• Alex Hont

Episode 45 - You say ethical, I say responsible! - How to incorporate principles of responsible inve

Updated: Mar 4, 2020

Climate change is very much front of mind at the moment after the horrendous bushfire season we are in the middle of here in Australia. It is starting to make its way into the decision-making process of investment firms and fund managers as key drivers of long-term profitability.

On this episode of the #mastersoffiancepodcast we take an in depth look at the current investment landscape, dissect another 3-letter acronym in ESG factors (Environmental, Social & Governance) and look at how you can incorporate some principles of responsible investment into your portfolio. Have a listen!

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Alex Hont 0:17

Welcome back to the masters of finance podcast. This is the first one that Chris and I are back in the studio for 2020 after our little money for jam series, and given what's happened over the Australian summer with the bushfires, and responsible investing coming to the fore, we thought we'd do an episode on it even though we've done one previously. So please have a listen to hear all about how you can invest ethically, sustainably, responsibly with climate change in mind. Have a listen.

Chris Haggart and Alex Hont are authorized representatives of Moran Partners Financial Planning. Any opinions expressed in this podcast are solely our own and do not reflect the opinions or views of Moran Partners Financial Planning or any entity we are associated with. This podcast is for informational purposes only and should not be used for or as a constitute investment advice

Okay, Chris Happy New Year 2020 I know we've done three podcasts, or two podcasts in 2020 already but here we are.

Chris Haggart 1:13

We weren't actually here though so

Alex Hont 1:15

no that was, we put those in the bank but welcomeback.

Chris Haggart 1:17

Welcome back everyone.

Alex Hont 1:19

How was your Christmas break?

Chris Haggart 1:22

I think I'm I don't know whether people are sick of you might be sick of hearing this but it was amazing.

Alex Hont 1:28

Why so Chris?

Chris Haggart 1:29

Well because you Why was it amazing? or why are you sick of hearing it?

Alex Hont 1:33

No I can listen to you a little bit more. But I only got this last one is the last time I'm going to ask you about that.

Chris Haggart 1:39

Yeah, so Naomi and I, my wife and I went down to Tasmania and for those of you who are walkers, you might have heard of something called the Overland Track. So it's a six day hike. We put everything on your back in and get rid of human communication essentially. So no mobile phones, no TV, no tech, no nothing.

Alex Hont 1:58

I joke that I did that, you know a couple of years ago went down to the Overland Track although I did it from the car park at Cradle Mountain and walked 200 meters of it then turned around and walked back.

Chris Haggart 2:08

Still beautiful though.

Alex Hont 2:10

It was amazing, Scarlett and I had a great time.

Chris Haggart 2:13

So yeah, loved it. Just, you know, no electricity either which was awesome. So circadian rhythms got reset, like bedtime when the sun went down, got up when the sun went up, and it was just magic. So yeah, awesome. Good break.

Alex Hont 2:28

Any trouble breathing down there?

Chris Haggart 2:30

No, we had a little bit of smoke in Launceston just around before we left and when we got back but um, nothing whilst we're actually on the track so well.

Alex Hont 2:40

Yeah, I mean, the reason I bring it up is everyone anywhere around the world pretty much is well aware we've had some horrendous bushfires pretty much was sort of Christmas through new years and I think New Year's Eve was one of the worst, wasn't it?

Chris Haggart 2:51

Yeah, it was pretty bad.

Alex Hont 2:53

And the air quality in in Melbourne was particularly bad I know in the lead up the air quality in Sydney or even in from November the air quality in Sydney was pretty poor as well and I mean, you know being us being in Melbourne we thought ah nah it can't be that bad, what are they whinging about and then as soon as it hit us

Chris Haggart 3:08

Oh my god the air quality is so bad.

Alex Hont 3:09

Yeah, it has to have been worse here than it was up there.

Chris Haggart 3:14

What about you mate? What did you get up to?

Alex Hont 3:16

We were mainly around because we're, we're, we just started knocking down half our house and and trying to build it back up to make it a bit safer and fix a few of the problems with it so we were packing and then we moved just before I got back into the office.

Chris Haggart 3:30

Yep, yep.

Alex Hont 3:31

So not not as much fun as what you had but still good though. Nonetheless exciting time.

Chris Haggart 3:37

That's exactly right.

Alex Hont 3:39

But the bushfire issue I guess I'm has really sparked a lot of

Chris Haggart 3:43

Yeah hasn't it

Alex Hont 3:44

a lot of debate, a lot of action. And, and I think introspection maybe but from a lot of companies as well as individuals.

Chris Haggart 3:53

Yeah I think it's focused a lot of people's minds, that's for sure.

