’re doing it because it is of economic value, or to what extent is it just for PR, or is it so called greenwashing, that sort of thing? So, we can we can chat about that? There are a couple of things I want to pick up on what you’ve said.
It’s ESG; and you mentioned the statement relates to environment. Is it society or social? Social issues and then corporate governance. So, to create the ESG abbreviation, they’ve dropped the C because ESG sounds better than ESCG, presumably. So yeah, that makes sense. Environment, social, and corporate governance. What typically are these issues; what are the big ESG issues, Rachel?
Rachel Baird 14:37
Okay. Well, before I go to that, I’ll just talk a bit about how I think the term can be misused or misappropriated. So sometimes it’s used for investment analysis and a lot even more and ASIC has made some comments that we can talk about later. Some say we’re ESG friendly, whatever that means. It can also be used from a risk management point of view, opportunity point of view; it can be used in what I call corporate social responsibility context, which is really values-based or morals-based. And then it can also be just its trend, like the vibe of people want to go to the movie, the castle, it’s the vibe.
So, I do sometimes get a bit cranky that people misuse the term or bandied around and don’t know what it means because it’s complex. And so, when people get, I just want an ESG strategy as well, I want one piece. What do you really want from your strategy? And it goes down to what your business is.
So, short climate change, greenhouse gas emissions reductions, sea level rising, they’re huge, big-ticket items, from a global point of view. But your local florist is not going to have much of an impact on that. What does ESG mean to them? So, then you have to really translate it to them and go, well, what are your environment impacts? Are they waste to energy use transport suppliers? What are your social impacts? What’s your supply chain? Are you employing staff properly? There’ll be micro level but, to them, don’t make a difference. And then also, what’s your what’s your governance impact? So, a florist who’s running a chain of florists might say, well, how governance impacts or compliance or decision making policies about employment or whatever they are, but you relate it to the florist.
But then if I move to say, a suite of health, transport operations, they would have completely different E, S and G issues. I guess, there’s no one size fits all, you can’t just roll out a roadmap or a playbook to a company and say, we’ve got your ESG sorted, because it will depend on their level of maturity, where they are in the businesses; some businesses might be so broken that until they get their governance framework sorted, people throw around diversity is a governance issue. Yes, it is. But if you if your governance framework is so broken, I can’t even talk to you about diversity until you get the governance framework working.
I’m working with an organization at the moment, who going on; we need women on the board, we need women on the board. I said, yes, you do. But governance is not static, it’s dynamic – it’s a journey. So, let’s sort out your basic hygiene first and your policies. And then you can talk about diversity on the board. And I think with ESG, people try and promise too much, as in, over promise and under deliver. And I think they really need to be realistic and going, what can we actually deliver? And that goes to greenwashing which we’ll talk about but don’t over promise and under deliver because that’s greenwashing territory.
Stephen Howell 17:34
I think it’s really interesting, Gene, with the activity that we’re seeing, at the moment. Yes, ESG is a big issue. But some of the questions that were being asked, as you know, in my role as the Principal Advisor for effective governance, I spend probably about 95% of my time working directly with boards. And the questions that I get asked all the time by boards is, those questions that you’ve posed today, what is ESG? How do we deal with it? Should we be dealing with it at board level? Should we be just ensuring that we’ve got the right people with the right skills in the management team? Or do we need people on the board? And if we do need people on the board with those skills, where do we get those people from? How’s that going to affect our business? How do we report on that? So, they’re asking all the right questions.
I’m talking about boards in the listed area, in the unlisted area, the public companies, even governments, of course. You know we do a lot of work with government and corporations, and we do a lot of work with charities, which is really interesting; the big charities around Australia. And they are asking those questions, because that’s going to improve their governance footprint, if you like. Particularly when they’re talking to funding bodies, about how they might be operating the hospitals, that we do a lot of work in the hospital; health sectors. in working imagine the ESG implications for within hospitals.
Rachel Baird 19:29
I was just going to say charities are; they’re going to have the biggest impact on the SRP – ESG. Because their whole purpose; their purpose driven for social impact and social change. So that’s where we’re going to see a lot of a lot of good work.
Gene Tunny 19:46
Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 20:20
Now back to the show.
