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AGL and Superannuation Fund Activism

Amante Abela

DISCLAIMER: The AGL Energy demerger was reported to be abandoned on 30 May 2022

While Atlassian co-founder and CEO billionaire Mike Cannon-Brookes’ recent 11.28 per cent stake in Australian energy giant AGL threatens to disrupt the company’s planned demerger, the response of superannuation fund giant HESTA may prove more decisive.

As of February 2021, AGL was Australia’s highest greenhouse gas emitter with 42.2 million tonnes of scope 1 greenhouse gas emissions, more than double the next largest emitter and responsible for almost 13 per cent of all reported scope 1 emissions. Further, 85 percent of energy generated by AGL arises from the burning of coal.  ‘Two out of three of AGL’s coal-burning power stations are set to close well beyond what scientists are calling for in order to prevent further catastrophic climate change. In order to protect Australians from the worsening impacts of climate change, all of AGL’s coal-burning power stations need to close by 2030 at the latest and be replaced by clean and safe renewable energy,’ Greenpeace Australia Pacific campaigner Glenn Walker said when the Clean Energy Regulator’s National Greenhouse and Energy Reporting (NGER) data was released.

In June 2021, AGL announced its plan to split into AGL Australia, an energy retailer, and Accel Energy, a coal-fired power generator. In March 2022 Cannon-Brookes attempted a $5.4 billion joint takeover bid of AGL, pursuing an acceleration of the shutdown of its coal-fired power plants. After the failure of this action, the private investment company of Mike Cannon-Brookes amassed an 11.3 per cent stake in AGL in May. Cannon-Brookes believes the demerger would create “two weaker, interdependent entities that are more costly to run”. However, AGL’s board maintains the demerger is in the best interest of shareholders, with the proposal set to be voted on next month.

More recently, superannuation fund giant HESTA, which has $68 billion in funds under management, declared it would also vote against the proposed demerger affirming that supporting the decarbonisation of the economy is in the interest of shareholders. ‘We cannot simply divest away from the risk of Australia being slow to transition to a low-carbon future. Responsible investors have a responsibility to their members to go to where the biggest emissions are and as owners try and first change the behaviour of these companies’, HESTA CEO Debby Blakey said.

The question all parties claim to know the answer to is at the centre of the David and Goliath battle: What is in the best interest of shareholders? Previously, the favoured response among institutional investors determined to reduce their carbon emissions was to do the “Wall Street Walk”, that is, to divest. In fact, many superannuation funds have already done just that in the case of AGL.

While it is true that super funds are under pressure to reduce their carbon emission exposure, as increasingly powerful financial institutions, they need to act with the view of maximising the retirement benefits to their members. Notably, all regulated superannuation funds must comply with the ‘sole purpose test’ to ensure that fund managers make decisions in the best interests of their fund’s members. In many respects, they need to act in the interests of shareholders as shareholders. As the events of the planned AGL demerger show however, ‘long-term shareholder value’ can be elusive and muddy. As such, super funds must be mindful of only prioritising environmental, social and governance issues  where they threaten the interests of shareholders.

Although last year Engine No. 1 overturning three of Exxon Mobil’s board seats was more powerful in stoking change than sending a message through divestment, the issue is murkier when balancing the retiree’s financial interests against ESG concerns. The sophisticated investor willing to put money into a tiny activist hedge fund is not the same as the average working Australian who is passively contributing to super. With AGL shares down almost 70 per cent since 2017, suffering shareholders will be the ultimate deciders of the company’s fate when the proposed demerger goes before a vote on June 15.

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