Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 134

Sin stocks, divestment and the right to choose

The notion that superannuation funds and other fiduciary investors may choose to divest themselves of certain investments, typically stocks, on philosophical grounds is not a new one. But the debate surrounding divestment has grown louder in the past year or so, especially in Australia.

There are now several prominent examples of Australian funds, from super funds to university endowments, which have announced certain divestments, typically in fossil fuel companies.

Most recently, a lot of attention was given to the health industry fund HESTA divesting itself of Transfield shares on the grounds that the investment looked unsustainable in the light of the company’s apparent involvement in morally suspect practices at the detention centres it manages.

Last year, and more commonly around the world, a similar debate focused on divestment of fossil fuel stocks – a debate which continues to rage. Once again, fiduciary investors usually emphasise that a decision to divest is taken on the grounds of lack of sustainability.

Are trustees acting in the best (retirement) interests of members?

But super funds and other fiduciaries manage money on other people’s behalf, often people who have little or no say in how the money is to be directly managed. This places considerable pressure on the trustees and management of the funds to make sure they really are acting in the long-term interests of their investors.

In the case of super funds, there is the Sole Purpose Test which makes it clear all decisions of the fund have to be made with a view to providing (maximum) retirement benefits to members. With university endowments, the position is not as uniform as superannuation funds, although trustees are aware the purpose of endowment funds is in contributing to the long-term viability of the institution.

The Australian National University announced in October 2014 it would divest itself of $16 million worth of shares held in seven stocks involved in fossil fuels, creating quite a political storm, although it represented a tiny component of the $1.1 billion fund. Other stocks, such as BHP, Woodside Petroleum and Rio Tinto, were retained. The decision was modelled on that of Stanford University’s sustainability review, announced a few months earlier.

Both decisions followed considerable student body lobbying.

In an interesting note on another set of deliberations, which ended in a different course of action, the University of New South Wales, through the then Vice-Chancellor and President, Professor Fred Hilmer, said last October that the University Council met and resolved ‘overwhelmingly’ to maintain the current approach – to retain its existing investments in fossil fuel stocks.

After outlining the University’s concerns about greenhouse gas emissions and global warming, and its considerable research and other efforts relating to clean energy, he quoted the words of Drew Faust, President of Harvard:

“Conceiving of the endowment not as an economic resource, but as a tool to inject the University into the political process or as a lever to exert economic pressure for social purposes, can entail serious risks to the independence of the academic enterprise. The endowment is a resource, not an instrument to impel social or political change.”

A key element in the debate is how much, if any, short to medium-term financial damage a divestment program is going to cost the stakeholders. Professional fund managers assume there will be a cost.

New research both supports this view over the shorter term and also suggests divestments may be counterproductive over the longer term. The research paper, ‘The Unintended Consequences of Divestment’, by Shaun William Davies and Edward Dickersin Van Wesep from the University of Colorado, says there are two major flaws in the pro-divestment argument. First, any reduction in the target companies’ share price will benefit other ‘amoral’ investors who buy the initial dip and in any event the price discount will shrink over time. Second, executive stock options will work in the opposite direction. A higher return, after the granting of stock options, increasing their value, so executives would prefer the high returns that being subject to a divestment campaign would provide, according to the paper.

The belief sets in a co-mingled fund

Any investment programme should match the belief sets of the investor. In the case of big co-mingled funds, such as an industry super fund, the members need to be informed of the implications of investment policies so they can make an informed decision.

One industry fund which uses an aspect of its investment programme for marketing purposes is Cbus, the multi-employer fund for the building and construction industry. Cbus has for many years held overweight positions in direct property. Asset consultants, however, are critical of this because the fund is ‘doubling up’ the members’ risk. If the building industry goes into a slump then members’ returns would decline at precisely the time they may need extra money. But the members love the fact that their fund invests back into their industry. The policy attracts and helps retain members in a competitive world. The programme fits the beliefs.

All big super funds provide considerable investment choice for members within their fund and most – but not all – members can readily change funds if they so wish. This adds to the responsibility on trustees to provide adequate information about what is happening in their fund.