So, one of the criticisms of, I think it’s a criticism of ESG, or maybe it’s a criticism of the whole sort of woke concept in the States, particularly is that there’s this concern by some commentators, particularly on the right, that companies such as Disney, and well, I think Netflix has pushed back on it recently, we chat about Netflix, perhaps. But other companies, Nike, they’ve gone, so woke, so to speak, and that they’ve embraced particular sort of positions. They’re promoting diversity. And I mean, I think diversity is great. But it looks like they’re taking political positions. To some extent they might be; Disney will be changing traditionally, male characters into female characters. There’s a huge debate about all of this. And that, I mean, there’s an argument that it’s gone too far. I’m just wondering to what extent is what you’re seeing in the States, I don’t know, maybe it’s a bit of a beat up? I don’t know. You’ve seen similar things in Australia? Is this something you’re concerned about?
Rachel Baird 21:34
Yeah, it’s really good question. And before I get to that, Steven mentioned something about the boards asking lots of questions. There’s a real dearth in ESG talent. Okay? So, what I worry about and it goes to your question, is there’s not enough people who have the skills to talk about this in an informed and intelligent way. So, and we can’t just call someone a sustainability officer, okay. So that they are so if you’re sticking someone in a big multinational and saying, drive sustainability, if they’re a young generation person, they might drive it from a me too lens because that’s all they know. Or if they’re a greeny who; I shouldn’t say greeny. It’s not in a pejorative sense. But if there’s someone who recycles and, and it has zero waste and doesn’t use plastic and all that, they’re going to drive it from an environmental sense. So, you’ve got to be really careful about what the corporate strategy is.
So, Nike, for example, their purpose is people, planet, profit. And so, they are going to go out and make comments about; and a lot of companies go people, planet, profit, because the planet is environment, people are social and profit is still their shareholders. Like I said before, there is the risk that the term gets misappropriated to drive different agendas. So for example, if we’re going to say that we’re going to have more animated characters – female because there’s been a dearth, and it’s been to male, that goes to gender diversity and social. But is that really part of ESG? Is that really the roots of ESG? And that’s where; you could be debating about that the whole time. But it probably has lost its way. And there’s a really interesting article that I’ve got with me, written by an American academic, where she out of the Wharton School, University of Pennsylvania, and it’s a really good one. It’s called the Origins and Consequences of the ESG moniker by Elizabeth Pullman. And it explores how the term evolved and has been appropriated.
Gene Tunny 23:29
Okay, I might put that in the show notes. I’ll have a read of that. Okay. Good stuff.
I’ll send you the link
Stephen Howell 23:35
From the Institute of Law and Economics, Gene.
Gene Tunny 23:39
Oh, good. Excellent. So, another thing I wanted to chat about was, you mentioned the younger cohorts. I mean, we’ve got, millennials have come into the workforce. And now, we’re getting what came after Millennials or Gen Zs; they’re coming in.
Rachel Baird 23:58
I forgotten I’m a Gen X. I’m just sandwiched between the baby boomers who spend my inheritance and my children who inherit it.
Gene Tunny 24:05
Yeah, same here. But I remember when I first entered the workforce, I mean, I don’t think anyone cared what I thought about. I wouldn’t have been presumptuous enough to try and change the culture of the, the organization of the company. I don’t know. But yeah, it’s extraordinary. It’s become an issue in the States because I think, it was Netflix; there were some employees at Netflix who complained about the Dave Chappelle special. I don’t know if you’re aware of that. Or was it, Josh Dave Chappelle the comedian and Ricky Gervais has had a controversial special on recently, and whether they’ll make comments that upset some of the people working because the people in the organizations think that they’re not respectful of the rights of marginalized groups or whether it’s gays or whether it’s trans people. And yes, there was some pushback internally, and then Netflix, I think, put out a memo that said, ultimately, we have to make the business; the business has to work, and we have to produce content people want. Just settle down people, was basically what they were saying. I thought that was interesting, because ultimately, these companies have to make money. They do have an obligation to shareholders, don’t they?
So, how do companies balance these considerations? Because the traditional economists view and what Milton Friedman argued, in that infamous Newsweek article in the early 70s, was that companies just owe an obligation to their shareholders. And so, they’ve just got to maximize profits. That’s what they do. They should abide by the law, but they shouldn’t go beyond that and do much more for the environmental social issues, and that they should just maximize profits. That’s how they’ll maximize well-being.