Alex Hont 3:55

You know, I know in the news, it's been the catalyst it's been described as possibly the catalyst to to move a lot of people and organizations into doing something about climate change, where for a long time it was thought ah yeah you know, one day maybe we'll get there maybe it's real maybe it's not I don't know.

Chris Haggart 4:11

Well, it's one of those things, isn't it? Where it's been an ideological debate rather than a scientific debate. So, you know, it feels like

Alex Hont 4:20

Inspite of the science

Chris Haggart 4:21

Correct.Yeah. It it's easy for to millennials to say that. Yeah, focused a lot of people's minds and there seems to be a lot more pressure and it seems like that that seems to be having some sort of effect on those in Canberra.

Alex Hont 4:36

Yeah. Well, yeah. Well, that remains to be seen,

Chris Haggart 4:38

Correct. Yeah. Initial noises. Such but we'll see what happens with action.

Alex Hont 4:43

What's been fascinating though, is that and this has been going on for a little while now that that there's a lot of governments and companies that are saying we're sick of waiting for you Canberra to come to the party and give us a some policy around this. We're gonna do it ourselves.

Look you look at when I think when Trump got in California said, Well, you know, you might not have your own energy target or your own emissions target, but we're going to bring in our own. So the Victorian Government, I mean, Daniel Andrews have been pretty vocal in bringing one in. And I'm not saying he's perfect, because there's still plenty of things that he lets go on from a climate point of view. But at least there is there's been some leadership from these maybe not the states. So the federal government's to try and move about implementing these things that they see as important.

Chris Haggart 4:59

We're gonna drive it. Yep.

Yeah. And I think that's just the point, we've got to where, you know, people have just decided, well, if you're not going to do anything, we'll do it ourselves. And that stretches to the investment world as well.

Alex Hont 5:39

And very much so because at the end of the day, you know, we particularly Australia, we've got so much money invested and might not feel like that for a lot of people but the superannuation system is worth I'm not sure what it's worth now, but it's in the trillions, or at least it's over 1 trillion.

Chris Haggart 5:53

Yeah. It's huge. Like and it's an, in a sense, it's an we're gonna talk about this during the podcast. That, with that investment comes a lot of shareholder votes and a lot of power. So, you know, how do we how do we wield that? And who's in control of wielding that?

Alex Hont 6:10

Well, that's right. I mean, you actually have a choice as an individual about where that money goes. And you have an ability to exercise some influence, however minor, although if we, you know, if we run with the pm's notion that just because we're so small and insignificant, we can't make a difference. Maybe, you know, that line of thinking might not get you where you what you want.

Chris Haggart 6:31

No that line of thinking doesn't get you very far.

Alex Hont 6:34

So let's think about this. You know, Adani's been a big a pretty polarizing

Chris Haggart 6:39

Well that was there prior to the election that was quite a touch point or a talking point.

Alex Hont 6:45

Well, it is but I think it's been going on before the election and long after as well. I mean, this is still something that that the people in Melbourne keep protesting about. I'm not sure about the rest of the country. I mean, I know you look back at the election, it was a pretty big point for why Queensland probably voted liberal.

Chris Haggart 7:02

Well that's what they were saying that it was a bit of a middle finger to the southern states saying don't come up here and tell us how we should run our lives.

Alex Hont 7:09

Yeah. Well, I think the prospect of you know what the jobs that were being talked about as being part of that project was pretty enticing for a lot of Queenslanders. Yep. And so, yeah, it was a really big issue for the for the election. But what's been some of the interesting fallout is that there have been a number of financial institutions that have refused to, to loan the money to it to Adani.

Chris Haggart 7:34

Yeah, well, that's it and they're finding it hard to hard to finance it now. And I don't think that's it's not even necessarily Adani. I think that's across the board. And I think given what has happened over the summer, in terms of the at least, media coverage, it's kind of almost opened the floodgates for stories about about climate change action, and some of that has started to come through on the investment front.

Alex Hont 7:58

Yeah, I even saw it. Well but just before we get to the investment front I saw that Greyhound coaches have also pulled out of a contract that they had with Adani to move people to and from their mines. So it's interesting this flow on but the right the investment world is starting to change some of their ideas about that. As an example, you know, relatively recently BlackRock who are probably one of the biggest

world's biggest fund manager, right. They run index funds, so Ishares in the US. As well as a whole bunch, Ishares in Australia, BlackRock in the US, yeah,

As well as a whole bunch of other funds as well, I mean, the Ishares is not just their only vehicle. And Goldman Sachs another investment bank from the US have both come out and said, we are divesting ourselves of thermal coal, thermal coal is not going to be something that we invest or loan money to. And here in Australia, ANZ have done the same thing.

