Voltaire said “with great power comes great responsibility,” a sentiment that is felt acutely by those at the helm of Australia’s $2.3 trillion superannuation industry, who are trusted with the retirement nest-eggs of millions of Australians.
The global significance of Australia’s managed funds industry (valued at A$2.8 trillion, the largest in the Asian region) has been underpinned by a number of factors: a sophisticated investor base, mature markets, strong presence of leading global financial institutions, a strict regulatory environment, and most important, Australia’s universal and mandatory retirement income scheme.
In our superannuation system, it’s compulsory for employers to make superannuation contributions for their employees on top of the employees’ wages and salaries. The employer contribution rate has been 9.5 percent since July 2014, and is planned to increase gradually from 2021 to 12 percent in 2025.
The impact of this is not just a significant and growing investment management industry, but an increased awareness and scrutiny of the actions and investments made by superannuation fund managers and institutional investors on behalf of virtually every Australian with a superannuation fund — over 70 percent of the population.
With this responsibility comes a dependency and reliance on a great deal of trust at both a retail and institutional level. The results of the 2017 Edelman Trust Barometer Special Report: Institutional Investors ring particularly true in Australia, where we’re seeing a growth in demand for impact investing, combined with a rise in activist investment that’s directly influencing the governance and composition of some of our largest and most significant businesses.
In short, the impact of trust is reshaping Australia’s financial services and investment sector. It’s no longer good enough, in the eyes of consumers, employees or investors, to pay lip service to social issues without active and genuine engagement. According to results from our Special Report, companies are now expected to take a public stand on social issues. Whether it’s education reform or training, environmental issues, income inequality, gender issues or immigration, 76 percent of respondents believe companies should be addressing at least one or more of these issues to ensure the global business environment remains healthy and robust.
The financial services industry in Australia is grappling to re-enforce its social license to operate after a litany of scandals affecting banks, insurers and investors. These included incentivized pay structures that led to product mis-selling, inflated executive pay, security breaches and gross misconduct.
In fact, the trust issues we’re seeing play out across our institutions in Australia (the 2017 Edelman Trust Barometer showed dramatic declines across business, media, NGOs and government) have been identified and actioned by institutional investors, who recognize the direct relationship between business actions and intent, consumer and employee engagement, and, ultimately, returns. This is evidenced by two trends: first, the growth in demand for impact investing as institutional investors search for investments that provide monetary and social returns; second, the increase in institutional activism.
HESTA, the superfund for health and community services, recently partnered with Social Ventures Australia to invest A$30 million in a number of programs, including a A$6.7 million investment in social and affordable housing provider Horizon Housing, set up to help low income earners achieve home ownership. HESTA’s proactive strategy to invest in assets that directly benefit the communities it operates in reflects the shifting onus of companies to not only address but actively improve social issues.
The Institutional Investor Special Report revealed that investors view themselves as agents of change, with 87 percent of respondents agreeing they would support a reputable activist investor if they believe change is necessary at a company they invest in or recommend doing so. However, the survey also found that investors believe the majority of companies are not prepared for activist investors. A total of 80 percent of respondents agree that most companies are not prepared to handle activists’ campaigns targeted at them.
In Australia, activism is increasing as institutional investors recognize the power they can wield by simply taking a stand.
AustralianSuper, Australia’s largest superannuation fund, with over 2 million members and A$120 billion under management, recently took an activist position in relation to the recent actions of the Commonwealth Bank, where it’s also one of its largest shareholders. AustralianSuper took this stance in protest to the high-profile mishandling of a number of issues, with the fund stating it “…wants to send a message that it is not prepared to accept that multiple scandals across financial advice, life insurance and reporting at the bank are product of bad luck.”
Australia’s superannuation system is only set to grow, and with 87 percent of respondents stating they must trust a company’s management before making or recommending an investment, it has never been more important for Australian companies to actively build and seek the trust of their employees, their investors, and most importantly their customers.
Francesca Boase is managing director, Reputation, Edelman Sydney.