But is that right? That companies still owe an obligation to shareholders, don’t they? And how do they balance all of these things?
Rachel Baird 26:04
It’s a double-edged sword because this new phrase of stakeholder capitalism has been gaining traction. And then it’s, well, how long is a piece of string? Because shareholders are stakeholders, but so are the community that you operate in. So, if you’re operating in a developing country, they’re stakeholders. So are your employees, so are your suppliers, so is the government. So, how do you keep all of those stakeholders happy? It’s a huge balancing job. And I think the key is to be really strong on what your strategy is, so that you’re not doing what I call the 24/7 news cycle, knee jerk reaction, that if someone says something, you go; I’ll be better put out a press release to keep them happy. The board goes back to its strategy and goes, well, look, we can’t keep everybody happy all the time. But our strategy is this, we’re happy with it, we’ve deliberated on it, we in a moment of quiet deliberation, we agree this was our strategy. So why in a moment of crisis, would we deviate from our strategy and make some kind of knee jerk comment? A bit like I guess, if you want to say cricket, Australia, when they handle the Tim Payne thing, stick to your strategy.
Gene Tunny 27:18
Can you elaborate on that?
Rachel Baird 27:20
I don’t know a lot about it. But I just think that they probably acted in the heat of the moment when they decided to part ways with Tim Payne rather than sticking to; and again, I wasn’t in the boardroom, sticking to a strategy and going, we don’t need to feed the 24/7 news cycle, we can take a moment, we can issue a press release that talks about strategy. So, the Netflix one sounds like they’ve done something where they’ve gone no, this is our pathway. We’re not going to keep everyone happy, but as long as we’re not being egregious, we’re being socially and environmentally, sustainable and responsible. We’re not going to apologize for who we are. I think that’s where boards are the second guessing themselves a bit trying to think well, we just got to keep; so I think really, Cricket Australia was trying to stay on the right side of the me-too movement. But if you ever try and stay on the right side of a movement, you’re never going to be on the right side of it.
Gene Tunny 28:13
Gotcha. So, Tim Payne was an Australian cricketer. And I’m trying to remember the circumstances; did he have an affair with someone who was working at Cricket Australia?
Rachel Baird 28:21
I think there’s something about that incident, messages exchanged or something. Okay, even the facts aren’t really relevant. It was I was more raising my eyebrow about how it was managed.
Gene Tunny 28:33
Right. Okay. I’ll put some links in the show notes. Can’t remember the facts.
Rachel Baird 28:39
And he was ultimately stood down as captain of Australia for something he did several years ago.
Several years prior.
Gene Tunny 28:46
Right. Okay. I’m interested in the companies that are asking for this. You talked about a wide variety of companies; there’re public companies, but what about private companies where the owners have a strong control over the operations of the company? I can see why charities would want something like this because they’re trying to achieve some social purpose. But what if you’re an Elon Musk or something; actually that’s not a good example, because these companies are public, aren’t they? But he’s been trying to privatized Twitter, but what about private companies? Are they immune from this or they’re not? Do they want ESG as well? what’s driving…
Stephen Howell 29:33
They might not want it now, but particularly, I always think about the private companies being some of the big building corporations, some of the big builders that are building not just homes;
Rachel Baird 29:51
We’re getting commercial work that needs to comply;
Stephen Howell 29:55
They need to comply. Yeah. It’s really interesting. Yes, the private companies are going to be involved as well.
Rachel Baird 30:05
They’re slower, they’re definitely slower than public companies. And I’m seeing in Europe because I’m, I’m involved in this course that’s run by Oxford University. But I’m employed by Pearson, I’m not allowed to say I’m employed by Oxford University even though I teach the university course. And I’m seeing talking to all my students who are from all around the world, that I mean, environmental law really started in Europe anyway, and those streets ahead of Australia, and we’ve been following the lead of the Europeans. And the private companies are jumping on and realizing they have to comply with ESG requirements as much for their customers, their employees, and also to be competitive, definitely. They might not have the stakeholders who are shareholders, but I’ve got all the other stakeholders.
Gene Tunny 30:55
Okay, so this is something that will you mentioned, the younger, potential employees, it’s something that they care about that if you want to get the best people, you need to show that you’ve got ESG. Right? That’s interesting.