Chris Haggart 8:51

Yeah, well, they haven't taken as a strong a strong view. So Goldman Sachs has said that they've ruled out thermal coal financing for either new mines or power stations globally, whereas the ANZ have shed more than 700 million in thermal coal loans within the next four years. So they're going to reduce their exposure, which is a 75% reduction. So that brings them into line with the NAB and the CBA. But not saying no nothing at all.

Alex Hont 9:19

Yeah, yeah.

Chris Haggart 9:21

Yeah, it's still big. In terms of especially in energy production from a thermal coal perspective. That's, that's, that's pretty significant.

Alex Hont 9:30

Now, I sort of think that this is really very much a matter of economics rather than principle to for the for the banks for these institutions.

Chris Haggart 9:38

Yeah a hundred percent.

Alex Hont 9:39

Yeah. Because they're not you know, their creed I suppose these you know, profit for shareholders is the

Chris Haggart 9:45

Yeah, the Almighty. Yeah, this has got nothing to do with moral values or ethical reasoning. This is all about it starting to show that the costs of the cost of investing in these types of projects with when something goes wrong is just destroying shareholder value.

Alex Hont 10:04

Well, I think also anything any kind of new power plants, any new coal fired power plants cost an arm and a leg to build.

Chris Haggart 10:10

Correct. Capital intensive

Alex Hont 10:11

And they take a long time to pay back the investment.

Chris Haggart 10:15

If the world's heading in a non thermal coal direction, then is there a likelihood that you're gonna get the payback?

Alex Hont 10:21

Well, that's right, you might be left holding this asset, this power plant that's, that's worth, essentially worthless, because you can't use it. You can't make any money out of it

Chris Haggart 10:29

and then no one wants to buy it.

Alex Hont 10:30

So so I think that's a big driver of the actions of some of these financial institutions. Now, we we did have a bit of a discussion about this with another member of our team, Paul Moran, who also wanted us to make sure we covered something called greenwashing. Yeah. Yep. Which is really when companies like do things like this, take a stance and make, make, make some some big statements to say we're going green where we're becoming responsible, look at how good we're doing, and when really the term greenwashing is really referring to well, you're doing it because the economic sense doesn't stack up and then you're claiming credit for taking principles.

Chris Haggart 11:07

Yeah, yep. Or it might well be that you're you're putting out there and from a marketing standpoint that you're no longer going to deal with thermal coal but then you're dealing with arms and or something like gambling, for example on on another part of the business and you can't really sort of stand up there on your soapbox and say, well, look how good we are.

Alex Hont 11:26

Look how ethical we are

Chris Haggart 11:27

We're doing something else. Yeah. So you know, and we're going to touch on this with some of the issues around socially responsible or green investing, ethical investment, whatever you want happen to call it. But this is I think this is definitely the starting point of a of a turn in views and how large investment managers manage money moving forward.

Alex Hont 11:51

Yeah. And I think you, you know, the point about governments are gonna have to take notice sometime soon, is we're gonna start to see that as well. I think you mentioned Finland had set a pretty ambitious target.

Chris Haggart 12:04

Yeah I was listening to a podcast the other day, I was just trying to think about it. So if anybody wants to go and listen to I couldn't remember, I think it was an NPR podcast. And basically 2035, they want zero net carbon emissions. So

Alex Hont 12:17

that's not that far away.

Chris Haggart 12:18

15 years away. So they've got a prime minister, a pretty young, female prime minister, I think in at the moment, who is the head of a coalition of I think about five or six different parties, including like, the center Party, which I think is the Conservative Party, but basically they're they're completely transitioning their economy to do as much as they can to reduce carbon emissions. And I think ideally, what they want is to become leaders in the world in that respect. And then obviously, that's going to drive interest in GDP for them from that point forward.

Alex Hont 12:53

I've had a really interesting, because transports a big carbon emission of carbon emitter and I did hear that I think it was Finland, it was definitely somewhere in Scandinavia, that they've got a lot of electric vehicles that they, they, it's making up about 30% of all sales there and climbing steeply. And I thought, well, you know, why couldn't we do that here? And it always comes back to having the infrastructure in place. Yeah. And one of the things that they McDonald's have done is they've put in charging points at all the McDonald's along the highways. Right?

Chris Haggart 13:24

It's, it's pretty smart, isn't it?

Alex Hont 13:26

It is. I mean you've got the real estate. Right? Exactly. And when I think about, you know, you drive up the Hume or you drive pretty much in on any of the highways in any direction. Yep. What is it probably only half an hour between any two McDonald's along the line.

