TRUST ISSUES: THE NEW FACE OF RISK

This article forms part of CAER’s  ‘Responsible Investment Agenda 2019 – A Work Plan for Australian and New Zealand Investors’ Report

The Banking Royal Commission has revealed serious concerns regarding the accountability and integrity of Australian financial services institutions. While the Commission has been the main face of waning public trust in the industry, it is representative of a greater loss of trust in all institutions occurring across the country. An increasing opacity around the influence special interest groups have on governmental systems and economic policy has also called into question the integrity of the bodies charged with ensuring an appropriate balance of power in society.

Investors are beginning to push back. Following on from unsuccessful behind the scenes company engagement, the Australasian Centre for Corporate Responsibility has lodged resolutions[1] calling on companies to cease financing of anti-climate lobbying, receiving widespread investor support. Outside such initiatives, regulatory responses to these concerns have been ad-hoc and non-systematic, creating uncertainty for both corporations and investors regarding the reliability of the systems within which they operate.

A closer look at indirect and undue influence on the political and economic system, alongside the statistics regarding risk and corruption in the Australian market, suggest that trust issues could be a significant influence on emerging ESG risk.

Measuring Trust

The increasingly opaque and complex nature of influence upon public policy has coincided with what appears to be an overall decrease in public trust in political systems as well as in institutions.

A study from the Australian National University entitled Trends in Australian Political Opinion: Results from the Australian Election Study 1987 – 2016 found that public trust in the Australian government fell from 43% in 2007 to just 26% in 2016. The remaining 74% of people surveyed in 2016 believed that people in government only looked after themselves.[2]

In a different measurement, Australia’s score on the Transparency International Corruption Perceptions Index dropped from 79/100 in 2016 to 77/100 in 2017 and 2018. The Index ranks 180 countries and territories by their perceived level of public sector corruption according to experts and business people.[3]

The Edelman Global Trust Index, measuring the responses of 33,000 respondents across 27 markets between October and November of 2018 also found that the general population of Australia showed distrust towards the government. It also identified that the ‘Mass Population’ in Australia were 13 points less trusting than the ‘Informed Public’, again reinforcing the notion that public perception of trustworthiness in Australian institutions was waning. Moreover, Australia was listed as one of the 14 markets in which the majority of the mass population did not believe that they would be better off in five years.[4]

Given that we are facing a loss of trust in both public and private institutions as well as the political and regulatory systems that govern them, identifying the evaluating the impact of influence presents a difficult task for investors.

Questioning Influence

Research conducted by the Grattan Institute in 2018 identified a range of groups influencing public policy at the expense of public interest.[5] It was found that Australia was vulnerable to ‘policy capture’ with well-resourced special-interest groups able to hijack discussions with parliamentarians due to the reliance of political parties on donations and a lack of checks and balances in place to determine how access to Parliament is facilitated.

Many States and Territories have acted to remedy concerns regarding the transparency of political donations through the implementation of ‘disclosure thresholds’. Commonwealth regulation however remains problematic― only donations above $13,800 are required to be disclosed and disaggregated donations are allowed to occur (e.g. multiple donations under the threshold amount for disclosure are possible without disclosure of the donor). The result is that parties are able to receive more than $100 million from undisclosed sources, as they did in the two financial years over which the 2016 elections took place.[6] Calls for political donation reform and a federal anti-corruption agency have steadily increased with some form of legislation looking likely to pass in 2019[7].

Separately, public debate on climate change and obesity (sugar taxation) regulation, for example, has sparked renewed interest in how industry associations and special interest groups use political lobbying as a strategy to prioritise private profits over public welfare. During 2018, several news media outlets reported on the refusal of both major political parties to introduce a tax on sugar-sweetened beverages despite calls from major Australian health and medical groups (including the Australian Medical Association and the Australian Dental Association) and the endorsement of the World Health Organisation[8],[9],[10]. The blatant strategies of disrupting public policy processes self-reported by the Australian Beverages Council in its own annual report[11] were of particular concern.