Rachel Baird 31:11
You’ve got everything, so you care about your staff, you’ve got good leave programs. You do waste recycling, and you give them leave days to do like, say, a law firm, pro bono, or whatever it is. You’ve got a social conscience, what does that mean? it’s defining it for the firm. Like you said, when you join the workforce, it was just you just turn up and work and do what you’re told. But now it’s like, I know, I want to have a work life balance, but I also want value in the work I do.
The worst thing my son told me was, I don’t want to grow up and be like you because you just leave the house and you look sad, and you go to work, and you come back and you’re tired. I really do enjoy my work when I’m at work. But they seem to think there’s a utopia out there in the workplace. I don’t know; it is still works.
Gene Tunny 32:02
Yeah. Well, ultimately, if you’re in business, you need to make money, you need to make a profit to keep going. just with this regulatory requirement or this requirement intenders, that you need to demonstrate your ESG credentials. I know for government that’s right; is it also corporations that are pushing this on their suppliers as well? Are they pushing for ESG?
Rachel Baird 32:32
It’s becoming more evident. I was talking to a very large company, I won’t say what industry they’re in, or it might be easy to pick them. But they found out dealing with other commercial providers that they were needing to show that they had an ESG strategy. If you think of it as like a food chain or supply chain. If they’re tendering for work, they needed to be able to demonstrate that the suppliers that they deal with how socially responsible. So, it goes up that whole ecosystem.
Gene Tunny 33:08
Gotcha. Yeah. Okay.
Stephen Howell 33:11
Also Gene, as I mentioned earlier, the push; there’s a significant push from government and regulators, and my experience is that when there’s a push from government, when there’s a push from regulators, boards and corporations will take note because they need to take note; because government and regulators don’t have a heightened scrutiny in particular areas for no reason. They do it based on what’s driving that, and it’s normally driven by shareholders, the people, those investors and the general public who want to see higher levels of ethics and responsibility in organizations. So, that’s what’s normally drives it.
And so, boards and organizations will take note of what the regulators have to say and as we were saying earlier about the; yesterday, ASIC made a press release in respect to that whole issue of what’s described as greenwashing. particularly Australians, the Australian Securities and Investments Commission, and, who are responsible for Australian or most of Australians companies.
It’s interesting that they targeted superannuation funds and managed funds. There’s a similar push from the corporate ring at the prudential regulator, ASIC being the corporate regulator; APRA, the Australian Prudential Regulation Authority, being the prudential regulator, the ones that the regulator looks after the financial institutions. Being, of course, some of the super funds and managed banks and insurance companies. And, in fact, I was only talking to a life insurance company this morning, one of their clients along the similar lines about skills that are needed in particular areas, and this particular area came up.
It’s all about what the regulator is saying, what ASIC is saying is that, these firms need to be very careful about how they represent their financial products, or their investment strategy. Particularly around being environmentally friendly, sustainable and ethical. If they market their products as being ethical and sustainable and environmentally friendly, they need to be able to show that that’s in fact, correct.
What ASIC is saying today is, these promoters need to use clear labels and they need to clearly define what sustainability terminology they’re using, they need to define that. What does that actually mean? This product will help maintain a sustainable, organization or product. But unless you properly describe it, it doesn’t make much sense, and clearly explain how sustainability considerations affected in to the investment strategy. How does that all work? How do you actually factor all that into any investment strategy?
They made it clear; the regulators made it clear that it’s what they call it a priority area of focus. And they’re going to be looking at it and monitoring the market.. And they specifically highlighted that any misleading claims about ESG and sustainability will come under their notice. What I’ve seen of recent times, Gene, is how the regulators making these sorts of comments about monitoring, and about how they’re going to be, really watching the market clearly. So, it’s not just ASIC, it’s APRA, and it’s the ACNC – the charities regulator,
Rachel Baird 37:54
Even the securities [exchange] ASX has come out and said, companies should check their sustainability claims. But what’s interesting is I think, this comes off the back of litigation. So, Australia is a bit of a hothouse of litigation. But in America, there is a shoe wear company called Allbirds. And they manufacture wool; they’re called slippers, but they’re not slippers. They are like soft linen, sunlight pleasure shoes, and their statement was that their wool was sustainably sourced. Now somebody in New York who had a lot of time on their hands delved into that and challenged that in a New York court and found that their wool wasn’t sustainably sourced or their statement was greenwashing. And I think everyone in Silicon Valley was wearing Allbirds shoes.