Chris Haggart 13:38

Exactly. Yeah. And you're almost giving people another reason to stop. Yeah. 'Cause they're forced to what like from a battery perspective.

Alex Hont 13:45

Well, that's right. I mean, if they're going to stop for a 20 minute Quick Charge, or whatever it might be, and you're there.

Chris Haggart 13:50

You've got a captive captive audience for 20 minutes.

Alex Hont 13:53

That's right. So you're really made economic sense for them to do it as well.

Chris Haggart 13:57

Yeah, definitely.

Alex Hont 13:58

Anyway I found that really fascinating. That they've gone down that path.

Chris Haggart 14:01

But this is the thing, isn't it? It's like you take advantage of these trends and you know, the companies and businesses or services that, I guess a bit more forward thinking are going to be the ones that take advantage of these opportunities first.

Alex Hont 14:13

those that can adapt and the ones that survive. Not that I think Maccas is in any trouble. But anyway. So Chris, how, how is it? How do we invest responsibly?

Chris Haggart 14:24

It's a very good question and a very varied answer. There's a number of ways to do it. And we have we kind of covered this in a podcast. I think I said to Al this morning was last year, and he said, No, I think it was the year before.

Alex Hont 14:38

I think it was 2018

Chris Haggart 14:39

I can't believe that. It's been two years we've been doing this but anyway, longer than two years now. This is our third year, isn't it?

Alex Hont 14:46

Yeah, I reckon we recorded the first one in 2017. But we're getting off topic. Sorry. We could just ramble on for awhile. So look. One of the places that you could look is called the the UN's principles of responsible investment. Right. And I think this is a reasonable I mean, as you said that it's the the definitions are varied. And this isn't a definition, but this is at least a guide, and something that you can sort of look at or think about when making investment decisions. But the principles of responsible investment defines responsible investment as a strategy and a practice to incorporate environmental, social and governance factors in investment decisions and active ownership.

Chris Haggart 15:30

So those of you out there who have might have a. listened to the podcast or b. explored this topic in some, even in some way in the past would have seen the acronym ESG. And a lot of companies have kind of and coming back to that greenwashing statement. A lot of the big companies have said yes, we incorporate ESG into our investment selection process. REST super is one of those which will come into but then just treated it as a almost a lip service not actually integrating it completely into their philosophy or systems.

Alex Hont 16:07

So let's get into it. Let's get into the nitty gritty about this because I mean, it's easy to say, environmental, social and governance is even easier to say ESG. But what? What does it mean? Because, as you said, you know, a lot of, a lot of companies throw it around saying, yes, yes, we use it. But but let's, start with environmental? What what are the issues that we're often talking about with environmental?

Chris Haggart 16:28

So you'd be looking at companies that are dealing with mining or companies that are dealing with something that's going to potentially damage the environment?

Alex Hont 16:36

Well, I think particularly things like climate change, you know, fossil fuels and climate change, very much so because there's plenty of mining that mean everything leads to a hole in the ground, but that we still need, even though it might have a more adverse environmental impact, but maybe not as much as others. Anyway. Climate change, resource depletion, dealing with waste, you know, pollution and deforestation as some examples of what would fall under that environmental factor.

Chris Haggart 17:08

Yep. So I guess this is when we're looking at companies when we're looking at fund managers, you know, going coming back to that discussion about the filters, either positive or negative filters that we put on, put on our selection process. So we would sit here and say, Well, you know, I want to invest in BHP, for example, well, obviously, the environmental aspects that you're going to take into consideration, obviously, because they're a miner are you going to want to look at what's their effect on climate change, resource depletion, what waste are they putting out? what pollution are they adding to? Are they are they are they contributing to the deforestation problem, and then I guess you'd put a score on that versus potentially other miners if you're looking at investing in the mining industry. Or if you want to rule the mining industry out altogether, then this would be something that would probably rule them out of your filter.

Alex Hont 18:00

Yeah, and there are some companies that do look at that, that can give scores like that. But one in particular is called sustainalytics that a lot of companies use to measure that externally measure their score. So that's worth having a look at.

Chris Haggart 18:14

And because this is pretty detailed information, this is like you can get some broad stuff, I suppose and but the, to get the real detail on, on how companies are dealing with these sorts of problems involves quite a lot of research into into their systems, processes, actions, that sort of thing.

Alex Hont 18:34

Yeah. So let's move on to the next one social. Social Factors would include things like human rights, I imagined detention of mandatory detention of asylum seekers, modern slavery, child labor, working conditions and employee relations. So really does this company do bad by people do companies do bad by people to put it in very simplistic terms.

