Having pushed governments to their democratic limits, green groups are now increasingly focusing on leveraging the financial sector to achieve their regulatory ends.
Two tests case of this strategy will be played out in Australia over the next week. The first is a campaign run by the Wilderness Society against the Tasmanian timber company Gunns Ltd. The second is a Greenpeace campaign against the large biotechnology multinational Monsanto. Both campaigns attempt to use advice from friendly financial analysts to convince investors, specifically banks and superfunds, to stop these firms from undertaking activity. In each case, the disliked activity -- logging of native timber in the case of Gunns and developing and selling genetically modified seed in the case of Monsanto -- is approved by governments, is profitable and is central to the firms' financial strategy.
This is not just some more green madness. Banks and super funds are actively considering the strategy. Indeed BT, a large Australian funds management company, now owned by Westpac, has announced that it will abstain from voting during Friday's general meeting on whether Gunns accedes to the Wilderness Society demands. That is, it has decided not to express an opinion on behalf of its unit holders on a decision, which on the Wilderness Society's own research, will reduce earnings per share by 11 per cent and increase the riskiness of the Gunns' earnings profile.
Why would otherwise hard-nose bankers support actions that reduce returns?
Well, the reasons are three fold. First the banks are concerned with protecting their brand name. The new stakeholder groups, such as the Wilderness Society and Greenpeace, are masters of brand-mail. They have, and will, undermine the reputation of firms that do not support their views; witness the anti-Nike Campaign. On the other hand, they will promote the brands of firms that do cater to their desires, as witnessed by Westpac's ascendency to the top of the "ethical ratings".
Second, the banks are concerned with regulatory risks. The new stakeholders have been highly successful in getting what they want through the democratic process. The banks may make the judgement that, while reluctant now to accede to the new stakeholders' demands, government eventually will. Moreover, individual banks may see the new stakeholders as ideal partners in lobbying for regulations that give them a competitive advantage.
Third, banks may be lured by the promised wave of "ethical investment". Ethical funds, which take into consideration non-financial factors in the selection of investments, are growing at a double digit rate (albeit from a miniscule level). Moreover, many large industry funds, which play a pivotal role in the funds management industry, are particularly enamoured with ethical investment principles and may direct monies accordingly.
The strategy is, however, flawed -- not only from the perspective of society and investors, but from the banks that jump on the bandwagon.
There is no doubt that the risk of brand-mail is real and the results are personally painful to the executives involved. However, there is little evidence that it has a real impact in the market place. Just look at Nike. Despite the-mother-of-all-campaigns it has out-performed its competitors in terms of market share and stock value.
While the new stakeholders have influence beyond their numbers, it is, in the end, limited. In the case of Tasmania, they have successfully locked away the lion's share of the State's forest and shut down all logging companies, bar Gunns. The cost of this is now clear to Tasmanians, and the community strongly supports Gunns. Indeed, Gunns has what other firms would die for: strong bipartisan community support, resource security guaranteed by a joint Act of the Commonwealth and Tasmanian parliaments, and a union militantly on side. This is why the Wilderness Society is seeking solace in Sydney.
Investors are likely to become more discerning about the ethical standards of their investments. However, as with society in general, the view of what is ethical in the market will vary widely. To some, like Greenpeace activists, GM crops are unethical. On the other hand, to the better informed, banning GM crops from people scraping a living out of subsistence agriculture, is not just unethical but inhumane.
In the end, however, financial result will rule. Firms like Gunns and Monsanto which have been star performers in an otherwise dismal market will always be able to get low-cost funding -- even if a few banks say "no".
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