But then in Australia, we’ve had Santos; there was a federal court claim made by the Australasian Centre for corporate responsibility, alleging that they engaged in misleading and deceptive conduct saying that they would produce clean energy and had a clear pathway to net zero emissions. So that was what I mean about over promising because, they were tested and then the Commonwealth Bank, a shareholder, must have been a large individual shareholder, made a claim in a federal court, and they ordered that he be given access to documents in the bank’s premises to, I guess, scrutinize the bank’s decision to finance oil and gas projects. So, more and more claims are being challenged to be verified the accuracy of those claims. And so, as Steven mentioned, the ASIC information sheet that just came out, came off the back of ASIC’s own review. They just looked at a sample of superannuation funds and found there were some areas for improvement.
We’re not at the stage yet, as the UK and New Zealand where they have actually; the government has mandated there’s got to be disclosures of financial related climate change, material risks or material disclosures. We are not there yet. But I think the change of government, they’re probably testing the mood of the public. I don’t think we’re that far away from some kind of mandatory reporting or tighter scrutiny. And the ASIC guideline is enough to put every single ASX company on notice to go. We can’t be cavalier anymore about ESG and greenwashing and just say, those terrible shows you see where you have marketers ago, just put that out that will do. This can’t happen anymore because it will be scrutinized.
Gene Tunny 40:38
I better make sure I understand what the actual requirements are now. Is it under the Corporations Act and other countries would have, I mean, the UK would have a Companies Act? And the US has got some legislation for corporations, but companies are supposed to look after the interests of shareholders or obligation to shareholders. I guess we’ll talk about Australia, given you’re working in this jurisdiction? What are the requirements for reporting on environmental and social and governance issues at the moment? They don’t have any, do they?
Rachel Baird 41:09
Directors have a responsibility to exchange due diligence in relation to climate change.
Gene Tunny 41:13
Due diligence in relation to climate change? That’s included in the corporations act, is it?
Rachel Baird 41:20
There’s no requirement to produce an ESG report, for example. There is a preference from shareholders, that any such report was integrated with the financial report, because a lot of companies are doing standalone reports, but there’s no requirement to do; just a financial disclosure report, is all that’s required.
Stephen Howell 41:39
So, directors just generally have a duty of care and diligence. Like, that’s one of the fundamental wrong to govern, with due care and diligence in the interests of the organization. I just think that we really do need to; I will be advising my clients to be very careful about how they label and explain any of their products, because any misinformation that will erode investor’s confidence in the Australian markets, is going to be looked at very, very closely by the regulators, and by the market supervisor, the ASX.
Gene Tunny 42:33
Yeah, I have to look into that provision about climate change, because I’m going to be the skeptical economist again. Because, the government saying you’ve got to give due diligence, or you’ve got to pay attention to climate change. But what’s wrong with a company just abiding by the law? And if there’s no carbon price imposed? What do you do? I mean, how do you know what to do? I mean, what if you do too much, and that adversely affects your company and the viability of your company? I mean, you’ve got employees, what if it affects our competitiveness relative to other countries?
Anyway, I know, these are big questions, and we can’t answer them today. But it just strikes me as just over the top to have that in the act at the moment.
Rachel Baird 43:21
It relates to financial disclosures. So, you’re obligated to make financial disclosures, material risks of climate change might be material risk. You’re not obliged to make non-financial disclosures. Does that makes sense?
Gene Tunny 43:34
It’s not imposing an obligation to do anything in a positive sense, to get to net zero? I misunderstood what you are saying.
Rachel Baird 43:43
There’s no obligation. And again, I don’t have it right in front of me, but I know that there’s been talk about; I wish I could remember the name of it. But some kind of safety mechanism, it might be called the safeguard system for over 200 Children 21 large emitters in Australia, those companies to help them transition. So even if there is something that comes in, there’ll be a recognition that you can’t require, say AGL for example, or Santos to suddenly pivot and stop emitting greenhouse gases, because otherwise we’d all be sitting around in the dark.
There’s got to be that pragmatism that we want to move to; not just net zero but just reducing our footprint waste use. Food waste is one of the worst contributors of carbon emissions and people don’t even talk about food waste. So, there’s all sorts of ways we can reduce our carbon emissions.
