Divestment decision criteria are the contentious issue.

Published 20141014

The recent decision by the Australian National University to copy decisions made by a small number of overseas universities and sell its investments in companies that are judged to be not meeting environmental, social and governance criteria has created a flood of both support and criticism in response to the ANU decision. It has also highlighted a critical weakness in such decision-making, because of the subjectivity of the criteria used to rate companies, and in many cases the weakness of the data underpinning some of these criteria. Many sub-sectors of agriculture face a growing risk from these types of developments.

The ANU decision to sell its investments in a number of companies that it deemed to be not meeting acceptable environmental, social and corporate governance standards was apparently based on advice on these issues provided to the ANU by an international consulting company, which operates in Australia as CAER – the Centre for Australian Ethical Research

The CAER website indicates that it rates companies based on a range of criteria, including information provided in response to surveys sent to those companies by CAER. 

However, a related website which describes the rating methodology used states that “The ratings process gathers a wide range of information to gain a perspective on the environmental impact, social engagement and corporate governance of each company. Information sources can be summarised as: –
• Details on the environmental and social impact of its products and services.
• Company reports on its contribution to the environment or society.
• Reports from third party sources (such as regulators, NGO’s and reputable commentators) on its impact on the   environment, contribution to society or corporate governance practice.”

The website further states: “Data is sent to CEOs (of the companies that are being rated) for their review prior to publication. Our data is not dependent on a company’s willingness to respond to a questionnaire or an agreement to keep relevant information off the record.”

There appear to be two fundamental flaws in this rating process. 

The first is that the ratings organisation identifies that it uses material provided by NGOs and ‘reputable commentators’ as part of its assessment of companies. By admitting that it uses information provided by activists in its processes, the rating organisation leaves itself open to claims that activists can influence ratings. The perception that activists an influence the rating process is highlighted by a report in the Australian Financial Review , identifying that a CAER staff member has recently co-authored a research paper on divestment with the leader of the “Students for a Fossil free ANU”. This raises serious questions about the independence and objectivity of the ratings agency. Further damaging claims of independence and transparency in this process, this same activist group was permitted to address the meeting of the ANU Council at which the decision was made  – a privelege not extended to the blacklisted companies.

The second fundamental flaw lies in the claim by the ratings agency that the data used to rate the companies is sent to the respective CEOs for checking prior to its finalisation. This claim is directly contradicted by at least some of the companies that ended up on ANUs blacklist. The objectivity or the process is obviously compromised if the companies being rated are not provided with an opportunity to check and correct information used in the process.

That the ANU Council would make its decision based on what appears to be a questionable, non-transparent and subjective process does not enhance the standing of the University as an objective bastion of science and reason.

The risk for companies involved in the agriculture sector arising from these types of rating processes is obvious. Because of the lack of transparency and objectivity of these processes, activists wishing to oppose, for example, intensive livestock production or the use of genetically modified crops could exert influence and have these included as activities that downgrade the rating of a company, or that downgrade the rating of an organisation such as a bank involved in providing finance to a company involved in these activities.

The added risk is that, even in the case where objective data is used in rating systems, this data can be highly misleading or inappropriately used. The classic example of this is the case where Richard Branson announced that he was stopping eating red meat because of the greenhouse emissions associated with its production. He utilised IPCC data to justify this, without understanding that the IPCC data he was using amounts to only a partial greenhouse accounting system that effectively counts gross rather than net greenhouse emissions. He also conveniently ignored the fact that air travel (Branson owns Virgin Air) produce more greenhouse emissions than all the worlds ruminant livestock combined.

There is no doubt that companies directly involved in agriculture, or those indirectly involved such as banks, need to pay more attention to environmental, social and corporate governance issues, and to make sure these are appropriately considered in their decision-making. There is also no doubt that the authorities managing institutions like the Australian National University are free to invest their money however they choose. 

However, what is disappointing about the ANU case is the apparent lack of transparency and due process involved in rating the companies that were blacklisted, made all the worse by the fact that the ANU Vice-Chancellor has defended the decision based on support expressed on social media sites, rather than explaining the robustness of the ratings process as a good scientist should. In effect, the ANU decision has damaged the reputation of the companies it has blacklisted, based on what appears to be a flawed rating process.

This example, and importantly the reliance of the ANU decision-makers on social media support as a justification for the rating decision is one which should create alarm for companies involved in agriculture, given the past history of activist campaigns on issues like animal welfare and GMs.

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