Default option is where debate is most relevant

It is the default component of the fund which is the most important for the purposes of this debate because it is usually the largest component and because it usually represents the least-engaged members.

To my mind, the smoking analogy is appropriate. People are entitled to exercise a right to smoke, without harming others, as long as they understand the risks. It may well be, in a similar vein, that divestments of fossil fuel stocks and other ‘sin’ stocks can damage your financial health. The choice should be the members’.

 

David Gallagher is the chief executive of the Centre for International Finance and Regulation (CIFR) and Professor in the UNSW Australia Business School.

 

1 Comments
Pablo Berrutti
November 12, 2015

I think the issue is more complex than the article suggests. The idea that environmental or social considerations can be separated from financial ones is incorrect, they influence each other in significant ways. The belief that using ethical or SRI strategies will result in under performance has been repeatedly disproved yet in persists.

The 'From Stock Holder to Stakeholder' report from Oxford University and Arabesque Partners, and the Responsible Investment Association of Australasia benchmark report are the two most recent examples which show this.

Superannuation is a long term investment over which time ESG issues like carbon constraints to avoid climate change will play out. A prudent fund should (and arguably must) take these factors into account when making investment decisions. Particularly when there is a well documented market failure and significant concern from credible bodies. See Minter Ellison, Baker McKenzie and the UK Law Commission for more on this.

For endowments, it is right to see it as a resource rather than a political tool, however if investments can be made which achieve the investment objective but do not conflict with the purpose of the institution surely that is a better option? In the case of ANU they actually avoided losses through their divestments.

These are far from purely 'moral decisions' which Trustees should leave to members (most of whom are in the default option anyway). The key to getting it right is ensuring that a trustee's 'values' don't override the members interests or what members would reasonably expect the trustee to do. These are difficult decisions that require an appropriate decision-making framework to reduce the risk of bias or group think. Despite their difficulty however they are decisions which should be properly assessed and made.


http://www.arabesque.com/index.php?tt_down=51e2de00a30f88872897824d3e211b11

http://responsibleinvestment.org/resources/benchmark-report/

http://www.cisl.cam.ac.uk/publications/publication-pdfs/ilg-the-value-of-responsible-investment.pdf

 

Leave a Comment:

RELATED ARTICLES

Read this before you go all in on US equities

Investing across deflation, inflation and stagflation

Asia deserves a closer look from investors

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

What Warren Buffett isn’t saying speaks volumes

Warren Buffett's annual shareholder letter has been fixture for avid investors for decades. In his latest letter, Buffett is reticent on many key topics, but his actions rather than words are sending clear signals to investors.

Latest Updates

Investing

Designing a life, with money to spare

Are you living your life by default or by design? It strikes me that many people are doing the former and living according to others’ expectations of them, leading to poor choices including with their finances.

Investment strategies

A closer look at defensive assets for turbulent times

After the recent market slump, it's a good time to brush up on the defensive asset classes – what they are, why hold them, and how they can both deliver on your goals and increase the reliability of your desired outcomes.

Financial planning

Are lifetime income streams the answer or just the easy way out?

Lately, there's been a push by Government for lifetime income streams as a solution to retirement income challenges. We run the numbers on these products to see whether they deliver on what they promise.

Shares

Is it time to buy the Big Four banks?

The stellar run of the major ASX banks last year left many investors scratching their heads. After a recent share price pullback, has value emerged in these banks, or is it best to steer clear of them?

Investment strategies

The useful role that subordinated debt can play in your portfolio

If you’re struggling to replace the hybrid exposure in your portfolio, you’re not alone. Subordinated debt is an option, and here is a guide on what it is and how it can fit into your investment mix.

Shares

Europe is back and small caps there offer significant opportunities

Trump’s moves on tariffs, defence, and Ukraine, have awoken European Governments after a decade of lethargy. European small cap manager, Alantra Asset Management, says it could herald a new era for the continent.

Shares

Lessons from the rise and fall of founder-led companies

Founder-led companies often attract investors due to leaders' personal stakes and long-term vision. But founder presence alone does not guarantee success, and the challenge is to identify which ones will succeed in the long term.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.