Chris Haggart 19:01

Yeah, yeah. And I think that's, you know, we, we want, companies are doing well for the environment, but then companies are also providing good outcomes for society.

Alex Hont 19:11

Yeah, that's right. Are they are they helping people as well. And then the last one governance, which is one that sometimes quite interesting. What we're talking about really is things like bribery and corruption, executive pay, board diversity and structure, political lobbying and donations and tax strategy.

Chris Haggart 19:29

And look, whilst this is important, from an overall standpoint, this has probably been the part that those those investment managers or companies that have been in inverted commas greenwashing where they've been doing it because I can basically say yes, we look at ESG. We look through their governance and like, have they got a clean governance record? Yes. They pass the filter we can invest in them. So it's been a almost a backdoor into including companies that might not necessarily meet certain, because it's going to be different for everyone, but certain people's filters of what what would constitute a responsible investment?

Alex Hont 20:09

Yeah. I always think there's a couple of really interesting ones in here that you wouldn't have necessarily thought of it on the responsible investing part. But it really makes sense. And I guess, you know, the board diversity one is one that that I think is really important, but can quite often be just put to the back of mind.

Chris Haggart 20:25

Yeah, yeah, definitely. Well, interesting that, um, I know, we don't do this all the time. But coming to points we're gonna discuss later in the podcasts around if you're paying attention to the business news, mid to late last year, about some of the biggest superfunds getting together as using their shareholder votes to try and get women quotas on the board to 50/50 to some of the big Australian companies because there clearly isn't enough women in the boardrooms of Australia.

Alex Hont 20:57

Yep. And I think every study that's been done shows that it's beneficial to have have the diversity and the diversity.

Chris Haggart 21:03

And that's not just across sex though that's across a whole range of factors.

Alex Hont 21:08

Yeah. Now tax strategy is another one. And it's been big in the news that there are a lot of multinational companies that don't pay any tax kind of anywhere. Yep. And I think it's interesting that's being included as to whether or not a company is included under these ESG these principles of responsible investment? Yep. Right. And I guess executive pay and bribery kind of speaks for itself bribery and corruption. Mind you just a little off topic, I remember sitting in you know, Economics 101, first year uni and listening to the guy teaching the class talk about corruption. And he said, Look, it's not always bad because corruption is greases the wheels and makes things happen. I'm not talking about you know, well, what what he was talking about was not was when you go into a place that is always corrupt and all where where laws aren't enforced and, and those, you know, sort of places, the Wild West we'll call it that the corruption actually means that things get done. And there that there isn't this big stalling period there isn't this roadblock, you can get around these things that might otherwise halt progress. Anyway, this is a theoretical conversation. I'm not suggesting that we should be living in a corrupt world ot that a corrupt world would be better.

Chris Haggart 22:25

I think it's just a matter of idealism versus reality. Like, it kind of applies to what we're talking about here is that at the moment, the way things stand not everything's perfect. So you there's some issues around you know, we can't have a perfectly ethical portfolio for pretty much anybody because as you said, Al, everything leads back to a hole in the ground and what's and what's the what's the impact on the supply chains all through that so but that doesn't mean you don't you don't start the ball rolling. And make changes where you can. So it's a bit like that in the sense that, you know, if you go to a corrupt country, then if you if you don't grease the wheel, then nothing's going to happen. So it's better to do that at least have some some positive impact in in some way that you can whilst creating change at the same time.

Alex Hont 23:15

I mean, that was that was his point. That was the message I got that that yes while it's not a perfect system, it's something that we're, you know, progress is done in utilities.

Chris Haggart 23:24

Correct.It's not like we live in a perfect system here. If you think corruption is not in Australia you're mad.

Alex Hont 23:29

Yeah. Well, it's in the news.

Chris Haggart 23:30

That's why IBACs been put into place.

Alex Hont 23:33

Yeah. So let's look that's ESG environmental, social and governance issues, and they're the kind of the, the factors that that that filter in or lead in to a lot of the principles of responsible investment, but there are some issues with it. Right and that which we touched on, and I think one of the big ones is supply chains, right? And what we mean by that is you might find a company that does great does really good things, but it needs inputs to either make their product or service and make them work.

Chris Haggart 24:03

You had a really good example of this this morning.

Alex Hont 24:06

Well I don't know if it's true but but

Chris Haggart 24:10

Well that makes it tough doesn't it but alright let's assume that it is.

Alex Hont 24:13

Let's let's do a hypothetical where let's just say there is an electric car company that's what