The Guardian’s research on the register of lobbying firms identified that majority of registered lobbyists had some government link, either through the employment of former public servants or other government representatives. These firms often specialised in representing particular industries to the two major political parties, with the pharmaceutical and energy, mining and resources industries named as key buyers of the lobbying services.[12]

In the day-to-day business of portfolio management, broad societal issues such as trust may not appear relevant to investment decisions on a company by company basis. However, given how pervasive and far-reaching the issues of trust and influence can be especially over longer time horizons, it is imperative that investors don’t let them drop off their radar.

A Complex Web of Risk

In an environment of decreasing trust in the government and increasing concern regarding the integrity of governance systems, capital markets start to be increasingly vulnerable to ESG investment risks.

Some examples of long-term ESG issues that we have known about over many years, if not decades, that are now rapidly transforming into threats to investments include:

  • The Climate Council’s report Weather Gone Wild notes the increasing cost of extreme weather events and identifies a lack of governmental action as an obstruction to better management of these issues.[13] It also provides figures for the economic losses caused by the insurance cost of climate change impacts between January and December of 2018, including $80 million due to bushfires in New South Wales, $99 million due to flooding in Hobart and at least $871 million due to storms in east coast of New South Wales. It is reasonable to predict that the 2018/19 summer will only be more costly in light of recent droughts, fire, heatwaves, flooding and storm events across the continent.
  • According to a report by The Australia Institute, the mismanagement of the $13 billion Murray Darling Basin Plan by the NSW Government resulted in the death of at least one million native fish and severe losses for local business. While drought and high temperatures were cited as factors, the improper management of water in the Menindee Lakes was identified as the main reason for the impact on the waterways.[14]
  • The Banking Royal Commission has highlighted a series of regulatory failures, deceptive behaviours and conflicts of interest in Australia’s banking and financial services industry. Consumers and shareholders have already begun filing lawsuits in response to the findings.[15] Although Commissioner Hayne’s report criticises the improper activities of the Big Four banks, the recommendations were not as hard on the banking sector as expected by the public. The share price of banks surged after the recommendations were released, signifying their biggest day increase in value in history.[16]

Challenges thrown at societies and governments around the world are increasingly complex and are by no means easy to address. However, that we have reached crisis point sadly is no surprise to many experts in their respective fields. With climate change, globalisation and technological disruption continuing at pace, these challenges won’t get easier, and investors are starting to recognise the increased importance of sound policy action, in addition to market responses.

The Impact on Investment

Investors must use their influence to support companies that aren’t obstructing much-needed policy reforms, and empower them to speak out against peer companies that are blocking such actions. Trust is essential if our society is to work collectively to address the monumental environmental and social challenges we face over the next few decades.

Investors should consider the following questions when engaging with companies on issues of trust and influence:

  • Have you conducted a review of your lobby group memberships?
  • Do you publicly disclose your lobby group memberships?
  • Are you aware of points of difference between your company and the lobby groups you are a member of?

Investors should also consider their stewardship practices and take more accountability for AGM voting decisions, particularly those where there is a clear ESG component in the motion being put forward.

Read the full ‘Responsible Investment Agenda 2019 – A Work Plan for Australian and New Zealand Investors’ Report

Or continue to explore each issue

  • RESPONSIBLE INVESTMENT IN 2019
  • MAKING SENSE OF CLIMATE SCENARIOS
  • TRUST ISSUES: THE NEW FACE OF RISK
  • WE ROBOT: AUTOMATION AND THE FUTURE OF WORK
  • WATER AVAILABILITY AND MANAGEMENT
  • DON’T WASTE YOUR INVESTMENTS

Interested in discussing any of these issues further? Feel free to get in touch


[1] Australian Centre for Corporate Responsibility, Results on Origin Energy Resolution relating to climate change lobbying (October 2018): <https://accr.org.au/origin/> [Accessed, 04/02/2019].

[2] Australian National University, Australian Political Opinion: Results from the Australian Election Study 1987 – 2016 (2016): <http://legacy.ada.edu.au/ADAData/AES/Trends%20in%20Australian%20Political%20Opinion%201987-2016.pdf> [Accessed, 04/02/2019].

