The Royal Commission continues to investigate many situations in which financial institutions in Australia have treated their customers badly, in some cases illegally. The fallout has been significant for both small firms and large, with AMP the most notable.
The Synod’s Ethical Investments Monitoring Committee, which includes representatives from Uniting and Uniting Financial Services, has over several meetings given careful consideration to the ethical investment issues that arise from the Commission’s hearings.
Noting that the hearings are not yet concluded and the Commission’s report and recommendations not yet presented, two specific questions have been the focus of our attention.
First, what do the incidents of misconduct imply for our ethical view of banks, financial services corporations and the finance sector?
Our view is that banking and financial services are not inherently unethical activities and that there is, therefore, no need for any blanket exclusion of investments in this sector. In terms of the Church’s Ethical Investment Policy, banking is not a service that has ‘unacceptable harmful effects on people or the environment … which cannot be avoided by prudent, practical controls.’ The general business of borrowing (including accepting deposits and bank accounts) and lending (for housing or to businesses) is an acceptable activity that supports the aspirations of ordinary citizens going about their lives.
This does not diminish the specific situations of misconduct exposed by the Royal Commission, which are clearly unethical behaviours. However, some institutions are better at behaving decently than others. Some have experienced bad behaviour within their business, but have taken genuine, positive steps to prevent repetition and to improve their culture.
To use investment terminology, assessing financial services companies on ethical grounds is a ‘stock picking’ exercise. The Ethical Investments Monitoring Committee employs an independent research group that conducts detailed analysis of the environmental, social and governance practices of thousands of Australian entities, as well as being affiliated with a global research network. The ratings that this research has generated for the Australian banks is already in line with what’s been revealed by the Royal Commission. To be blunt, we have rated CBA as the poorest of the four major banks for their ethical character for some time and this has been reflected in relatively low investment allocations to the CBA in our equity fund.
Another consideration in deciding against a blanket exclusion of banks is that it would preclude consultation with specific companies. One of our roles as an ethical investor is to engage with organisations we invest in, to encourage changes in their approach. We have done so in relation to issues of culture, ethics and specific practices in this sector through our partners prior to the Royal Commission and will continue to do so.
Second, what do the matters that have arisen in relation to AMP mean specifically for our dealings with that organisation?
The most important thing that the Committee wishes to say is that we excpect and encourage AMP to bring in the changes needed to turn its culture around and, in turn, to restore community faith. AMP advises and manages funds on behalf of a significant number of Australian people. It has at times been referred to as the Fifth Pillar of our financial services industry, alongside the Big Four banks. It is not in anyone’s interests that such an important institution should diminish as AMP inevitably will if it doesn’t address its ethical culture. We wish the new Chair of the AMP Board and his team every success in the rebuilding process that is needed.
That said, in the context of ‘stock picking’ noted above, our rating of AMP on ethical grounds has been reduced. We do not have AMP Limited on the excluded investment list, but they are on watch. Our unfolding view of AMP will depend upon how the new Chair, Board and management of AMP Limited respond to the issues uncovered by the Commission. Our external managers have sold out of AMP bonds and shares, because the ethical concerns have created significant investment risks as the outlook for the AMP business is somewhat clouded.
A subsidiary organisation to AMP Limited is AMP Capital, which is the managed funds business within the AMP Group. Uniting Financial Services holds two funds managed by AMP Capital within its Ethical Diversified Fund. Both the Board of UFS and the Ethical Investments Monitoring Committee have discussed whether the issues before the Royal Commission flow through to concerns about investing in funds managed by AMP Capital.
Our conclusion is that there is no need to divest from AMP Capital investment products. The reasons include:
- AMP Capital operates as a stand-alone business, with its own Board and governance structure, including independent Directors and a separate governing body for their Responsible Entity.
- There has been no suggestion that any of the behaviours at AMP Limited, within its financial planning division and at the senior management level, have been seen at AMP Capital.
- AMP Capital was pro-active in reaching out to its institutional investor base to discuss potential concerns, including a discussion between its CEO, Adam Tyndall, and the Executive Director of Uniting Financial Services and also at operational levels between the two organisations.
- AMP Capital responded quickly to investor suggestions that they take steps to ensure that their Chair from now on be an independent, rather than a member of the AMP Limited Board.
- All of AMP’s managed funds operate with an ethical overlay that is one of the closest in the industry to the Uniting Church Synod of NSW &ACT’s own ethical approach.
- Consistent with the ethical investment approach, AMP’s ESG research team is an industry leader, with Dr Ian Woods a highly respected expert and advocate for environmental, social and governance factors to be built into investment decisions. We have communicated to AMP Capital that any sign of Dr Woods’ input being curtailed would be of concern.
Therefore, we’ve concluded that AMP Capital remains an appropriate organisation for UFS to deal with.
The Ethical Investments Monitoring Committee and the team at UFS will continue to monitor the Royal Commission and the responses of institutions whose behaviour is being called into question, to ensure that all investments within the Synod remain compliant with the Church’s policy, a copy of which can be found here.