Stephen Howell 44:47
I saw a great thing, talking about food waste; I saw a great innovation just recently, one of our colleagues showed us, was in here in Brisbane or around and all the public hospitals, you can only just imagine the food waste within public hospital systems. And it all traditionally just gets delivered out to a waste disposal facility somewhere. What they’ve been doing is there’s a company been gathering all waste food up and turning it into fertilizer and putting it into carryback packaging and selling it as fertilizer. It’s just amazing. Rather than take it all the way and dispose of it, turn it into something that’s going to be useful and, and making money out of it as well. So, turning it into fertilizer
Gene Tunny 45:45
That’s useful, particularly because the price of fertilizer has been spiking, hasn’t it because the cost of the inputs;
Stephen Howell 45:54
I thought that was a very innovative, sort of a process; deal with what would otherwise be a total waste of product.
Rachel Baird 46:05
And that reminds me like ESG, you can take it really, really high and say okay, what’s Wesfarmers doing about ESG? Or you can take it really, really low and say what’s Rachel doing about ESG so in where I live, I can have my little worm farm and my little recycling compost thing and I cannot use plastic; that’s the thing, it’s such a huge term that can go across all these layers of human activity.
So, if your listeners, I’d encourage them to say well, what can you do to ensure you don’t have a net zero? Some of my students at Oxford are talking about an individual passport, so when you buy something you get to choose, you might go and the product actually has a little ESG rating like the heart smart or the energy rating you can go I’m choosing that loaf of bread because it has a lower carbon footprint. Yeah, and that goes onto my little smartwatch and I can show everyone that my carbon footprint, kind of gamify which the young people would like but we’re not there yet.
Gene Tunny 47:02
Just as long as this doesn’t end up going to some government agency…
…We’re going to have to start wrapping up. This is a good conversation.
Stephen Howell 47:29
Isn’t it the smallest garbage bin you’ve ever seen in your entire life, Gene?,
Rachel Baird 47:34
Does that makes you rethink? That’s the bin in our office.
Gene Tunny 47:37
It’s slightly bigger than a Rubik’s Cube.
Stephen Howell 47:46
That’s what I was thinking. It’s the size of a Rubik’s Cube.
Gene Tunny 47:49
Yeah, that’s tiny. I was just going to ask you about Wesfarmers; that owns, is it Coles? One of the major…
Rachel Baird 47:57
I think they’ve diverted from Coles, they did okay. Bunnings and Officeworks.
Gene Tunny 48:03
Right. Okay, so they’ve got some retail businesses in Australia.
Rachel Baird 48:07
And then, they got the chemicals part in their fertilizers partners, WesCEF.
Gene Tunny 48:12
I know that at least one of the major supermarket chains is trying to have it all of its energy, renewable energy, by some date, and I think they’ve signed some agreement with the clean energy company here in Queensland, if I remember correctly, I’ll try and find some information about that.
Rachel Baird 48:29
That’s really smart because you’re going to get customer loyalty. So, a lot of my friends who don’t work in law at all, but they ring me up and they say, oh, shop here, because that’s an environmentally friendly company. I don’t always take it on face value. I like to investigate and make sure they actually are. But it’s a great PR tool if you’re accurate. If you’re not accurate, you could be in front of the court.
Gene Tunny 48:52
That will cost you …I mean, if you’re making bold claims, like Volkswagen years ago, I mean, they got into trouble for what they were alleging about emissions, didn’t they? They were doctoring or they were manipulating their test results on the diesel engines, okay.
I’ll just ask you finally, about this article that Stephen and I both found independently, it was published in the Financial Times, and then it was picked up by the Australian Financial Review; how ESG investing came to a reckoning. This is the sort of thing you expect to see in the Financial Times – very good paper. The term ESG is less than two decades old, but it may already be coming to the end of its useful life. Have you had a look at that article at all, Rachel? And any thoughts on that?
Rachel Baird 49:48
I did. Steven, do you want to start?