[3] Transparency International, Corruptions Perceptions Index (2018):<https://www.transparency.org/cpi2018> [Accessed, 04/02/2019].

[4] Edelman, 2019 Edelman Trust Barometer Global Report (2019): <https://www.edelman.com/sites/g/files/aatuss191/files/2019-02/2019_Edelman_Trust_Barometer_Global_Report.pdf> [Accessed, 04/02/2019].

[5] The Grattan Institute, Who’s in the room? Access and influence in Australian politics (23 September 2018): <https://grattan.edu.au/report/whos-in-the-room/> [Accessed, 04/02/2019].

[6] Carmela Chivers, Danielle Wood and Kate Griffiths, ‘Time for federal government to catch up on political donations reform,’ The Conversation (14 August 2018): <https://theconversation.com/time-for-the-federal-government-to-catch-up-on-political-donations-reform-100822> [Accessed, 04/02/2019].

[7] Brett Worthington, ‘Scott Morrison announces anti-corruption commission, buckling to crossbench pressure’ ABC News (13 December 2018): <https://www.abc.net.au/news/2018-12-13/scott-morrison-creates-federal-integrity-commission/10614658> [Accessed, 04/02/2019].

[8] Melissa Davey, ‘Sugar tax: why health experts want it but politicians and industry are resisting,’ The Guardian (10 January 2018): <https://www.theguardian.com/australia-news/2018/jan/10/sugar-tax-why-health-experts-want-it-but-politicians-and-industry-are-resisting> [Accessed, 04/02/2019]

[9] Aisha Dow, ‘Hospitals and health groups demand 20 per cent soft drink tax,’ Sydney Morning Herald (18 September 2017): <https://www.smh.com.au/healthcare/hospitals-and-health-groups-demand-20-per-cent-soft-drink-tax-20170918-gyjx7i.html> [Accessed, 04/02/19].

[10] World Health Organisation, Taxes on sugary drinks: why do it? (2017): <http://apps.who.int/iris/bitstream/handle/10665/260253/WHO-NMH-PND-16.5Rev.1-eng.pdf;jsessionid=2D53F7C8D55D3CF86068EC24B83B10B5?sequence=1> [Accessed, 04/02/19].

[11] Esther Han, ‘Beverages industry praises itself for turning politicians away from sugar tax,’ Sydney Morning Herald (22 October 2017): <https://www.smh.com.au/healthcare/beverages-industry-praises-itself-for-turning-politicians-away-from-sugar-tax-20171020-gz520t.html> [Accessed, 04/02/19].

[12] Nick Evershed and Christopher Knaus, ‘Lobbying in Australia: how big business connects to government,’ The Guardian (19 September 2018): <https://www.theguardian.com/australia-news/ng-interactive/2018/sep/19/lobbying-in-australia-how-big-business-connects-to-government> [Accessed, 04/02/19].

[13] Climate Council, New Climate Council Report: Weather Gone Wild (6 February 2019):<https://www.climatecouncil.org.au/resources/new-climate-council-report-weather-gone-wild/> [Accessed, 07/02/19].

[14] Anne Davies, ‘New South Wales government largely culpable for fish kill, report finds,’ The Guardian (19 January 2019):<https://www.theguardian.com/australia-news/2019/jan/19/murray-darling-basin-authority-and-nsw-largely-culpable-for-fish-kill-report-finds> [Accessed, 07/02/19].

[15] Misa Han, ‘Banks face a litigious year post-Hayne royal commission,’ Australian Financial Review (14 January 2019): <https://www.afr.com/business/banking-and-finance/banks-face-a-litigious-year-posthayne-royal-commission-20190110-h19wpy> [Accessed, 07/02/19].

[16] Mark Humphrey-Jenner, ‘Why bank shares are climbing despite the royal commission,’ The Conversation (5 February 2019): <https://theconversation.com/why-bank-shares-are-climbing-despite-the-royal-commission-111175> [Accessed, 07/02/19].

Julia Leske

Author: Julia Leske

Julia Leske CEO, Managing Director