24 February 2021
In the lead up to BCCM’s 2021 Leaders’ Summit, our guest speakers are sharing their perspectives on ESG as it pertains to CMEs in Australia.
by Rade Musulin, Finity Consulting
Activist investors have been pushing listed companies to report on sustainability for many years, while prominent fund managers, like BlackRock Chairman Larry Fink, have been equating climate risk with investment risk and suggesting that a major shift in finance is about to occur. Lacking such shareholder pressure, do co-operative and mutual enterprises (CMEs) have strong incentives to focus on sustainability?
The short answer is yes. In many ways, CMEs have much more at stake in terms of climate risk and sustainability than listed companies. They are not able to enter and exit markets at will based on the whims of investors. They are embedded in their communities with planning horizons measured in years or decades, not quarters. They are focused on helping their members and providing stable jobs for their employees. As a result, CMEs have very strong incentives to adopt sustainable practices and hold important perspectives on how to manage climate change.
Agricultural organisations, an important sector within the CME space, are a good example. Farmers and the regional communities they support witness firsthand the devastating consequences of drought, floods, and hail. They also understand the practical challenges of implementing proposals for climate action in regional Australia, where communities often depend on carbon intensive industries. Agricultural CMEs can play an important role in finding the right balance between environmental and economic needs.
The recent federal legislation enabling Mutual Capital Instruments (MCIs) and longstanding state and territory practices allowing Co-operative Capital Units (CCUs) provide further motivation for CMEs to focus on sustainability. Many investors are adopting Environmental, Social, and Governance (ESG) standards which favour investment in firms which are strong stewards of nature, focused on communities, and well-governed. CMEs are well placed to meet these standards and thus should be preferred by socially conscious investors should they choose to raise capital through MCIs or CCUs.
Climate change poses many risks and opportunities to CMEs. Disasters or shifts in employment may create mental health challenges, but could open the door to valuable new services from health funds. Losses from bushfires and floods will affect general insurers, but could create demand for new products to cover electric vehicles or renewable energy. Farmers may struggle with drought and floods, but agricultural co-ops can help members transition to new crops and markets.
Tackling climate risk will require many changes and new strategies. CMEs are well positioned to do their part and play a major role in building a sustainable Australia.
Rade Musulin is a Principal with Finity Consulting and leads its Climate Risk Practice. He is also Convener of the Actuaries Institute’s Climate Change Working Group and Vice Chair of the International Actuarial Association’s Resource and Environment Forum.