Stephen Howell 49:49
I think that’s just a way; what I read into that, Gene was that it was a way to, once again, highlight ESG, to say, it’s been around for a long time, we haven’t really sort of made too much of a movement. But really, we have. This what I read into it that it was a way to heighten the level of understanding of ESG. I don’t agree with that comment that it’s not going to be around, I think it’s going to be around for a long, long, long time. And it may even change shape in some way. But I think, from the way I look at it, Gene, from a governance perspective. And as a forensic accountant coming out in me, looking at the evidence and looking at the impact that ESG will have from a governance point of view, I just think it’s just that another level of good governance practice.
Gene Tunny 51:06
Stephen Howell 51:07
That’s the way I’d describe it.
Gene Tunny 51:09
Yeah. I just thought I’d ask because this article is getting shared around a lot, and particularly by economists, who say, I’ve been saying this all along.
Rachel Baird 51:18
That’s interesting, because a couple of weeks ago, there was a Financial Times conference, where a very senior banker at a bank whose name escapes me, made a comment about how those hysteria carry on and it’s the same as like Y2K, and I think he got stood down, didn’t really test the waters. So, this might be the Financial Times way of saying, it’s a movement that’s come and gone. I think it’s not, there’s so much to do, like, we don’t even know what the implications are of lithium, like, is that actually going to be environmentally friendly? We don’t even know; there’s movements about green steel, we don’t know what the impacts are of all the cloud-based servers in the American desert. So, there’s so much more potential to understand what we’re doing. And every time we have a decision to reduce our impact, we don’t know what the trigger is for more impact.
This is not why we’re here and we’re aware. I mean, we can say that we’ve evolved as a species. And going back to my polar exploration, when mankind, because it was men first started exploring, they just left their rubbish in Antarctica, that didn’t take it back, right? So it’s taken years and years to clear those rubbish dumps from Antarctica, because it doesn’t degrade, right? There’s nothing to degrade it. So, we’ve just evolved as a species to understand that we can’t just keep polluting our environment, and keep abusing our people. That’s not going to go anywhere.
Gene Tunny 52:47
Yeah. And that’s why we have regulations and laws.
Stephen Howell 52:54
It’s like that concept, Gene, that I’ve been sort of, looking at closely recently about the consequences of decision making. And, the decisions that you make in respect to whatever the issue might be, what are the consequences? What are the likely consequences into the future? And so, we’re talking here about, ESG and environmental issues, what are the consequences, many decisions that we make in respect to our environment. The consequences of the decisions that we make in respect to the social impact within Australia and also corporate governance issues. I think you might be aware, I just said, there’s a fabulous book that I’m reading at the moment called Leadership by Algorithm.
Gene Tunny 53:45
Yes, my mother bought it for my birthday based on your recommendation.
Stephen Howell 53:57
It’s written by Professor David de Cremer. It’s all about artificial intelligence, but he does talk a lot about the consequences of your decision making. And he relates it to real life stories. It’s really interesting stuff.
Gene Tunny 54:16
I’m going to read it. It does look great. And I’ll see if I can get him on the program.
Stephen Howell 54:26
I think it’d be great to; he told a fabulous; I went to a conference that he spoke at, he related that to a to a decision that was made by the Singapore government, in respect to the COVID app.
Gene Tunny 54:49
Stephen Howell 54:52
And the COVID app in respect to identifying where people might be at any point at the time, so that they could be tested, etc. And then what happened there in Singapore is that the Singapore government then decided to go one step further and use the information for law enforcement. I am sure it happens in other jurisdictions as well. But it was only the Singapore government got caught. I’m sure we got closer in Australia, there might be something similar. It’s interesting, isn’t it? We think that okay, the government is going to do this for us, to help us, but we had no idea that we’re going to move further and use it for war enforcement purposes.
Gene Tunny 55:44
Yeah, okay. I just thought I’d bring up that FT article, because it has been shared around a lot. And I’ll put a link in the show notes, unfortunately, as paywalled, though, but anyway, I’d recommend getting a subscription to the FT if you don’t already have one, if you’re if you’re listening. I just what I did want to point out was that, one of the factors is this war in Ukraine, which is arguably making it more difficult for companies to meet ESG goals. I’ll just read this out before we wrap up.
On top of the allegations of greenwashing at the industry’s highest levels, there is the impact of Russia’s invasion of Ukraine, which is forcing companies investors and governments to wrestle with developments that at times appear to pit, the E, the S and the G against one another. For example, governments in Europe are reneging on environmental goals by turning to fossil fuels to reduce dependence on Russian gas in order to fulfil ethical goals because they don’t want to buy it from the Russians. They’ve got someone who’s a managing partner at Lombard od air is it? I probably mispronounced that.
The war in Ukraine is an incredible challenge for the world of ESG says Hubert Keller. This conflict is forcing the questions; what is ESG investing? Does it really work? And can we afford it? And that’s what we’ve been talking about today, Rachel.
Rachel Baird 57:07
I know; what it goes to that whole social issue, if you really want to take the high moral ground and the UN’s involved, and we’re not political. I’m not being political. But if you’re saying what Russia is doing in Ukraine is hugely immoral socially, because of the civilian casualties? Then that’s highlighting a failing of the whole international community to try and do something for social good. And I mean, I know you can’t just stop the war because you can’t take action against Russia, because then you’d have world war three. But you can see how ESG can just apply to any conversation, right? So don’t think it’s failing. I think it’s just showing how complex it is. Because there’s so many levers and there’s so much human interaction.
Gene Tunny 57:50
Exactly. And there are tradeoffs. And I mean, this is what economists would say. And ultimately, the companies have to be sustainable financially, so they can keep people employed, they can keep operating, and so if you can do these other things, and then that’s great, but fundamentally, that’s what they need to do. They need to produce products that people want to consume.
Rachel, we should wrap up. Any final words, I mean, anything you’d like to say anything you’d like to push back on anything? If you want to push back on anything I’ve said? Or if you’ve got other points you did want to make that haven’t been made, then please make them now.
Rachel Baird 58:27
No, I think what I’d like to; if your listeners if there’s anyone out there go, where do we start on this ESG journey? Is to just get the right advice from the right people who actually have the right credentials. Because there is a lot of; there’s a vacuum, we need skills on ESG, and the vacuum has been filled, and it’s not being filled equally, if you know what I mean. So, if you want to start embarking on this journey, or you want to have a critical conversation on ESG, do some reading yourself first, but then really test the credentials of the people that you’re talking to. Because you can’t afford to make a misstep on this now that we’ve got the heightened scrutiny by regulators and also stakeholders, which are not just shareholders on what you’re doing. So, I guess, I get a bit cynical that there’s the people who suddenly go, Hey, I’m an ESG expert, and I’m going, yesterday, you were, like a corporate lawyer. You can’t just be an ESG expert overnight. So, people please, look for someone who knows what they are.
Gene Tunny 59:26
So, you need the experience?
I think you do.
Do you need specific training?
Rachel Baird 59:30
Not necessarily. I’m talking to some people at the moment who are experts in greenhouse gas emissions measurements, right. So, it’s a huge ecosystem of talent from environmental scientists to accountants, who are forensic accountants to lawyers to bankers, so pick the person for the problem you’ve got at the time. So, it’s not particularly credentials, just matching. So don’t think you’re going to get one person to solve your whole ESG problem. It won’t happen
Gene Tunny 59:59
Stephen Howell 1:00:02
That’s why we have an expert in Rachel.
Gene Tunny 1:00:06
I’ll put links to effective governance out of the hub good Ganon. Lawyers here in headquartered in Brisbane, but you work or live in Australia, you probably work internationally as well.
Rachel Baird 1:00:19
Yeah. I’ve practiced in most, a lot of different states in Australia, because we have environmental law, is state based, is Commonwealth based, it’s international. Again, you’ve got to understand how they operate. It’s quite complex.
Gene Tunny 1:00:35
I have to come back to environmental law. There’s so much of our law that’s driven by these international agreements and rams are and all of that, but that’s a topic for another time.
Okay. Rachel Baird and Steven Howell from Effective Governance; I’ve really enjoyed this conversation. Thanks so much for your time and your great insights. Really appreciate it.
Stephen Howell 1:00:59
Always great to be with you.
Gene Tunny 1:01:01
Rachel Baird 1:01:03
Thanks, I really appreciate the chance to talk about something that I’m passionate about.
Gene Tunny 1:01:08 Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to firstname.lastname@example.org and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.
Big thanks to EP145 guests Rachel Baird and Stephen Howell, to the show’s audio engineer Josh Crotts for his assistance in producing the episode, and to Peter Oke for editing the transcript.
Please get in touch with any questions, comments and suggestions by emailing us at email@example.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.